EXHIBIT 10.1
$7,500,000
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
CORTELCO SYSTEMS, INC.
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF JULY 31, 1997
Table of Contents
Page
1. DEFINITIONS AND CONSTRUCTION................................................................. 1
1.1 Definitions............................................................................. 1
1.2 Accounting Terms........................................................................ 14
1.3 Code.................................................................................... 14
1.4 Construction............................................................................ 14
1.5 Schedules and Exhibits.................................................................. 15
2. LOAN AND TERMS OF PAYMENT.................................................................... 15
2.1 Revolving Advances...................................................................... 15
2.2 Letters of Credit....................................................................... 16
2.3 Overadvances............................................................................ 18
2.4 Interest and Letter of Credit Fees: Rates, Payments, and Calculations; Promise to Pay.. 18
2.5 Collection of Accounts.................................................................. 20
2.6 Crediting Payments; Application of Collections.......................................... 20
2.7 Designated Account...................................................................... 21
2.8 Maintenance of Loan Account; Statements of Obligations.................................. 21
2.9 Fees.................................................................................... 21
2.10 Tax Indemnity........................................................................... 22
3. CONDITIONS; TERM OF AGREEMENT................................................................ 24
3.1 Conditions Precedent to the Initial Advance and Letter of Credit........................ 24
3.2 Conditions Precedent to all Advances and all Letters of Credit.......................... 25
3.3 Condition Subsequent.................................................................... 26
3.4 Term.................................................................................... 26
3.5 Effect of Termination................................................................... 26
3.6 Early Termination by Borrower........................................................... 26
3.7 Termination Upon Event of Default....................................................... 26
4. CREATION OF SECURITY INTEREST................................................................ 27
4.1 Grant of Security Interest.............................................................. 27
4.2 Negotiable Collateral................................................................... 27
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral.................. 27
i.
Table of Contents
(Continued)
Page
4.4 Delivery of Additional Documentation Required........................................... 27
4.5 Power of Attorney....................................................................... 27
4.6 Right to Inspect........................................................................ 28
5. REPRESENTATIONS AND WARRANTIES............................................................... 28
5.1 No Encumbrances......................................................................... 28
5.2 Eligible Accounts....................................................................... 28
5.3 Eligible Inventory...................................................................... 29
5.4 Equipment............................................................................... 29
5.5 Location of Inventory and Equipment..................................................... 29
5.6 Inventory Records....................................................................... 29
5.7 Location of Chief Executive Office; FEIN................................................ 29
5.8 Due Organization and Qualification; Subsidiaries........................................ 29
5.9 Due Authorization; No Conflict.......................................................... 30
5.10 Litigation.............................................................................. 30
5.11 No Material Adverse Change.............................................................. 31
5.12 Solvency................................................................................ 31
5.13 Employee Benefits....................................................................... 31
5.14 Environmental Condition................................................................. 31
6. AFFIRMATIVE COVENANTS........................................................................ 31
6.1 Accounting System....................................................................... 32
6.2 Collateral Reporting.................................................................... 32
6.3 Financial Statements, Reports, Certificates............................................. 32
6.4 Tax Returns............................................................................. 34
6.5 Guarantor Reports....................................................................... 34
6.6 Returns................................................................................. 34
6.7 Title to Equipment...................................................................... 34
6.8 Maintenance of Equipment................................................................ 34
6.9 Taxes................................................................................... 34
6.10 Insurance............................................................................... 35
6.11 No Setoffs or Counterclaims............................................................. 36
SCHEDULES AND EXHIBITS
----------------------
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule 5.8 Shareholders and Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness as of Closing Date
Schedule 7.13 Investments
Exhibit P-1 Projections
ii.
Table of Contents
(Continued)
Page
6.12 Location of Inventory and Equipment..................................................... 36
6.13 Compliance with Laws.................................................................... 36
6.14 Employee Benefits....................................................................... 36
6.15 Leases.................................................................................. 37
7. NEGATIVE COVENANTS............................................................................ 37
7.1 Indebtedness............................................................................ 37
7.2 Liens................................................................................... 38
7.3 Restrictions on Fundamental Changes..................................................... 38
7.4 Sale or Disposal of Assets.............................................................. 38
7.5 Change Name............................................................................. 38
7.6 Guarantee............................................................................... 38
7.7 Nature of Business...................................................................... 38
7.8 Repayments, Prepayments and Amendments.................................................. 38
7.9 Change of Control....................................................................... 39
7.10 Consignments............................................................................ 39
7.11 Distributions........................................................................... 39
7.12 Accounting Methods...................................................................... 39
7.13 Investments............................................................................. 39
7.14 Transactions with Affiliates............................................................ 40
7.15 Suspension.............................................................................. 40
7.16 Compensation............................................................................ 40
7.17 Use of Proceeds......................................................................... 40
7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees...... 40
7.19 No Prohibited Transactions Under ERISA.................................................. 40
8. EVENTS OF DEFAULT............................................................................. 41
9. FOOTHILL'S RIGHTS AND REMEDIES................................................................ 43
9.1 Rights and Remedies..................................................................... 43
9.2 Remedies Cumulative..................................................................... 45
10. TAXES AND EXPENSES............................................................................ 45
iii.
Tables of Contents
(Continued)
Page
11. WAIVERS; INDEMNIFICATION...................................................................... 46
11.1 Demand; Protest; etc.................................................................... 46
11.2 Foothill's Liability for Collateral..................................................... 46
11.3 Indemnification......................................................................... 46
12. NOTICES....................................................................................... 46
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.................................................... 47
14. DESTRUCTION OF BORROWER'S DOCUMENTS........................................................... 48
15. GENERAL PROVISIONS............................................................................ 48
15.1 Effectiveness........................................................................... 48
15.2 Successors and Assigns.................................................................. 48
15.3 Section Headings........................................................................ 49
15.4 Interpretation.......................................................................... 49
15.5 Severability of Provisions.............................................................. 49
15.6 Amendments in Writing................................................................... 49
15.7 Counterparts; Telefacsimile Execution................................................... 49
15.8 Revival and Reinstatement of Obligations................................................ 49
15.9 Integration............................................................................. 49
15.10 Time of the Essence..................................................................... 49
iv.
SCHEDULES AND EXHIBITS
----------------------
Schedule E-1 Eligible Inventory Locations
Schedule P-1 Permitted Liens
Schedule 5.8 Shareholders and Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness as of Closing Date
Schedule 7.13 Investments
Exhibit P-1 Projections
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this "AGREEMENT"), is entered into as of
July 31, 1997, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇,
▇▇▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇ and an office located in Atlanta,
Georgia and CORTELCO SYSTEMS, INC., a Delaware corporation ("Borrower"), with
its chief executive office located at ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Account Debtor" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods or the rendition of services by
Borrower, irrespective of whether earned by performance, and any and all credit
insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section 2.1(a)
"Affiliate" means, as applied to any Person, any other Person,
who directly or indirectly controls, is controlled by, is under common control
with or is a director or Officer of sock Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote ten percent (10%) or more of securities having ordinary voting power for
the election of directors or the direct or indirect power to direct the
management and policies of a Person.
"Agreement" has the meaning set forth in the preamble hereto.
"Alcatel" means Alcatel Network System, Inc., a Delaware
corporation.
"Alcatel Debt" means that Indebtedness owing by Cortelco Systems
Holding Corp. to Alcatel pursuant to that certain Promissory Note dated December
16, 1993, in the original principal amount of $8,000,000.
"Authorized Person" means any officer or other employee of
Borrower.
1.
"Average Unused Portion of Maximum Amount" means, as of any date
of determination, (a) the Maximum Amount, less (b) the sum of (i) the average
Daily Balance of Advances that were outstanding during the immediately preceding
month, plus (ii) the average Daily Balance of the undrawn Letters of Credit that
were outstanding during the immediately preceding month.
"Bankruptcy Code" means the United States Bankruptcy Code (11
U.S.C. (S) 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the Past six years.
"Borrower" has the meaning set forth in the preamble to this
Agreement.
"Borrower's Books" means all of Borrower's books and records
including: ledgers, records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
"Borrowing Base" has the meaning set forth in Section 2.1(a).
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which national banks are authorized or required to close
"Change of Control" shall be deemed to have occurred at such time
as a "person" or "group" other than Parent (within the meaning of Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act
Of 1934), directly or indirectly, of more than ten percent (10%) of the total
voting power of all classes of stock then outstanding of Borrower entitled to
vote in the election of directors; provided, however, a "Change of Control"
shall not occur solely as a result of the Subordinated Lender's conversion, in
accordance with the documents evidencing the Subordinated Debt as of the Closing
Date, of the Subordinated Debt into equity of Borrower comprising up to thirty
percent (30%) of the total voting power of all classes of stock then outstanding
of Borrower entitled to vote in the election of directors.
"Closing Date" means the date of the first to occur of the making
of the initial Advance or the issuance of the initial Letter of Credit.
"Code" means the Uniform Commercial Code, as in effect in the
State of Georgia.
"Collateral" means all property of Borrower, including each of
the following:
(A) the Accounts;
2.
(B) Borrower's Books;
(C) the Equipment;
(D) the General Intangibles;
(E) the Inventory;
(F) the Investment Property;
(G) the Negotiable Collateral;
(H) any money, or other assets of Borrower that now of hereafter come
into the possession, custody, or control of Foothill; and
(I) the proceeds and products, whether tangible or intangible, of any
of the foregoing, including proceeds of insurance covering any or all of the
Collateral, and any and all Accounts, Borrower's Books, Equipment, General
Intangibles, Inventory, Investment Property, Negotiable Collateral, Real
Property, money, deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and die proceeds
thereof.
"Collateral Access Agreement" means a landlord waiver, mortgagee
waiver, bailee letter, or acknowledgement agreement of any warehouseman,
processor, lessor, consignee, or other Person in possession of, having a Lien
upon, or having rights or interests in the Equipment or Inventory, in each case,
in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes, instruments, and other
items of payment (including, insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds).
"Daily Balance" means the amount of an Obligation owed at the end
of a given day.
"deems itself insecure" means that the Person deems itself insecure in
accordance with the provisions of Section 11-1-208 of the Code.
"Default" means an event, condition, or default that, with the giving
of notice, the passage of time, or both, would be an Event of Default.
"Designated Account" means account number 750164727 of Borrower
maintained with Borrower's Designated Account Bank, or such other deposit
account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"Designated Account Bank" means Marine Midland Bank, whose office is
located in Buffalo, New York, and whose ABA number is ▇▇▇▇▇▇▇▇▇.
3.
"Dilution" means, in each case based upon the experience of the
immediately prior three (3) months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilution with respect to the Accounts, by (b) Borrower's Collections
(excluding extraordinary items) plus the Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of determination, an amount
sufficient to reduce Foothill's advance rate against Eligible Accounts by one
percentage point for each percentage point by which Dilution is in excess of
five percent (5.00%).
"Disbursement Letter" means an instructional letter executed and
delivered by Borrower to Foothill regarding the extensions of credit to be made
on the Closing Date, the form and substance of which shall be satisfactory to
Foothill.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth in Section 3.6.
"EBITDA" means, with respect to Borrower as of the end of any fiscal
year, the Net Income for such fiscal year, plus, without duplication and to the
extent deducted in determining Net Income for such period, the sum of (a) income
taxes, (b) interest expense for such period determined in accordance with GAAP
and (c) depreciation and amortization expense.
"Eligible Accounts" means those Accounts created by Borrower in the
ordinary course of business (net of finance charges), that arise out of
Borrower's sale of goods and rendition of services, that strictly comply with
each and all of the representations and warranties respecting Accounts made by
Borrower to Foothill in the Loan documents, and that are and at all times
continue to be acceptable to Foothill in all respects; provided, however, that
standards of eligibility may be fixed and revised from time to time by Foothill
in Foothill's reasonable credit judgment. Eligible Accounts shall not include
the following:
(a) Accounts (i) that the Account Debtor has failed to pay within (x)
thirty (30) days of the due date with respect to Graybar Electric Co., Inc., or
(y) sixty (60) days of the due date with respect to all other Account Debtors'
or (ii) with selling terms of more than sixty (60) days;
(b) Accounts owed by an Account Debtor or its Affiliates where fifty
percent (50%) or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor is an employee,
Affiliate or agent of Borrower;
(d) Accounts with respect to which goods are samples or are placed on
consignment, guaranteed sale, sale or return, sale an approval, ▇▇▇▇ and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
4.
(e) Accounts that are not payable in Dollars or with respect to which
the Account Debtor (i) does not maintain its chief executive office in the
United States, or (ii) is not organized under the laws of the United States or
any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Foothill and is directly
drawable by Foothill, or (z) the account is covered by credit insurance in form
and amount, and by an insurer, satisfactory to Foothill;
(f) Accounts with respect to which the Account Debtor is either (i)
the United States or any department, agency, or instrumentality of the United
States (exclusive, however, of Accounts with respect to which Borrower has
complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31
U.S.C. (S) 3727), or (ii) any State of the United States (exclusive, however, of
Accounts owed by any State that does not have a statutory counterpart to the
Assignment of Claims Act), to the extent such accounts described in (i) and (ii)
above exceed, in the aggregate, $250,000;
(g) Accounts with respect to which the Account Debtor is a creditor of
Borrower, has or has asserted a right of setoff, has disputed its liability,
cancelled its contract with Borrower, or has made any claim with respect to the
Account (to the extent of such claim);
(h) Accounts, to the extent such Accounts, together with all other
Accounts owing by such Account Debtor to Borrower, exceed in the aggregate (i)
fifty percent (50%) of all Eligible Accounts in the case of Graybar Electric
Co., Inc., (ii) twenty percent (20%) of all Eligible Accounts in the case of
Interdigital Communication Corp. and Tele-Automation, (iii) fifteen percent
(15%) of all Eligible Accounts in the case of Circuit City Stores, Inc., AmStar
Communications, Alltel Supply, North Supply Co., Power & Telephone Supply
Company, and ▇▇▇▇▇▇▇-▇▇▇▇ Corp., and (iv) ten percent (10%) of all Eligible
Accounts in all other cases;
(i) Accounts with respect to which the Account Debtor is subject to
any Insolvency Proceeding, or becomes insolvent, or goes out of business;
(j) Accounts the collection of which Foothill, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(k) Accounts with respect to which the goods giving rise to such
Account have not been shipped and billed to the Account Debtor, the services
giving rise to such Account have not been performed and accepted by the Account
Debtor, or the Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor is located in
the states of New Jersey, Minnesota, Indiana, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, Indiana,
5.
West Virginia, or such other states, or has filed a Notice of Business
Activities Report with the applicable division of taxation, the department of
revenue, or with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(m) Accounts that represent progress payment, deposits or other
advance ▇▇▇▇▇▇▇▇ that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"Eligible In-Transit Inventory" means those items of Inventory that do
not qualify as Eligible Landed Inventory solely because they are not in a
location set forth on Schedule E-1 but: (a) such Inventory is currently in-
transit from a location not set forth on Schedule E-1 to a location set forth on
Schedule E-1, (b) title to such Inventory has passed to Borrower, (c) documents
of title with respect to such Inventory have been delivered to Foothill or its
agent; (d) such Inventory is insured against types of loss, damage, hazards, and
risks, and in amounts, satisfactory to Foothill in its discretion, and (e) such
Inventory has been paid for or, if purchased under an Inventory Letter of
Credit, such Inventory Letter of Credit either has been drawn upon in full and
reimbursed, or expired undrawn; in each case, with documentation therefor in
form and substance satisfactory to Foothill in its discretion.
"Eligible Inventory" means the Eligible In-Transit Inventory and
the Eligible Landed Inventory.
"Eligible Landed Inventory" means Inventory consisting of first
quality finished goods held for sale in the ordinary course of Borrower's
business that are located at or in-transit between Borrower's premises
identified on Schedule E-1, that strictly comply with each and all of the
representations and warranties respecting Inventory made by Borrower to Foothill
in the Loan Documents, and that are and at all times continue to be acceptable
to Foothill in all respects; provided, however, that standards of eligibility
may be fixed and revised from time to time by Foothill in Foothill's reasonable
credit judgment. In determining the amount to be so included, Inventory shall be
valued at the lower of cost or market on a basis consistent with GAAP and
Borrower's current and historical accounting practices. An item of Inventory
shall not be included in Eligible Landed Inventory if:
(a) it is not owned solely by Borrower and Borrower does not have
good, valid, and marketable title thereto;
(b) it is not located at, or in-transit between, one of the locations
set forth on Schedule E-1;
(c) it is not located on property owned or leased by Borrower or in a
contract warehouse, in each case, subject to a Collateral Access Agreement
executed by the mortgagee, lessor, the warehouseman, or other third party, as
the case may be, and segregated or otherwise separately identifiable from goods
of others, if any, stored on the premises;
(d) it is located at any retail store or at Borrower's premises in
Kennesaw, Georgia, or it is in the possession or control of King Technology;
6.
(e) it is not subject to a valid and perfected first priority security
interest in favor of Foothill;
(f) it does not meet all of Borrower's quality standards or any other
standards imposed by any Person having regulatory authority over such goods;
(g) it consists of goods rejected by Borrower's customers; and
(i) it is obsolete, a restrictive or custom item, work-in-process, a
component that is not part of finished goods, or constitutes spare parts,
packaging and shipping materials, supplies used or consumed in Borrower's
business, Inventory subject to a Lien in favor of any third Person, ▇▇▇▇ and
hold goods, defective goods, sample Inventory, "seconds," or Inventory acquired
on consignment.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, machine tools, motors, equipment, furniture, furnishings, fixtures,
tools, parts, goods (other than consumer goods, farm products, or Inventory),
wherever located, including, (a) any interest of Borrower in any of the
foregoing, and (b) all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974, 29
U.S.C. (S)(S) 1000 et seq., amendments thereto, successor statutes, and
regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject to ERISA whose
employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with respect to any Benefit
Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA), (c)
the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan, (e)
any event or condition (i) that provides a basis under Section 4042(a)(1), (2),
or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.
7.
"Event of Default" has the meaning set forth in Section 8.
"Existing Lender" means Marine Midland Business Loans, Inc.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble to this
Agreement.
"Foothill Account" has the meaning set forth in Section 2.5.
"Foothill Expenses" means all: reasonable costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Foothill; reasonable fees
or charges paid or incurred by Foothill in connection with Foothill's
transactions with Borrower, including, fees or charges for photocopying,
notarization, couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC searches and including searches with
the patent and trademark office, the copyright office, or the department of
motor vehicles), filing, recording, publication, appraisal (including periodic
Collateral appraisals), costs and expenses incurred by Foothill in the
disbursement of funds to Borrower (by wire transfer or otherwise); reasonable
charges paid or incurred by Foothill resulting from the dishonor of checks;
costs and expenses paid or incurred by Foothill to correct any default or
enforce any provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling, preparing for
sale, or advertising to sell the Collateral or any portion thereof, irrespective
of whether a sale is consummated; costs and expenses paid or incurred by
Foothill in examining Borrower's Books; costs and expenses of third party claims
or any other suit paid or incurred by Foothill in enforcing or defending the
Loan Documents or in connection with the transactions contemplated by the Loan
Documents or Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing (including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or
any guarantor of the Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present and future
general intangibles and other personal property (including contract rights,
rights arising under common law, statutes, or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, servicemarks, copyright,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty, distribution or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
8.
"Hazardous Materials" means (a) substances that are defined or listed
in, or otherwise classified pursuant to, any applicable laws or regulations as
"Hazardous substances," "hazardous materials," "hazardous wastes," "toxic
substances," or any other formulation intended to define, list, or classify
substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower for borrowed
money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or
other similar instruments and all reimbursement or other obligations of Borrower
in respect of letters of credit, bankers acceptances, interest rate swaps, or
other financial products, (c) all obligations of Borrower under capital leases,
(d) all obligations or liabilities of others secured by a Lien on any property
or asset of Borrower, irrespective of whether such obligation or liability is
assumed, and (e) any obligation of Borrower guaranteeing or intended to
guarantee (whether guaranteed, endorsed, co-made, discounted, or sold with
recourse to Borrower) any indebtedness, lease, dividend, letter of credit, or
other obligation of any other Person.
"Insolvency Proceeding" means any proceeding commenced by or against
any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"Inventory" means all present and future inventory in which Borrower
has any interest, including goods held for sale or lease or to be furnished
under a contract of service and all of Borrower's present and future raw
materials, work in process, finished goods, and packing and shipping materials,
wherever located.
"Inventory Letter of Credit" means a documentary Letter of Credit
issued to support the purchase by Borrower of Inventory prior to transit to a
location set forth on Schedule E-1, that provides that all draws thereunder must
require presentation of customary documentation (including, if applicable,
commercial invoices, packing list, certificate of origin, ▇▇▇▇ of lading or
airwaybill, customs clearance documents, quota statement, inspection
certificate, beneficiaries statement, and ▇▇▇▇ of exchange, bills of lading,
dock warrants, dock receipts, warehouse receipts, or other documents of title)
in form and substance satisfactory to Foothill and reflecting the passage to
Borrower of title to first quality Inventory conforming to Borrower's contract
with the seller thereof. Any such Letter of Credit shall cease to be an
"Inventory Letter of Credit" at such time, if any, as the goods purchased
thereunder become Eligible Landed Inventory.
"Inventory Reserves" means reserves (determined from time to time by
Foothill in its reasonable credit judgment) for (a) the estimated costs relating
to unpaid freight
9.
charges, warehousing or storage charges, taxes, duties, and other similar unpaid
costs associated with the acquisition of Eligible In-Transit Inventory by
Borrower, plus (b) the estimated reclamation claims of unpaid sellers of
Inventory sold to Borrower.
"Investment Property" means all "investment property", as such term is
defined in the Code, now owned or hereafter acquired by Borrower and, in any
event, including, without limitation, all securities, whether certificated or
uncertificated, security entitlements, securities accounts, commodity contracts
and commodity accounts.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section 2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty, as the context
requires.
"Lien" means any interest in property security an obligation owed to,
or a claim by, any Person other than the owner of the property, whether such
interest shall be based on the common law, statute, or contract, whether such
interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes, and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section 2.8.
"Loan Documents" mean this Agreement, the Disbursement Letter, the
Letters of Credit, the Lockbox Agreements, the Trademark Security Agreement, the
Patent Security Agreement, the Subordination Agreement, the Collateral Access
Agreements, any assignment of insurance policies, any note or notes executed by
Borrower and payable to Foothill, and any other agreement entered into, now or
in the future, in connection with this Agreement.
"Lockbox Account" shall mean a depositary account established pursuant
to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox Operating Procedural
Agreements and those certain Blocked Depository Account Agreements, in form and
substance satisfactory to Foothill, each of which is among Borrower, Foothill,
and one of the Lockbox Banks.
10.
"Lockbox Banks" means Marine Midland Bank, First Tennessee Bank
National Association, and/or such other Person or Persons as Foothill and
Borrower may designate from time to time.
"Lockboxes" has the meaning set forth in Section 2.5.
"Material Adverse Change" means (a) a material adverse change in the
business, prospects, operations, results of operations, assets, liabilities or
condition (financial or otherwise) of Borrower, (b) the material impairment of
Borrower's ability to perform its obligations under the Loan Documents to which
it is a party or of Foothill to enforce the Obligations or realize upon the
Collateral, (c) a material adverse effect on the value of the Collateral or the
amount that Foothill would be likely to receive (after giving consideration to
delays in payment and costs of enforcement) in the liquidation of such
Collateral, or (d) a material impairment of the priority or enforceability of
Foothill's Liens with respect to the Collateral.
"Margin" has the meaning set forth in Section 2.4(a).
"Maturity Date" has the meaning set forth in Section 3.4.
"Maximum Account" means $7,500,000.
"Multiemployer Plan" means a "multiemployer plan" (as defined in
Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any
ERISA Affiliate has contributed, or was obligated to contribute, within the past
six years.
"Net Income" means, with respect to Borrower as of the end of any
fiscal year, the net income (or deficit) of Borrower for such fiscal year,
determined in accordance with GAAP.
"Negotiable Collateral" means all of Borrower's present and future
letters of credit, notes, drafts, instruments, investment property, security
entitlements, securities (including the shares of stock of Subsidiaries, if any,
of Borrower), documents, personal property leases (wherein Borrower is the
lessor), chattel paper, and Borrower's Books relating to any of the foregoing.
"Obligations" means all loans, Advances, debts, principal, interest
(including any interest that, but for the provisions of the Bankruptcy Code,
would have accrued), contingent reimbursement obligations under any outstanding
Letters of Credit, premiums (including Early Termination Premiums), liabilities
(including all amounts charged to Borrower's Loan Account pursuant hereto),
obligations, fees, charges, costs, or Foothill Expenses (including any fees or
expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further
11.
including all interest not paid when due and all Foothill Expenses that Borrower
is required to pay or reimburse by the Loan Documents, by law, or otherwise.
"Other Taxes" has the meaning set forth in Section 2.10.
"Overadvance" has the meaning set forth in Section 2.3.
"Parent" means Cortelco Systems Holding Corporation, a Delaware
corporation.
"Patent Security Agreement" means that certain Patent Security
Agreement of even date herewith among Borrower and Foothill, in form and
substance reasonably satisfactory to Foothill.
"Pay-Off Letter" means a letter, in form and substance reasonably
satisfactory to Foothill, from Existing Lender respecting the amount necessary
to repay in full all of the obligations of Borrower owing to Existing Lender and
obtain a termination or release of all of the Liens existing in favor of
Existing Lender in and to the properties or assets of Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation as defined in
Title IV of ERISA, or any successor thereto.
"Permitted Liens" means (a) Liens held by Foothill, (b) Liens for
unpaid taxes that either (i) are not yet due and payable or (ii) are the subject
of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the interest of
lessors under operating leases and purchase money Liens of lessors under capital
leases to the extent that the acquisition or lease of the underlying asset is
permitted hereunder and so long as the Lien only attaches to the asset purchased
or acquired and only secures the purchase price of the asset, (e) Liens arising
by operation of law in favor of warehousemen, landlords, carriers, mechanics,
materialmen, laborers, or suppliers, incurred in the ordinary course of business
of Borrower and not in connection with the borrowing of money, which Liens
either (i) are for sums not yet due and payable, or (ii) are the subject of
Permitted Protests, (f) Liens arising from deposits made in connection with
obtaining worker's compensation or other unemployment insurance, (g) Liens or
deposits to secure performance of bids, tenders, or leases (to the extent
permitted under this Agreement), incurred in the ordinary course of business of
Borrower and not in connection with the borrowing of money, (h) Liens arising by
reason of security for surety or appeal bonds in the ordinary course of business
of Borrower, (i) Liens of or resulting from any judgment or award that would not
have a Material Adverse Change and as to which the time for the appeal or
petition for rehearing of which has not yet expired, or in respect of which
Borrower is in good faith prosecuting an appeal or proceeding for a review, and
in respect of which a stay of execution pending such appeal or proceeding for
review has been secured, and (j) with respect to any Real Property, easements,
rights of way, zoning and similar covenants and restrictions, and similar
encumbrances that customarily exist on properties of Persons engaged in similar
activities and similarly situated and that in any event do not materially
interfere with or impair the use or operation of the Collateral by Borrower or
the value of Foothill's Lien thereon or therein, or materially interfere with
the ordinary conduct of the business of Borrower.
12.
"Permitted Protest" means the right of Borrower to protest any Lien
other than any such Lien that secures the Obligations, tax (other than payroll
taxes or taxes that are the subject of a United States federal tax lien), or
rental payment, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Foothill, (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while
any such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Liens of Foothill in and to the Collateral.
"Person" means and includes natural persons, corporations, limited
liability companies, limited partnerships, general partnerships, limited
liability partnerships, joint ventures, trusts, land trusts, business trusts, or
other organizations, irrespective of whether they are legal entities, and
governments and agencies and political subdivisions thereof.
"Plan" means any employee benefit plan, program or arrangement
maintained or contributed to by Borrower or with respect to which it may incur
liability.
"Projections" means those projections attached hereto as Exhibit P-1
for the fiscal year ending 7/31/88 and such other subsequent projects of
Borrower's financial statements as Foothill may request from time to time, for
such periods and in such form and substance as may be mutually agreed upon by
Borrower and Foothill.
"Real Property" means any estates or interests in real property now
owned or hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest, per annum, most
recently announced by Norwest Bank Minnesota, National Association, or any
successor thereto, as its "base rate," irrespective of whether such announced
rate is the best rate available from such financial institution.
"Reportable Event" means any of the events described in Section
4043(c) of ERISA or the regulations thereunder other than a Reportable Event as
to which the provision of thirty (30) days notice to the PBGC is waived under
applicable regulations.
"Retiree Health Plan" means an "employee welfare benefit plan" within
the meaning of Section 3(1) of ERISA that provides benefits to individuals after
termination of their employment, other than as required by Section 601 of ERISA.
"Solvent" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's
13.
properties and assets would constitute unreasonably small capital after giving
due consideration to the prevailing practices in the industry in which such
Person is engaged. In computing the amount of contingent liabilities at any
time, it is intended that such liabilities will be computed at the amount that,
in light of all the facts and circumstances existing at such time, represents
the amount that reasonably can be expected to become an actual or matured
liability.
"Subordination Agreement" means that certain Subordination
Agreement entered into on or after the Closing Date between Borrower, Foothill
and the Subordinated Lender, in form and substance reasonably satisfactory to
Foothill and as amended with the consent of Foothill.
"Subordinated Debt" means that Indebtedness owed by Borrower to
the Subordinated Lender, which Indebtedness does not exceed in the aggregate
$3,000,000, plus accrued interest, and which is at all times subordinated to the
Obligations pursuant to the Subordination Agreement.
"Subordinated Lender" means, collectively, ChinaVest IV, L.P., a
Delaware limited partnership, ChinaVest IV-A, L.P., a Delaware limited
partnership and ChinaVest IV-B, L.P., a Bermuda limited partnership.
"Subsidiary" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"Taxes" has the meaning set forth in Section 2.10.
"Trademark Security Agreement" means that certain Trademark
Security Agreement of even date herewith among Borrower and Foothill, in form
and substance reasonably satisfactory to Foothill.
"Voidable Transfer" has the meaning set for in Section 15.8.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP. When used herein, the term
"financial statements" shall include the notes and schedules thereto. Whenever
the term "Borrower" is used in respect of a financial covenant or a related
definition, it shall be understood to mean Borrower on a consolidated basis
unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as
14.
a whole and not to any particular provision of this Agreement. An Event of
Default shall "exist", "continue" or be "continuing" until such Event of Default
has been waived in writing by Foothill. Section, subsection, clause, schedule,
and exhibit references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this Agreement or any of
the Loan Documents shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements, thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(A) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at any one time the lesser of (i) the Maximum Amount
less the outstanding balance of all undrawn or unreimbursed Letters of Credit,
or (ii) the Borrowing Base less (A) the aggregate amount of all undrawn or
unreimbursed Letters of Credit (other than Inventory Letters of Credit), less
(B) seventy percent (70%) of the aggregate amount of all undrawn or unreimbursed
Inventory Letters of Credit, less (C) the aggregate amount of the Inventory
Reserves. For purposes of this Agreement, "Borrowing Base", as of any date of
termination, shall mean the result of:
(x) the lesser of (i) eighty-five percent (85%) of Eligible
Accounts, less the amount, if any, of the Dilution Reserve, and (ii)
an amount equal to Borrower's Collections with respect to Accounts for
the immediately preceding seventy-five (75) day period, plus
(y) the lowest of (i) $3,750,000, (ii) thirty percent (30%)
of the value of Eligible Inventory, and (iii) eighty percent (80%) of
the amount of credit availability created by clause (x) above, minus
(z) the aggregate amount of reserves, if any, established by
Foothill under Section 2.1(b).
(B) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against the Borrowing Base or
reduce its advance rates based upon Eligible Accounts or Eligible Inventory
without declaring an Event of Default if it determines, in its reasonable
discretion, that any of the circumstances described in clauses (b), (c) or (d)
of the definition of "Material Adverse Change" have occurred. Additionally,
Borrower acknowledges that the advance rate against Eligible Inventory set forth
in clause (y)(ii) above is based on the appraisal of Eligible Inventory
performed by ▇▇▇▇-▇▇▇▇ Tech Global Valuation prior to the Closing Date and
agrees that Foothill may adjust the advance rate against Eligible Inventory set
forth in clause (y)(ii) above based on the results of subsequent quarterly
appraisals of the Eligible Inventory.
15.
(C) Foothill shall have no obligation to make Advances hereunder
to the extent they would cause the outstanding Obligations to exceed the Maximum
Amount.
(D) Amounts borrowed pursuant to this Section 2.1 may be repaid
and, subject to the terms and conditions of this Agreement, reborrowed at any
time during the term of this Agreement.
2.2 LETTERS OF CREDIT.
(A) Subject to the terms and conditions of this Agreement,
Foothill agrees to issue letters of credit for the account of Borrower (each, an
"L/C") or to issue guarantees of payment (each such guaranty, an "L/C Guaranty")
with respect to letters of credit issued by an issuing bank for the account of
Borrower. Foothill shall have no obligation to issue a Letter of Credit if any
of the following would result:
(1) the sum of seventy percent (70%) of the aggregate amount
of all undrawn and unreimbursed Inventory Letters of Credit, plus one hundred
percent (100%) of the aggregate amount of all other types of undrawn and
unreimbursed Letters of Credit, would exceed the Borrowing Base less the amount
of outstanding Advances less the aggregate amount of Inventory Reserves and
reserves established under Section 2.1(b); or
(2) the aggregate amount of all undrawn or unreimbursed
Letters of Credit (including Inventory Letters of Credit) would exceed the lower
of: (x) the Maximum Amount less the amount of outstanding Advances less the
aggregate amount of Inventory Reserves and reserves established under Section
2.1(b); or (y) $500,000; or
(3) the outstanding Obligations would exceed the Maximum
Amount.
Borrower expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by issuing banks of the letters of credit that are
to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and
agree that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have a expiry date no later than twenty (20) days prior to the date on which
this Agreement is scheduled to terminate under Section 3.4 and all such Letters
of Credit shall be in form and substance acceptable to Foothill in its sole
discretion. If Foothill is obligated to advance funds under a Letter of Credit,
Borrower immediately shall reimburse such amount to Foothill and, in the absence
of such reimbursement, the amount so advanced immediately and automatically
shall be deemed to be an Advance hereunder and, thereafter, shall bear interest
at the rate then applicable to Advances under Section 2.4.
(B) Borrower hereby agrees to indemnify, save, defend, and hold
Foothill harmless from any loss, cost, expense, or liability, including payments
made by Foothill, expenses, and reasonable attorneys fees incurred by Foothill
arising out of or in connection with any Letter of Credit. Borrower agrees to be
bound by the issuing bank's regulations and interpretations of any Letters of
Credit guarantied by Foothill and opened to or for Borrower's account or by
Foothill's interpretations of any L/C issued by Foothill to or for Borrower's
account, even though this interpretation may be different from Borrower's own,
and Borrower
16.
understands and agrees that Foothill shall not be liable for any error,
negligence, or mistake, whether of omission or commission, in following
Borrower's instruction or those contained in the Letter of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that the
L/C Guarantees may require Foothill to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify, save, defend, and hold Foothill
harmless with respect to any loss, cost, expense (including reasonable attorneys
fees), or liability incurred by Foothill under any L/C Guaranty as a result of
Foothill's indemnification of any such issuing bank. Notwithstanding the
foregoing, Borrower shall not be required to indemnify Foothill for any loss,
cost or expense that is the result of the gross negligence or willful misconduct
of Foothill, as determined by a final order of a court of competent
jurisdiction.
(C) Borrower hereby authorizes and directs any bank that issues a
letter of credit guaranteed by Foothill to deliver to Foothill all instruments,
documents, and other writings and property received by the issuing bank pursuant
to such letter of credit, and to accept and rely upon Foothill's instructions
and agreements with respect to all matters arising in connection with such
letter of credit and the related application. Borrower may or may not be the
"applicant" or "account party" with respect to such letter of credit.
(D) Any and all charges, fees, and costs actually incurred by
Foothill, relating to the letters of credit guaranteed by Foothill shall be
considered Foothill Expenses for purposes of this Agreement and immediately
shall be reimbursable by Borrower to Foothill.
(E) Immediately upon the termination of this Agreement, Borrower
agrees to either (i) provide cash collateral to be held by Foothill in an amount
equal to 102% of the maximum amount of Foothill's obligations under Letters of
Credit, or (ii) cause to be delivered to Foothill releases of all of Foothill's
obligations under standing Letters of Credit. At Foothill's discretion, any
proceeds of Collateral received by Foothill after the occurrence and during the
continuation of an Event of Default may be held as the cash collateral required
by this Section 2.2(e).
(F) If by reason of (i) any change in any applicable law, treaty,
rule, or regulation or any change in the interpretation or application by any
governmental authority of any such applicable law, treaty, rule, or regulation,
or (ii) compliance by the issuing bank or Foothill with any direction, request,
or requirement (irrespective of whether having the force of law) of any
governmental authority or monetary authority including, without limitation,
Regulation D of the Board of Governors of the Federal Reserve System as from
time to time in effect (and any successor thereto):
(A) any reserve, deposit, or similar requirement is or shall be
imposed or modified in respect of any Letters of Credit issued hereunder, or
(B) there shall be imposed on the issuing bank or Foothill any
other condition regarding any letter of credit, or Letter of Credit, as
applicable, issued pursuant hereto;
17.
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining
any letter of credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or Foothill, then, and
in any such case, Foothill, may, at any time within a reasonable period after
the additional cost is incurred or the amount received is reduced, notify
Borrower, and Borrower shall pay on demand such amounts as the issuing bank or
Foothill may specify to be necessary to compensate the issuing bank or Foothill
for such additional cost or reduced receipt, together with interest on such
amount from the date of such demand until payment in full thereof at the rate
set forth in Section 2.4(a) or (c)(1), as applicable. The determination by the
issuing bank or Foothill, as the case may be, of any amount due pursuant to this
Section 2.2(f), as set forth in a certificate setting forth the calculation
thereof in reasonable detail, shall, in the absence of manifest or demonstrable
error, be final and conclusive and binding on all of the parties hereto.
2.3 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and 2.2 is
greater than either the Dollar or percentage limitations set forth Sections 2.1
and 2.2 (an "Overadvance"), Borrower immediately shall pay to Foothill, in cash,
the amount of such excess to be used by Foothill first, to repay Advances
outstanding under Section 2.1 and, thereafter, to be held by Foothill as cash
collateral to secure Borrower's obligation to repay Foothill for all amounts
paid pursuant to Letters of Credit.
2.4 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS, AND
CALCULATIONS; PROMISE TO PAY.
(A) INTEREST RATE. Except as provided in clause (c) below, all
Obligations (except for undrawn Letters of Credit) shall bear interest at a per
annum rate equal to the Reference Rate plus the Margin in effect from time to
time. As of the Closing Date and through and including September 15, 1998, the
Margin shall be the per annum rate of three-eighths of one percent (0.375%).
Except as provided in the last sentence of this Section 2.4(a), on September 16,
1998 and on September 16/th/ of each year thereafter, the Margin shall be-
adjusted to be the interest rate margin based upon the EBITDA as of the most
recent fiscal year end, as reflected in Borrower's financial statements required
to be delivered pursuant to Section 6.3(a)(ii) (with such EBITDA to be verified
upon Foothill's receipt of the audited financial statements required to be
delivered pursuant to Section 6.3 (a)(iii) and adjusted retroactively if such
EBITDA pursuant to such audited financial statements differs from the EBITDA
reported to Foothill in the financial statements delivered pursuant to Section
6.3(a)(ii)), expressed as a per annum rate of interest as follows:
EBITDA Margin
------ ------
Less than or equal to $1,200,000 three-eighths of one percent
(0.375%)
Greater than $1,200,000 but one-quarter of one percent
Less than or equal to $1,700,000 (0.250%)
Greater than $1,700,000 but one-eighth of one percent
Less than or equal to $2,200,000 (0.125%)
18.
Greater than $2,200,000 zero (0.000%)
In the event that Borrower fails to timely provide the financial statements
referred to above in accordance with the terms of Section 6.3(a)(ii) thereof,
and without prejudice to any additional rights under Section 9.1 hereof, the
Margin shall be three-eighths of one percent (0.375%) until two Business Days
after the actual delivery of such statements. Notwithstanding the above,
however, the Margin shall not be adjusted on September 16/th/ of any year if
Cortelco International, Inc.'s EBITDA was less than $1,500,000 as of the fiscal
year of Cortelco International, Inc. most recently ended, and, in such event,
the Margin shall be three-eighths of one percent (.375%) until the following
September 16/th/.
(B) LETTER OF CREDIT FEE. Except as provided in clause (c) below,
Borrower shall pay Foothill a fee (in addition to the charges, commissions,
fees, and costs set forth in Section 2.2(d)) equal to one and one-half
percentage points (1.50%) per annum times the aggregate undrawn amount of all
outstanding Letters of Credit.
(C) DEFAULT RATE. Upon the occurrence and during the continuation of
an Event of Default, (i) all Obligations (except for undrawn Letters of Credit)
shall bear interest at a per annum rate equal to the Reference Rate plus the
Margin then in effect plus two percentage points (2.00%), and (ii) the Letter of
Credit fee provided in Section 2.4(b) shall be increased to three and one-half
percentage points (3.50%) per annum times the amount of the undrawn Letters of
Credit that were outstanding during the immediately preceding month.
(D) MINIMUM INTEREST AND FEES. Notwithstanding anything to the
contrary set forth in clauses (a) through (c) above, in no event shall the rate
of interest chargeable hereunder for any day be less than eight percent (8.00%)
per annum, and in no event shall the aggregate interest and Letter of Credit
fees chargeable pursuant to this Section 2.4 for any month be less than $15,000.
To the extent that interest accrued hereunder at the rate set forth herein would
be less than eight percent (8.00%) per annum, the interest rate chargeable
hereunder for such day automatically shall be deemed increased to such minimum
rate. To the extent that interest and Letter of Credit fees accrued hereunder at
the rates set forth herein (including the minimum interest rate) would yield
less than $15,000 per month, the rates chargeable hereunder for the period in
question automatically shall be deemed increased to such rates that would result
in the minimum amount of interest and Letter of Credit fees being accrued and
payable hereunder. Foothill shall be entitled to such minimum interest and
Letter of Credit fees even if there are no Advances or Letters of Credit
outstanding hereunder and, in such event, the amount of such minimum interest
and Letter of Credit fees shall be deemed to be an additional fee payable by
Borrower hereunder.
(E) PAYMENTS. Interest and Letter of Credit fees payable hereunder
shall be due and payable, in arrears, on the first day of each month during the
term hereof. Borrower hereby authorizes Foothill, at its option, without prior
notice to Borrower, to charge such interest and Letter of Credit fees, all
Foothill Expenses (as and when incurred), the charges, commissions, fees, and
costs provided for in Section 2.2(d) (as and when accrued incurred), the fees
and charges provided for in Section 2.9 (as and when accrued or incurred), and
all installments or other payments due under any Loan Document to Borrower's
Loan Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder.
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Any interest not paid when due shall be compounded and shall thereafter accrue
interest at the rate then applicable to Advances hereunder.
(F) COMPUTATION. The Reference Rate as of the date of this Agreement
is 8.50 % per annum. In the event the Reference Rate is changed from time to
time hereafter, the applicable rate of interest hereunder automatically and
immediately shall be increased or decreased by an amount equal to such change in
the Reference Rate. All interest and fees chargeable under the Loan Documents
shall be computed on the basis of a 360 day year for the actual number of days
elapsed.
(G) INTENT TO LIMIT CHARGES TO MAXIMUM LAWFUL RATE. In no event shall
the interest rate or rates payable under this Agreement, plus any other amounts
paid in connection herewith, exceed the highest rate permissible under any law
that a court of competent jurisdiction shall, in a final determination, deem
applicable. Borrower and Foothill, in executing and delivering this Agreement,
intend legally to agree upon the rate or rates of interest or manner of payment
stated within it; provided, however, that, anything contained herein to the
contrary notwithstanding, if said rate or rates of interest or manner of payment
exceeds the maximum allowable under applicable law, then, ipso facto as of the
date of this Agreement, Borrower is and shall be liable only for the payment of
such maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the principal
balance of the Obligations to the extent of such excess.
(H) PROMISE TO PAY. Borrower hereby promises to pay to Foothill the
principal amount of all Advances, together with accrued interest, fees and other
amounts due thereon, all in accordance with the terms of this Agreement.
2.5 COLLECTION OF ACCOUNTS. Borrower shall at all times maintain lockboxes
(the "Lockboxes") and, immediately after the Closing Date, shall instruct all
Account Debtors with respect to the Accounts, General Intangibles, and
Negotiable Collateral of Borrower to remit all Collections in respect thereof
to such Lockboxes. Borrower, Foothill, and the Lockbox Banks shall enter into
the Lockbox Agreements, which among other things shall provide for the opening
of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower
agrees that all Collections and other amounts received by Borrower from any
Account Debtor or any other source immediately upon receipt shall be deposited
into a Lockbox Account. No Lockbox Agreement or arrangement contemplated thereby
shall be modified by Borrower without the prior written consent of Foothill.
Upon the terms and subject to the conditions set forth in the Lockbox
Agreements, all amounts received in each Lockbox Account shall be wired each
Business Day into an account (the "Foothill Account") maintained by Foothill at
a depositary selected by Foothill.
2.6 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of
any Collections by Foothill (whether from transfer to Foothill by the Lockbox
Banks pursuant to the Lockbox Agreements or otherwise) immediately shall be
applied provisionally to reduce the Obligations outstanding under Section 2.1,
but shall not be considered a payment on account unless such Collection item is
a wire transfer of immediately available federal funds and is made to the
Foothill Account or unless and until such Collection item is honored when
presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrower for one
20.
(1) Business Day of 'clearance' or 'float' at the rate set forth in Section
2.4(a) or Section 2.4(c)(i), as applicable, on all Collections that are received
by Foothill (regardless of whether forwarded by the Lockbox Bank to Foothill,
whether provisionally applied to reduce the Obligations under Section 2.1 or
otherwise). This across-the-board one (1) Business Day clearance or float charge
on all Collections is acknowledged by the parties to constitute an integral
aspect of the pricing of Foothill's financing of Borrower, and shall apply
irrespective of the characterization of whether receipts are owned by Borrower
or Foothill, and whether or not there are any outstanding Advances, the effect
of such clearance or float charge being the equivalent of charging one (1)
Business Day of interest on such Collections. Should any Collection item not be
honored when presented for payment, then Borrower shall be deemed not to have
made such payment, and interest shall be recalculated accordingly. Anything to
the contrary contained herein notwithstanding, any Collection item shall be
deemed received by Foothill only if it is received into the Foothill Account on
a Business Day on or before 2:00 p.m. Eastern time. If any Collection item is
received into the Foothill Account on a non-Business Day or after 2:00 p.m.
Eastern time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
2.7 DESIGNATED ACCOUNT. Foothill is authorized to make the Advances
and the Letters of Credit under this Agreement based upon telephonic or other
instructions received from anyone purporting to be an Authorized Person, or
without instructions if pursuant to Section 2.4(e). Borrower agrees to
establish and maintain the Designated Account with the Designated Account Bank
for the purpose of receiving the proceeds of the Advances requested by Borrower
and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder shall
be made to the Designated Account.
2.8 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Foothill
shall maintain an account on its books in the name of the Borrower (the "Loan
Account") on which Borrower will be charged with all Advances made by Foothill
to Borrower or for Borrower's account, including accrued interest, Foothill
Expenses, and any other payment Obligations of Borrower. In accordance with
Section 2.6, the Loan Account will be credited with all payments received by
Foothill from Borrower or for Borrower's account, including all amounts received
in the Foothill Account from any Lockbox Bank. Foothill shall render statements
regarding the Loan Account to Borrower, including principal, interest, fees, and
including an itemization of all charges and expenses constituting Foothill
Expenses owing, and such statements shall be conclusively presumed to be correct
and accurate and constitute an account stated between Borrower and Foothill
unless, within thirty (30) days after receipt thereof by Borrower, Borrower
shall deliver to Foothill written objection thereto describing the error or
errors contained in any such statements.
2.9 FEES. Borrower shall pay to Foothill the following fees:
(A) Closing Fee. On the Closing Date, a closing fee of $37,500
(B) Unused Line Fee. On the first day of each month during the
term of this Agreement, an unused line fee in an amount equal to three-eighths
of one percent (0.375%) per annum times the Average Unused Portion of the
Maximum Amount;
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(C) Annual Facility Fee. On each anniversary of the Closing Date,
an annual facility fee in an amount equal to one-eighth of one percent (0.125%)
of the Maximum Amount;
(D) Financial Examination, Documentation, and Appraisal Fees.
Foothill's customary fee of $650 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill (provided, so long as no Event of
Default has occurred, Borrower shall not be required to pay more than $16,250 in
examiner fees, (specifically excluding out-of-pocket expenses) during any
calendar year); Foothill's customary appraisal fee of $1,500 per day per
appraiser, plus out-of-pocket expenses for each appraisal of the Collateral
performed by personnel employed by Foothill; and, the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations (i.e., audits) of
Borrower or to appraise the Collateral; and, on each anniversary of the Closing
Date, Foothill's customary fee of $1,000 per year for its loan documentation
review; and Borrower acknowledges that Foothill, ▇▇▇▇-DoveTech Global Valuation,
▇▇▇▇▇-▇▇▇▇▇▇ Corporation or any other Person selected by Foothill and reasonably
acceptable to Borrower, shall conduct appraisals, reviews and/or audits of the
Collateral not less than once every ninety (90) days (commencing ninety (90)
days from the date of the appraisal obtained by Foothill prior to the Closing
Date); provided, so long as no Event of Default has occurred, Borrower shall not
be required to pay more than $4,000 in fees for any such quarterly appraisal and
such appraisals shall not occur more than once each ninety day period; and
(E) Servicing Fee. On the first day of each month during the term of
this Agreement, and thereafter so long as any Obligations are outstanding, a
servicing fee in an amount equal to $1,500.
(F) Miscellaneous. The fees set forth above shall be fully earned
when due, non-refundable when paid and, if applicable, computed on the basis of
a 360 day year for the actual number of days elapsed.
2.10 TAX INDEMNITY. (a) All payments by Borrower under this Agreement or
under any other Loan Document shall be made free and clear of and without
deduction or withholding for any and all taxes, levies, imposts, deck charges or
withholding and all liabilities with respect thereto, excluding taxes paid or
payable by Foothill or required to be withheld from a payment to Foothill as a
result of Foothill having a present or former connection to the jurisdiction
imposing such tax (other than such connection arising solely from Foothill
having executed and delivered or performed its obligations or received a payment
under, this Agreement or any other Loan Document) (all such non-excluded taxes,
levies, imposts, deductions, charges, withholdings and other liabilities being
referred to herein as "Taxes"), unless such Taxes are required by law or the
administration thereof to be withheld or deducted. If Borrower shall be required
by law or the administration thereof to deduct or withhold any Taxes from or in
respect of any sum payable under this Agreement or any other Loan Document: (i)
the sum payable shall be increased (and, for greater certainty, in the case of
interest, the amount of interest shall be increased) as may be necessary so that
after making all required deductions or withholdings (including deductions or
withholdings applicable to additional amounts paid under this Section 2.10)
Foothill receives an amount equal to the sum it would have received if no
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deductions or withholdings had been made; (ii) Borrower shall make such
deductions or withholdings; and (iii) Borrower shall pay the full amount
deducted or withheld to the relevant taxation or other authority in accordance
with applicable law.
(B) Borrower shall pay any present or future stamp or documentary taxes or
any other foreign exchange, foreign investment, property or any other type of
taxes, charges, fees or costs or similar levies or any financial institutions
duty and debits tax which arise from any payment made under this Agreement or
any other Loan Document or from the execution, delivery or registration of, or
otherwise with respect to, this Agreement or any other Loan Document (all such
taxes, fees or charges, costs, and levies being herein referred to as "Other
Taxes")
(C) Borrower shall indemnify Foothill for the full amount of Taxes and
Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by
any jurisdiction on amounts payable under this Section 2.10) paid by Foothill
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto, whether or not such Taxes or Other Taxes are correctly
or legally asserted so that, after the receipt of any indemnity payment under
this Section 2.10, Foothill shall be in the same position as it would have been
had it not been required to pay any Taxes or Other Taxes. Borrower shall also
indemnify Foothill on a after-tax basis for any additional taxes on net income
that Foothill may be obliged to pay as the result of the receipt of additional
amounts under this Section 2.10 (computed on the basis that the only receipts
and deductions of Foothill are in respect of the Obligations). Payment under
this indemnification shall be made within thirty (30) days from the date
Foothill makes written demand therefor. A certificate as to the amounts owing by
Borrower under this Section 2.10 submitted to Borrower by Foothill shall be
conclusive evidence, absent manifest error, of the amount due from Borrower to
Foothill. For greater certainty, the parties acknowledge that nothing contained
in this Section 2.10 shall be interpreted as requiring Borrower to pay to any
taxation authority any Taxes or Other Taxes owed by it to such taxation
authority and which are contested in good faith and by proper proceedings and
against which adequate reserves are maintained, provided that any such contest
of Taxes or Other Taxes shall have no effect on any rights of Foothill under
this Section 2.10, including without limitation, the right to receive
indemnification payments within thirty (30) days of written demand therefor.
(D) Borrower shall furnish to Foothill the original or a certified copy of
a receipt evidencing payment of Taxes or Other Taxes, promptly after receipt by
Borrower of any such receipt.
(E) If Foothill is, in its sole opinion, entitled to claim a refund or
able to apply for or otherwise take advantage of any tax credit, tax deduction
or similar benefit by reason of any withholding or deduction made by Borrower in
respect of a payment made by it hereunder which payment shall have been
increased pursuant to Section 2.10(a), then Foothill will use reasonable efforts
to obtain such refund, credit, deduction or benefit and upon receipt thereof
will pay to Borrower such amount (if any) not exceeding the increased amount
paid by Borrower as equals the net after-tax value to Foothill of such part of
such refund, credit, deduction or benefit as it considers is allocable to such
withholding or deduction having regard to all its dealings giving rise to
similar credits, deductions or benefits in relation to the same tax period and
to the cost of obtaining the same. There is no obligation for Foothill to claim
any refund or to apply for or take advantage of any tax credit, tax deduction or
similar benefit as contemplated by this paragraph.
23.
Nothing herein shall (i) interfere with the right of Foothill to arrange its tax
affairs in whatever manner it deems appropriate; and (ii) Foothill shall not be
obligated to disclose to Borrower any information regarding its tax affairs or
tax computations, except to the extent that such information is necessary to
determine Borrower's liability hereunder. Further, Foothill shall not be under
any obligation to claim relief from its corporate profits or similar tax
liability in respect to any such deduction or withholding in priority to any
other relief, claims, credits or deductions available to it.
(f) Notwithstanding anything in this Section 2.10 to the contrary, at no
time shall Borrower be obligated to pay any corporate level excise tax,
franchise tax, income tax or any privilege tax measured based on income of
Foothill.
(g) Without prejudice to the survival of any other agreement or obligation
of the Borrower hereunder, the obligations of Borrower under this Section 2.10
shall survive the payment in full of the Obligations.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND LETTER OF CREDIT.
The obligation of Foothill to make the initial Advance or to issue the initial
Letter of Credit is subject to the fulfillment, to the satisfaction of Foothill
and its counsel, of each of the following conditions on or before the Closing
Date:
(A) the Closing Date shall occur on or before July 31, 1997;
(B) Foothill shall have received searches reflecting the filing
of its financing statements;
(C) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(1) the Lockbox Agreements;
(2) the Disbursement Letter;
(3) the Pay-Off Letter, UCC termination statements and
other documentation evidencing the termination by Existing Lender of its Liens
in and to the properties and assets of Borrower, and UCC termination statements
for all other Liens in and to the properties and assets of Borrower that are not
Permitted Liens; and
(4) the Subordination Agreement, the Trademark Security
Agreement, the Patent Security Agreement, and the other Loan Documents;
(D) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
24.
(E) Foothill shall have received copies of Borrower's Governing
Documents, as amended, modified, or supplemented to the Closing Date, certified
by the Secretary of Borrower;
(F) Foothill shall have received a certificate of status with
respect to Borrower, dated within ten (10) days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(G) Foothill shall have received certificates of status with
respect to Borrower, each dated within fifteen (15) days of the Closing Date,
such certificates to be issued by the appropriate officer of the jurisdictions
in which its failure to be duly qualified or licensed would constitute a
Material Adverse Change, which certificates shall indicate that Borrower is in
good standing in such jurisdictions;
(H) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by Section 6.10, the
form and substance of which shall be satisfactory to Foothill and its counsel;
(I) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(J) Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill and its counsel in their
sole discretion;
(K) After giving effect to the making of the requested initial
Advance hereunder, Borrower shall have demonstrated that it has, on the Closing
Date, funds available to be borrowed hereunder in an aggregate amount equal to
or greater than $500,000;
(L) Foothill shall have received satisfactory evidence that all
tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except such taxes that are the subject of a Permitted Protest; and
(M) all other documents and legal matters in connection with the
transactions contemplated by this Agreement shall have been delivered, executed,
or recorded and shall be in form and substance satisfactory to Foothill and its
counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND ALL LETTERS OF CREDIT.
The following shall be conditions precedent to all Advances and all Letters of
Credit hereunder:
(A) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all respects
on and as of the date of such extension of credit, as though made on and as of
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
25.
(B) no Default or Event of Default shall have occurred and be
continuing on the date of such extension of credit, nor shall either result from
the making thereof, and
(C) no injunction, writ, restraining order, or other order of
any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(A) within thirty (30) days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel.
3.4 TERM. This Agreement shall become effective upon the execution
and delivery hereof by Borrower and Foothill and shall continue in full force
and effect for a term ending on the date (the "Maturity Date") that is four (4)
years from the Closing Date, unless sooner terminated pursuant to the terms
hereof. The foregoing notwithstanding, Foothill shall have the right to
terminate its obligations under this Agreement immediately and without notice
upon the occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated.
3.6 EARLY TERMINATION BY BORROWER. Borrower has the option, at any
time upon ninety (90) days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations (including an amount
equal to 102% of the undrawn amount of the Letters of Credit), in full, together
with a premium (the "Early Termination Premium") equal to (a) the Maximum
Amount, multiplied by (b) (i) four percent (4%) if such termination occurs prior
to the twelve month anniversary of the Closing Date, (ii), three percent (3%) if
such termination occurs after the twelve month anniversary of the Closing Date
but at any time during the thirteenth month after the Closing Date, and (iii)
(x) three percent (3%) minus (y) the product of (A) one-twelfth of one percent
(l/12%) multiplied by (B) the number of months after the thirteenth month
anniversary of the Closing Date during which such termination occurs, if such
termination occurs at any time after the thirteenth month anniversary of the
Closing Date; provided, however, any Early Termination Premium required to be
paid pursuant to the provisions of this Section shall be reduced by fifty
percent (50%) if such early termination occurs solely as a result of an initial
public offering of Borrower or the sale of all capital stock or
26.
all or substantially all assets of Borrower to any other Person other than a
Person that is an Affiliate of Borrower prior to such sale.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates this
Agreement during the continuance of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Foothill a
continuing security interest in all currently existing and hereafter acquired or
arising collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Foothill's security interest in
the Collateral shall attach to all Collateral without further act on the part of
Foothill or Borrower. Anything contained in this Agreement or any other Loan
Document to the contrary notwithstanding, except as permitted by Section 7.4,
Borrower has no authority, express or implied, to sell or dispose of any item or
portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. Upon the occurrence and during the continuation of an Event of
Default or if Foothill deems itself insecure, Foothill or Foothill's designee
may (a) notify customers or Account Debtors of Borrower that the Accounts,
General Intangibles, or Negotiable Collateral have been assigned to Foothill or
that Foothill has a security interest therein, and (b) collect the Account,
General Intangibles, and Negotiable Collateral directly and charge the
collection costs and expenses to the Loan Account. Borrower agrees that it will
hold in trust for Foothill, as Foothill's trustee, any Collections that it
receives and immediately will deliver said Collections to Foothill in their
original form as received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon
the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
account, letters of authority, and all other documents that Foothill reasonably
may request, in form reasonably satisfactory to Foothill, to perfect and
continue perfected Foothill's security interests in the Collateral, and in order
to fully consummate all of the transactions contemplated hereby and under the
other the Loan Documents.
27.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of Borrower on any of
the documents described in Section 4.4, (b) at any time that an Event of Default
has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or ▇▇▇▇ of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to Account Debtors, (c) send requests for verifications of
Account, (d) endorse Borrower's name on any Collection item that may come into
Foothill's possession, (e) at any time that an Event of Default has occurred and
is continuing or Foothill deems itself insecure, notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure, make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance, and (g) at any time that
an Event of Default has occurred and is continuing or Foothill deems itself
insecure, settle and adjust disputes and claims respecting the Accounts directly
with Account Debtors, for amounts and upon terms that Foothill determines to be
reasonable, and Foothill may cause to be executed and delivered any documents
and releases that Foothill determines to be necessary. The appointment of
foothill as Borrower's attorney, and each and every one of Foothill's rights and
powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully and finally repaid and performed and Foothill's
obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter (during
normal business hours if no Event of Default then exists or at any time if an
Event of Default then exists) to inspect Borrower's Books and to check, test,
and appraise the Collateral in order to verify Borrower's financial condition or
the amount, quality, value, condition of, or any other matter relating to, the
Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all respects as of the date hereof, and shall be true, correct,
and complete in all respects as of the Closing Date, and at and as of the date
of the making of each Advance or Letter of Credit thereafter, as though made on
and as of the date of such Advance or Letter of Credit (except to the extent
that such representations and warranties relate solely to an earlier date) and
such representations and warranties shall survive the execution and delivery of
this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to the
Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing
obligations created by the sale and delivery of Inventory or the rendition of
services to Account
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Debtors in the ordinary course of Borrower's business, unconditionally owed to
Borrower without defenses, disputes, offsets, counterclaims, or rights of return
or cancellation. The property giving rise to such Eligible Accounts has been
delivered to the Account debtor, or to the account Debtor's agent for immediate
shipment to and unconditional acceptance by the Account Debtor. Borrower has not
received notice of actual or imminent bankruptcy, insolvency, or material
impairment of the financial condition of any Account Debtor regarding any
Eligible Account.
5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and
merchantable quality, free from known defects.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. Except for (a) Inventory-
in-transit in the ordinary course of business from one location on Schedule 6.12
to another location on Schedule 6.12 and (b) Inventory on consignment at King
Technology in accordance with Section 7.10 hereof, the Inventory and Equipment
are not stored with a bailee, consignee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
5.6 INVENTORY RECORDS. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality, and quantity of the Inventory,
and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is ▇▇-▇▇▇▇▇▇▇.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(A) Borrower is duly organized and existing and in good standing
under the laws of the jurisdiction of its incorporation and qualified and
licensed to do business in, and in good standing in, any state where the failure
to be so licensed or qualified reasonably could be expected to have a Material
Adverse Change.
(B) Set forth on Schedule 5.8, is a complete and accurate list
of all shareholder of Borrower owning five (5) percent or more of Borrower's
capital stock as of the Closing Date, showing: (i) the number of shares of each
class of common and preferred stock authorized for Borrower; and (ii) the number
and the percentage of the outstanding shares of each such class owned by such
shareholders.
(C) Set forth on Schedule 5.8, is a complete and accurate list
of Borrower's direct and indirect subsidiaries, showing: (i) the jurisdiction of
their incorporation (ii) the number of shares of each class of common and
preferred stock authorized for each of such Subsidiaries; and (iii) the number
and the percentage of the outstanding shares of each such class owned directly
or indirectly by Borrower. All of the outstanding capital stock of each such
Subsidiary has been validly issued and is fully paid and non-assessable.
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(D) Except as set forth on Schedule 5.8, no capital stock (or
any securities, instruments, warrants, options, purchase rights, conversion or
exchange rights, calls, commitments or claims of any character convertible into
or exercisable for capital stock) of Borrower or any direct or indirect
Subsidiary of Borrower is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(A) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(B) The execution, delivery, and performance by Borrower of this
Agreement and the Loan Documents to which it is a party do not and will not (i)
violate any provision of federal, state, or local law or regulation (including
Regulations G, T, U, and X of the Federal Reserve Board) applicable to Borrower,
the Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict with,
result in a breach of, or constitute (with due notice or lapse of time or both)
a default under any material contractual obligation or material lease of
Borrower (including the Subordinated Debt), (iii) result in or require the
creation or imposition of any Lien of any nature whatsoever upon any properties
or assets of Borrower, other than Permitted Liens, or (iv) require any approval
of stockholders or any approval or consent of any Person under any material
contractual obligation of Borrower, except for Alcatel (which consent has been
obtained).
(C) Other than the filing of appropriate financing statements,
and the filing of the Trademark Security Agreement and the Patent Security
Agreement with the United States Patent and Trademark Office, the execution,
delivery, and performance by Borrower of this Agreement and the Loan Documents
to which Borrower is a party do not and will not require any registration with,
consent, or approval of, or notice to, or other action with or by, any federal,
state, foreign, or other Governmental Authority or other Person, except for
Alcatel (which consents has been obtained).
(D) This Agreement and the Loan Documents to which Borrower is a
party, and all other documents contemplated hereby and thereby, when executed
and delivered by Borrower will be the legally valid and binding obligations of
Borrower, enforceable against Borrower in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to
or limiting creditors' rights generally.
(E) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or
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belief of any pending, threatened, or imminent litigation, governmental
investigations, or claims, complaints, actions, or prosecutions involving
Borrower or any guarantor of the Obligations, except for; (a) ongoing collection
matters in which Borrower is the plaintiff: (b) matters disclosed on Schedule
5.10; and (c) matters arising after the date hereof that, if decided
adversely to Borrower, would not have a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to
Borrower or any guarantor of the Obligations that have been delivered by
Borrower to Foothill have been prepared in accordance with GAAP (except, in the
case of unaudited financial statements, for the lack of footnotes and being
subject to year-end audit adjustments) and fairly present Borrower's (or such
guarantor's, as applicable) financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been a
Material Adverse Change with respect to Borrower (or such guarantor, as
applicable) since the date of the latest financial statements submitted to
Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is being
made by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan Documents
with the intent to hinder, delay, or defraud either present or future creditors
of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries, or
any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on Schedule 5.13. Borrower, each of its Subsidiaries and
each ERISA Affiliate have satisfied the minimum funding standards of ERISA and
the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA
Affiliate is required to provide security to any Plan under Section 401(a)(29)
of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets
has ever been used by Borrower or, to the best of Borrower's knowledge, by
previous owners or operators in the disposal of, or to produce, store, handle,
treat, release, or transport, any Hazardous Materials. To the best of Borrower's
knowledge, none of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
Hazardous Materials disposal site, or a candidate for closure pursuant to any
environmental protection statute. To the best of Borrower's knowledge, no Lien
arising under any environmental protection statute has attached to any revenues
or to any real or personal property owned or operated by Borrower. Borrower has
not received a summons, citation, notice, or directive from the Environmental
Protection Agency or any other federal or state governmental agency concerning
any action or omission by Borrower resulting in the releasing or disposing of
Hazardous Materials into the environment.
6. AFFIRMATIVE COVENANTS.
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Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, and
unless Foothill shall otherwise consent in writing, Borrower shall do all of
the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral that contain
information as from time to time may reasonably be requested by Foothill.
Borrower also shall keep a modern inventory reporting system that shows all
additions, sales, claims, returns, and allowances with respect to the Inventory.
6.2 COLLATERAL REPORTING. Provide Foothill with the following
document at the following times in form satisfactory to Foothill: (a) on each
Business Day, a sales journal, collection journal, and credit register since the
last such schedule and a calculation of the Borrowing Base as of such date, (b)
on a monthly basis and, in any event, by no later than the tenth (10/th/) day of
each month during the term of this Agreement, (i) a detailed calculation of the
Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together
with a reconciliation to the detailed calculation of the Borrowing Base
previously provided to Foothill, (c) on a monthly basis and, in any event, by no
later than the tenth (10/th/) day of each month during the term of this
Agreement, a summary aging, by vendor, of Borrower's accounts payable and any
book overdraft, (d) on a weekly basis, Inventory reports specifying Borrower's
cost and the wholesale market value of its Inventory by category, with
additional detail showing additions to and deletions from the Inventory, (e) on
each Business Day, notice of all returns, disputes, or claims, (f) upon request,
copies of invoices in connection with the Accounts, customer statement, credit
memos, remittance advices and reports, deposit slips, shipping and delivery
documents in connection with the Accounts and for Inventory and Equipment
acquired by Borrower, purchase orders and invoices, (g) on a quarterly basis, a
detailed list of Borrower's customers, (h) on a monthly basis, a calculation of
the Dilution for the prior month; and (i) such other reports as to the
Collateral or the financial condition of Borrower as Foothill may request from
time to time. Original sales invoices evidencing daily sales shall be mailed by
Borrower to each Account Debtor and, upon the occurrence of an Event of Default
or at Foothill's request if Foothill deems itself insecure, the invoices shall
indicate on their face that the Account has been assigned to Foothill and that
all payments are to be made directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Deliver to
Foothill: (i) as soon as available, but in any event within forty-five (45) days
after the end of each month during each of Borrower's fiscal years, a company
prepared balance sheet, income statement, and statement of cash flow covering
Borrower's operations during such period; (ii) as soon as available, but in any
event within forty-five (45) days after the end of each fiscal year of Borrower,
a company prepared balance sheet, income statement, and statement of cash flow
covering Borrower's operations during such period, and (iii) as soon as
available, but in any event within ninety (90) days after the end of each of
Borrower's fiscal years, financial statements of Borrower for each such fiscal
year, audited by independent certified public accountants reasonably acceptable
to Foothill and certified, without any qualifications, by such accountants to
have been prepared in accordance with GAAP, together with a certificate of such
addressed to Foothill stating that such accountants do not have knowledge of the
existence of any Default or Event of Default. Such audited financial statements
shall include a balance sheet,
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profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent company of one or
more Subsidiaries, or Affiliates, or is a Subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
(B) Together with the above, if Borrower becomes a public
corporation, Borrower also shall deliver to Foothill Borrower's Form 10-Q
Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and
any other filings made by Borrower with the Securities and Exchange Commission,
if any, as soon as the same are filed, or any other information that is provided
by Borrower to its shareholders, and any other report reasonably requested by
Foothill relating to the financial condition of Borrower, and if Parent becomes
a public corporation, Borrower shall also deliver to Foothill each of the above-
referenced reports of, and filings made by, Parent.
(C) (1) Each month, together with the financial statements provided
pursuant to Section 6.3(a), Borrower shall deliver to Foothill a certificate
signed by its chief financial officer stating that: (x) all financial statements
delivered or caused to be delivered to Foothill hereunder have been prepared in
accordance with GAAP (except with respect to the equity adjustment made with
respect to the entry of the Alcatel Debt as a liability of Borrower and except,
in the case of unaudited financial statements, for the lack of footnotes and
being subject to year-end audit adjustments) and fairly present the financial
condition of Borrower, (y) the representations and warranties of Borrower
contained in this Agreement and the other Loan Documents are true and correct in
all material respects on and as of the date of such certificate, as though made
on and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date), and (z) on the date of delivery of
such certificate to Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (x) or
(y), to the extent of any non-compliance, describing such non-compliance as to
which he or she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto); and (ii) each fiscal year,
together with the financial statements provided pursuant to Section 6.3(a)(ii)
for such fiscal year, Borrower shall deliver to Foothill a certificate signed by
its chief financial officer certifying the EBITDA as of the end of such fiscal
year and showing in reasonable detail the calculation thereof.
(D) Borrower shall have issued written instructions to its
independent certified public accounts authorizing them to communicate with
Foothill and to release to Foothill whatever financial information concerning
Borrower that Foothill may request and that is in such accountant's possession,
custody or control. Borrower hereby irrevocably authorizes and directs all
auditors, accountants, or other third parties to deliver to Foothill, at
Borrower's expense, copies of Borrower's financial statements, papers related
thereto, and other accounting records of any nature in their possession, and to
disclose to Foothill any information they may have regarding Borrower's business
affairs and financial conditions. In all cases, Foothill shall request that
Borrower obtain and provide such information to Foothill and give Borrower a
reasonable opportunity to so provide same and only if the requested information
is not so provided shall Foothill request such information directly from such
auditors, accountants or other third parties.
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(E) Borrower shall deliver to Foothill, promptly after its
preparation of same, copies of all notices and, upon the request of Foothill,
copies of such other information provided to the holder of the Subordinated
Debt, and promptly after its receipt of same, copies of all notices or other
documents received from the holder of the Subordinated Debt.
6.4 TAX RETURNS. Deliver to Foothill copies of each of Borrower's future
federal income tax returns, and any amendments thereto, within thirty (30) days
of the filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Intentionally Omitted.
6.6 RETURNS. Cause returns and allowances, if any, as between Borrower
and its Account Debtors to be on the same basis and in accordance with the usual
customary practices of Borrower, as they exist at the time of the execution and
delivery of this Agreement. If, at a time when no Event of Default has occurred
and is continuing, any Account Debtor returns any Inventory to Borrower,
Borrower promptly shall determine the reason for such return and, if Borrower
accepts such return, issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor. If, at a time when
an Event of Default has occurred and is continuing, any Account Debtor returns
any Inventory to Borrower, Borrower promptly shall determine the reason for such
return and, if Foothill consents (which consent shall not be unreasonably
withheld), issue a credit memorandum (with a copy to be sent to Foothill) in the
appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Foothill's reasonable request, Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good operating
condition and repair (ordinary wear and tear excepted), and make all necessary
replacements thereto so that the value and operating efficiency thereof shall at
all times be maintained and preserved. Other than those items of Equipment that
constitute fixtures on the Closing Date, Borrower shall not permit any item of
Equipment to become a fixture to real estate or an accession to other property,
and such Equipment shall at all times remain personal property.
6.9 TAXES. Cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that the validity of
such assessment or tax shall be the subject of a Permitted Protest. Borrower
shall made due and timely payment or deposit of all such federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Foothill, on demand, appropriate certificates attesting
to the payment thereof or deposit with respect thereto. Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof reasonably satisfactory to Foothill indicating that
Borrower has made such payments or deposits.
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6.10 INSURANCE.
(A) At its expense, keep the Collateral insured against loss or
damage by fire, theft, explosion, sprinklers, and all other hazards and risks,
and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation.
(B) All such policies of insurance shall be in such form, with such
companies, and in such amounts as may be reasonably satisfactory to Foothill.
All insurance required herein shall be written by companies which are authorized
to do insurance business in the State of California. All hazard insurance and
such other insurance as Foothill shall specify, shall contain a California Form
438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to
Foothill, showing Foothill as sole loss payee thereof and shall contain a waiver
of warranties. Every policy of insurance referred to in this Section 6.10 shall
contain an agreement by the insurer that it will not cancel such policy except
after thirty (30) days prior written notice to Foothill and that any loss
payable thereunder shall be payable notwithstanding any act or negligence of
Borrower or Foothill which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment and notwithstanding (i) occupancy or
use of the Collateral for purposes more hazardous than permitted by the terms of
such policy or (ii) any change in title or ownership of the Collateral. Borrower
shall deliver to Foothill certified copies of such policies of insurance and
evidence of the payment of all premiums therefor.
(C) Original policies or certificates thereof satisfactory to
Foothill evidencing such insurance shall be delivered to Foothill at least (30)
days prior to the expiration of the existing or preceding policies. Borrower
shall give Foothill prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss. Foothill shall have the
exclusive right to adjust all losses payable under any such insurance policies
without any liability to Borrower whatsoever in respect of such adjustments. Any
monies received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Foothill to be applied
at the option of Foothill either to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect, or shall be disbursed to
Borrower under stage payment terms satisfactory to Foothill for application to
the cost of repairs, replacements, or restorations. All repairs, replacements,
or restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction. Upon the occurrence of an Event of Default, Foothill
shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Foothill shall determine.
(D) Borrower shall not take out separate insurance concurrent in form
or contributing in the event of loss with that required to be maintained under
this Section 6.10, unless Foothill is included thereon as named insured with the
loss payable to Foothill under a standard California 438BFU (NS) Mortgagee
endorsement, or its local equivalent. Borrower immediately shall notify Foothill
whenever such separate insurance is taken out, specifying the
35.
insurer thereunder and full particulars as to the policies evidencing the same,
and originals of such policies immediately shall be provided to Foothill.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the
other Loan Documents by or on behalf of Borrower without setoff or counterclaim
and free and clear of, and without deduction or withholding for or on account
of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment
only at the locations identified on Schedule 6.12; provided, however, that
Borrower may amend Schedule 6.12 so long as such amendment occurs by written
notice to Foothill not less than thirty (30) days prior to the date on which the
Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's security
interests in such assets and also provides to Foothill a Collateral Access
Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable
laws, rules, regulations, and orders of any governmental authority, including
the Fair Labor Standards Act and the Americans With Disabilities Act, other than
laws, rules, regulations, and orders the non-compliance with which, individually
or in the aggregate, would not have and could not reasonably be expected to
result in a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(A) Promptly, and in any event within ten (10) Business Days after
Borrower or any of its Subsidiaries knows or has reason to know that an ERISA
Event has occurred that reasonably could be expected to result in a Material
Adverse Change, deliver to Foothill a written statement of the chief financial
officer of Borrower describing such ERISA Event and any action that is being
taking with respect thereto by Borrower, any such Subsidiary or ERISA Affiliate,
and any action taken or threatened by the IRS, Department of Labor, or PBGC.
Borrower or such Subsidiary, as applicable, shall (i) be deemed to know all
facts known by the administrator of any Benefit Plan of which it is the plan
sponsor, (ii) promptly, and in any event within three (3) Business Days after
the filing thereof with the IRS, deliver to Foothill a copy of each funding
waiver request filed with respect to any Benefit Plan and all communications
received by Borrower, any of its Subsidiaries or, to the knowledge of Borrower,
any ERISA Affiliate with respect to such request, and (iii) promptly, and in any
event within three (3) Business Days after receipt by Borrower, any of its
Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate, of the
PBGC's intention to terminate a Benefit Plan or to have a trustee appointed to
administer a Benefit Plan, deliver to Foothill copies of each such notice.
(B) Cause to be delivered to Foothill, upon Foothill's request, each
of the following: (i) a copy of each Plan (or, where any such plan is not in
writing, complete description thereof) (and if applicable, related trust
agreements or other funding instruments) and all amendments thereto, all written
interpretations thereof and written descriptions thereof that have been
distributed to employees or former employees of Borrower or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each
Benefit Plan; (iii) for the
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three most recent plan years, annual reports on Form 5500 Series required to be
filed with any governmental agency for each Benefit Plan; (iv) all actuarial
reports prepared for the last three plan years for each Benefit Plan; (v) a
listing of all Multiemployer Plans, with the aggregate amount of the most recent
annual contributions required to be made by Borrower or any ERISA Affiliate to
each such plan and copies of the collective bargaining agreements requiring such
contributions; (vi) any information that has been provided to Borrower or any
ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and
(vii) the aggregate amount of the most recent annual payments made to former
employees of Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable under any
leases to which Borrower is a party or by which Borrower's properties and assets
are bound, unless such payments are the subject of a Permitted Protest. To the
extent that Borrower fails timely to make payment of such rents and other
amounts payable when due under its leases, Foothill shall be entitled, in its
discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder shall
be available and until full and final payment of the Obligations, Borrower will
not do any of the following without Foothill's prior written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(A) Indebtedness evidenced by this Agreement, together with
Indebtedness to issuers of letters of credit that are the subject of L/C
Guarantees;
(B) Indebtedness set forth on Schedule 7.1 and in existence on
the Closing Date;
(C) Indebtedness secured by Permitted Liens;
(D) the Alcatel Debt and the Subordinated Debt,
(E) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this Section 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the terms
and conditions of such refinancings, renewals, or extensions do not materially
impair the prospects of repayment of the Obligations by Borrower, (ii) the net
cash proceeds of such refinancings, renewals, or extensions do not result in an
increase in the aggregate principal amount of the Indebtedness so refinanced,
renewed, or extended, (iii) such refinancings, renewals, refundings, or
extensions do not result in a shortening of the average weighted maturity of the
Indebtedness so refinanced, renewed, or extended, and (iv) to the extent that
Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness; and
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(F) Indebtedness permitted by Section 7.6 of this Agreement.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(e) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any merger,
consolidation, or reorganization, or, except in connection with the Subordinated
Lender's conversion of the Subordinated Debt into equity of Borrower in
accordance with the documents evidencing the Subordinated Debt as in effect on
the Closing Date, any recapitalization or reclassification of its capital stock,
or liquidate, wind up, or dissolve itself (or suffer any liquidation or
dissolution), or convey, sell, assign, lease, transfer, or otherwise dispose of,
in one transaction or a series of transactions, all or any substantial part of
its property or assets.
7.4 SALE OR DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than (a) the
sale of Inventory in the ordinary course of Borrower's business and (b) physical
assets disposed of or replaced in the ordinary course of Borrower's business as
currently conducted and in an aggregate amount not exceeding $100,000 during any
fiscal year.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate structure
(within the meaning of Section 11-9-402(7) of the Code), or identity, or add any
new fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable with
respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal nature of
Borrower's business.
7.8 REPAYMENTS, PREPAYMENTS AND AMENDMENTS.
(A) Make any payment on (i) the Subordinated Debt; provided,
however, if no Default or Event of Default then exists or would be caused
thereby, Borrower may make regularly scheduled payments of interest on the
Subordinated Debt; to the extent permitted by the Subordination Agreement; and
(ii) the Alcatel Debt; provided, however, if no Default or Event of Default then
exists or would be caused thereby, Borrower may make regularly scheduled
payments of principal and interest on the Alcatel Debt if (x) after giving
effect to such payments and of other Advances to be made hereunder on such date,
Borrower shall have borrowing availability hereunder of not less than $50,000,
and (y) the aggregate amount of all principal payments an the Alcatel Debt
(whether made directly to Alcatel or via a distribution to Parent) made by
Borrower during the term of this Agreement does not exceed $1,000,000;
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(B) Except in connection with a refinancing permitted by Section
7.1(e), prepay, redeem, retire, defease, purchase, or otherwise acquire any
Indebtedness owing to any third Person, other than the Obligations in accordance
with this Agreement; and
(C) Directly or indirectly, amend, modify, alter, increase, or
change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under Sections 7.1 (b), (c), (d) or (e); provided, however, Borrower may amend
the Alcatel Debt to extend the scheduled repayment thereof.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control, except, with the prior written consent of
Foothill (and if no Event of Default then exists, which consent shall not be
unreasonably withheld), in connection with the conversion of Indebtedness of
Borrower into equity securities of Borrower or other recapitalization of the
stock of Borrower.
7.10 CONSIGNMENTS. Except for Inventory on consignment at King
Technology in amounts and in a manner consistent with Borrower's past business
practices and fully disclosed to Foothill, at any time, consign any Inventory or
sell any Inventory on ▇▇▇▇ and hold, sale or return, sale on approval, or other
conditional terms of sale.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding; provided, however, so long as no Default
or Event of Default then exists or would be caused thereby, if Borrower's
financial performance is equal to or better than that set forth in the
Projections, Borrower may make distributions to Parent which, together with all
distributions made to Parent during the term of this Agreement by Cortelco
International, Inc. and Cortelco Puerto Rico, Inc., do not exceed in the
aggregate $750,000. Additionally, Borrower may make a distribution to Parent for
payment of the Alcatel Debt to the extent such payment is permitted by Section
7.8(a)(ii).
7.12 ACCOUNTING METHODS. Modify or change its method of accounting or
enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau agreeing to provide Foothill information
regarding the Collateral or Borrower's financial condition. Borrower waives the
right to assert a confidential relationship, if any, it may have with any
accounting firm or service bureau in connection with any information requested
by Foothill pursuant to or in accordance with this Agreement, and agrees that
Foothill may contact directly any such accounting firm or service bureau in
order to obtain such information.
7.13 INVESTMENTS. Except as disclosed on Schedule 7.13 and except for
investments of the type described in clauses (a) and (b) below which do not
exceed $100,000 in an aggregate at any time owned by Borrower, directly or
indirectly (a) make or acquire, or incur any liabilities (including contingent
obligations) for or in connection with, any loan or advance to, or capital
contribution in, any Person, (b) acquire the securities (whether debt
39.
or equity) of, or other interests in, any Person, or (c) acquire all or
substantially all of the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms, that are fully disclosed to Foothill, and that
are no less favorable to Borrower than would be obtained in an arm's length
transaction with a non-Affiliate. Additionally, other than as permitted by
Section 7.11 hereof, Borrower shall not make any loan or advance or otherwise
transfer any funds (whether pursuant to an accounting entry on Borrower's or
Parent's books or otherwise) to an Affiliate without the prior written consent
of Foothill.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 COMPENSATION. Increase the annual fee or per-meeting fees paid
to directors during any year by more than twenty-five percent (25%) over the
prior year; or pay or accrue total cash compensation, during any year, to
officers and senior management employees appointed or employed as of the Closing
Date in an aggregate amount in excess of 120% of that paid or accrued in the
prior year. Borrower shall not pay or accrue total cash compensation, during any
year, to officers and senior management employees that are appointed or
initially employed after the Closing Date in an amount in excess of that which
is customary in Borrower's industry and consistent with Borrower's past business
practices.
7.17 USE OF PROCEEDS. Use the proceeds of the Advances made hereunder
for any purpose other than (a) on the Closing Date, (i) to repay in full the
principal, accrued interest, and accrued fees and expenses owing to Existing
Lender, and (ii) to pay transactional costs and expenses incurred in connection
with this Agreement, and (b) thereafter, consistent with the terms and
conditions hereof, for its lawful and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing thirty (30) days prior written notification thereof to
Foothill and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
continue perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or indirectly:
(A) engage, or permit any Subsidiary of Borrower to engage, in
any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
40.
(B) permit to exist with respect to any Benefit Plan any accumulated
funding deficiency (as defined in Sections 302 of ERISA and 412 of the IRC),
whether or not waived;
(C) fail, or permit any Subsidiary of Borrower to fail, to pay timely
required contributions or annual installments due with respect to any waived
finding deficiency to any Benefit Plan;
(D) terminate, or permit any Subsidiary of Borrower to terminate, any
Benefit Plan where such event would result in any liability of Borrower, any of
its Subsidiaries or any ERISA Affiliate under Title IV of ERISA;
(E) fail, or permit any Subsidiary of Borrower to fail, to make any
required contribution or payment to any Multiemployer Plan;
(F) fail, or permit any Subsidiary of Borrower to fail, to pay any
required installment or any other payment required under Section 412 of the IRC
on or before the due date for such installment or other payment;
(G) amend, or permit any Subsidiary of Borrower to amend, a Plan
resulting in an increase in current liability for the plan year such that either
of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is required to
provide security to such Plan under Section 401(a)(29) of the IRC; or
(H) withdraw, or permit any Subsidiary of Borrower to withdraw, from
any Multiemployer Plan where such withdrawal is reasonably likely to result in
any liability of any such entity under Title IV of ERISA.
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $100,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in Section 2, or
subsections 3.6 or 3.7, or Section 4.6 (other than subsections 6.4, 6.5, 6.8,
6.13, 6.14, or 6.15), or 7 of this Agreement;
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8.3 If Borrower fails or neglects to perform, keep, or observe any
term, provision, condition, covenant, or agreement contained in subsections 6.4,
6.5, 6.8, 6.13, 6.14 or 6.15, or any other section of this Agreement not
referenced elsewhere in this Section 8, or in any of the Loan Documents, or in
any other present or future agreement between Borrower and Foothill and such
failure is not cured or remedied within five (5) days;
8.4 If there is a Material Adverse Change;
8.5 If any material portion of Borrower's properties or assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any third Person;
8.6 If an Insolvency Proceeding is commenced by Borrower;
8.7 If an Insolvency Proceeding is commenced against Borrower and any
of the following events occur: (a) Borrower consents to the institution of the
Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within forty-five (45) calendar days of
the date of the filing thereof; provided, however, that, during the pendency of
such period, Foothill shall be relieved of its obligation to extend credit
hereunder; (d) an interim trustee is appointed to take possession of all or a
substantial portion of the properties or assets of, or to operate all or any
substantial portion of the business of, Borrower; or (e) an order for relief
shall have been issued or entered therein;
8.8 If Borrower is enjoined, restrained, or in any way prevented by
court order from continuing to conduct all or any material part of its business
affairs;
8.9 If a notice of Lien, levy, or assessment is filed of record with
respect to any of Borrower's properties or assets having an aggregate value in
excess of $200,000 by the United States Government, or any department, agency,
or instrumentality thereof, or by any state, county, municipal, or governmental
agency, or if any taxes or debts owing at any time hereafter to any one or more
of such entities becomes a Lien, whether ▇▇▇▇▇▇ or otherwise, upon any of
Borrower's properties or assets and the same is not paid on the payment date
thereof (Borrower expressly acknowledges that Foothill may establish a reserve
for the amount of any Lien of any governmental authority filed with respect to
or affecting any of the Collateral);
8.10 If a judgment or other, claim becomes a Lien or encumbrance upon
any material portion of Borrower's properties or assets;
8.11 (a) If any default occurs under the Subordinated Debt, or (b) if
there is a default in any other material agreement to which Borrower is a party
with one or more third Persons and such default (i) occurs at the final maturity
of the obligations thereunder, or (ii) results in a right by such third
Person(s), irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder;
8.12 If Borrower makes any payment on account of Indebtedness that has
been contractually subordinated in right of payment to the payment of the
Obligations, except to the
42.
extent such payment is expressly permitted hereunder and by the terms of the
subordination provisions applicable to such Indebtedness;
8.13 If any material misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by Borrower or any officer, employee, agent, or director of Borrower, or if any
such warranty or representation is withdrawn; or
8.14 If the obligation of any guarantor under its guaranty or other
third Person under any Loan Document is limited or terminated by operation of
law or by the guarantor or other third Person thereunder, or any such guarantor
or other third Person becomes the subject of an Insolvency Proceeding.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(A) Declare all Obligations, whether evidenced by this Agreement,
by any of the other Loan Documents, or otherwise, immediately due and payable;
(B) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(C) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of Foothill, but without affecting
Foothill's rights and security interests in the Collateral and without affecting
the Obligations;
(D) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Foothill considers advisable, and in
such cases, Foothill will credit Borrower's Loan Account with only the net
amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(E) Cause Borrower to hold all returned Inventory in trust for
Foothill, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory as
the property of Foothill;
(F) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Foothill considers necessary or
reasonable to protect it security interests in the Collateral. Borrower agrees
to assemble the Collateral if Foothill so requires, and to make the Collateral
available to Foothill as Foothill may designate. Borrower authorizes Foothill to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses incurred
in connection therewith. With respect to any of
43.
Borrower's owned or leased premises, Borrower hereby grants Foothill a license
to enter into possession of such premises and to occupy the same, without
charge, for up to one hundred twenty (120) days in order to exercise any of
Foothill's rights or remedies provided herein, at law, in equity, or otherwise;
(G) Without notice to Borrower (such notice being expressly waived),
and without constituting a retention of any collateral in satisfaction of an
obligation (within the meaning of Section 11-9-505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(H) Hold, as cash collateral, any and all balances and deposits of
Borrower held by Foothill, and any amounts received in the Lockbox Accounts, to
secure the full and final repayment of all of the Obligations.
(I) Seek the appointment of a receiver or keeper to take possession of
the Collateral and to enforce any of Foothill's remedies with respect to such
appointment without prior notice or hearing;
(J) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell (in the manner provided for herein) the
Collateral, Foothill is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademark, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Foothill's
benefit.
(K) Sell the Collateral at either a public or private sale, or both,
by way of one or more contracts or transactions, for cash or on terms, in such
manner and at such places (including Borrower's premises) as Foothill determines
is commercially reasonable. It is not necessary that the Collateral be present
at any such sale;
(L) Foothill shall give notice of the disposition of the Collateral as
follows:
(1) Foothill shall give Borrower and each holder of a security
interest in the Collateral who has filed with Foothill a written request for
notice, a notice in writing of the time and place of public sale, or, if the
sale is a private sale or some other disposition other than a public sale is to
be made of the Collateral, then the time on or after which the private sale or
other disposition is to be made;
(2) The notice shall be personally delivered or mailed, postage
prepaid, to Borrower as provided in Section 12, at least five (5) days before
the date fixed for the sale, or at least five (5) days before the date on or
after which the private sale or other disposition is to be made; no notice needs
to be given prior to the disposition of any portion of the Collateral that is
perishable or threatens to decline speedily in value or that is of a type
customarily sold on
44.
a recognized market. Notice to Persons other than Borrower claiming an interest
in the Collateral shall be sent to such addresses as they have furnished to
Foothill;
(3) If the sale is to be a public sale, Foothill also shall
give notice of the time and place by publishing a notice one time at least five
(5) days before the date of the sale in a newspaper of general circulation in
the county in which the sale is to be held,
(M) Foothill may credit bid and purchase at any public sale;
(N) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Foothill to Borrower; and
(O) Borrower hereby acknowledges that the Obligations arose out
of a commercial transaction, and agrees that if an Event of Default shall occur
Foothill shall have the right to an immediate writ of possession without notice
of a hearing. Foothill shall have the right to the appointment of a receiver for
the Collateral, and Borrower hereby consents to such rights and such appointment
and hereby waives any objection Borrower may have thereto or the right to have a
bond or other security posted by Foothill in connection therewith.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Foothill shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Foothill of one
right or remedy shall be deemed an election, and no waiver by Foothill of any
Event of Default shall be deemed a continuing waiver. No delay by Foothill
shall constitute a waiver election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessment, insurance
premiums, or, in the case of leased properties or assets, rents or other amounts
payable under such leases) due to third Persons, or fails to make any deposits
or furnish any required proof of payment or deposit, all as required under the
terms of this Agreement, then, to the extent that Foothill determines that such
failure by Borrower could result in a Material Adverse Change, in its discretion
and without prior notice to Borrower, Foothill may do any or all of the
following: (a) make payment of the same or any part thereof, (b) set up such
reserves in Borrower's Loan Account as Foothill deems necessary to protect
Foothill from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type described in Section 6.10, and take any action
with respect to such policies as Foothill deems prudent. Any such amounts paid
by Foothill shall constitute Foothill Expenses. Any such payments made by
Foothill shall not constitute an agreement by Foothill to make similar payments
in the future or a waiver by Foothill of any Event of Default under this
Agreement. Foothill need not inquire as to, or contest the validity of, any
such expense, tax, or Lien and the receipt of the usual official advice for the
payment thereof shall be conclusive evidence that the same was validly due and
owing.
45.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill complies
with its obligations, if any, under Section 11-9-207 of the Code, Foothill shall
not in any way or manner be liable or responsible for: (a) the safekeeping of
the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold
Foothill, and each of its officers, directors, employees, counsel, agents, and
attorneys-in-fact (each, an "Indemnified Person") harmless (to the fullest
extent permitted by law) from and against any and all claims, demands, suits,
actions, investigations, proceedings, and damages, and all reasonable attorney's
fees and disbursements and other costs and expenses actually incurred in
connection therewith (as and when they are incurred and irrespective of whether
suit is brought), at any time asserted against, imposed upon, or incurred by any
of them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration, of this Agreement and
any other Loan Document, or the use of the proceeds of the credit provided
hereunder (irrespective of whether any Indemnified Person is a party thereto),
or any act, omission, event or circumstance in any manner related thereto (all
the foregoing, collectively, the "Indemnified Liabilities"). Borrower shall have
no obligation to any Indemnified Person under this Section 11.3 for
consequential damages or with respect to any Indemnified Liability that a court
of competent jurisdiction finally determines to have resulted from the gross
negligence or willful misconduct of such Indemnified Person. This provision
shall survive the termination of this Agreement and the repayment of the
Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other Loan Document shall be in writing
and (except for financial statements and other informational documents which may
be sent by first-class mail, postage prepaid) shall be personally delivered or
sent by registered or certified mail (postage prepaid, return receipt
requested), overnight courier, or telefacsimile to Borrower or to Foothill, as
the case may be, at its address set forth below:
IF TO BORROWER: CORTELCO SYSTEMS, INC.
▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇
Fax No. ▇▇▇-▇▇▇-▇▇▇▇
46.
WITH A COPY TO: BAKER, DONELSON, BEARMAN &
▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇, ▇▇., Esq.
Fax No. ▇▇▇-▇▇▇-▇▇▇▇
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇
Attn: Business Finance Division Manager
Fax No. (▇▇▇) ▇▇▇-▇▇▇▇
WITH A COPY TO: PAUL, HASTINGS, ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP
▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇
Attn: ▇▇▇▇▇ ▇. ▇▇▇▇▇▇, III, Esq.
Fax No. (▇▇▇) ▇▇▇-▇▇▇▇
The parties hereto may change the address at which they are to receive notices
hereunder, by notice in writing in the foregoing manner given to the other. All
notices or demands sent in accordance with this Section 12, other than notices
by Foothill in connection with Sections 11-9-504 or 11-9-505 of the Code, shall
be deemed received on the earlier of the date of actual receipt or three (3)
days after the deposit thereof in the mail. Borrower acknowledges and agrees
that notices sent by Foothill in connection with Sections 11-9-504 or 11-9-505
of the Code shall be deemed sent when deposited in the mail or personally
delivered, or, where permitted by law, transmitted telefacsimile or other
similar method set forth above,
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE
PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. THE PARTIES
AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT
AND THE OTHER LOAN DOCUMETNTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND
FEDERAL COURTS LOCATED IN THE COUNTY OF ▇▇▇▇▇▇, STATE OF GEORGIA OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN
47.
CONTROVERSY. EACH OF BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 13. TO THE EXTENT PERMITTED BY APPLICABLE LAW,
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR
STATUTORY CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED
THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers delivered to
Foothill may be destroyed or otherwise disposed of by Foothill four (4) months
after they are delivered to or received by Foothill, unless Borrower requests,
in writing, the return of said documents, schedules, or other papers and makes
arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and assigns of each of the parties;
provided however, that Borrower may not assign this Agreement or any rights or
duties hereunder without Foothill's prior written consent and any prohibited
assignment shall be absolutely void. No consent to an assignment by Foothill
shall release Borrower from its Obligations. Foothill may assign this Agreement
and its rights and duties hereunder to an Affiliate of Foothill or in connection
with a bulk sale of its portfolio of financial accommodations and no consent or
approval by Borrower is required in connection with any such assignment. No
other assignment (except as set forth in the next sentence) by Foothill, shall
be permitted without the consent of Borrower, which consent shall not be
unreasonably withheld or delayed. Foothill reserves the right to sell syndicated
interests in and/or grant participations in all or any part of, or in any
interest in Foothill's rights and benefits hereunder. In connection with any
such assignment, sale of a syndicated interest or participation, Foothill may
disclose all documents and information which Foothill now or hereafter may have
relating to Borrower or Borrower's business. To the extent that Foothill assigns
its rights and obligations hereunder to a third Person, Foothill thereafter
shall be released from such assigned obligations to Borrower and such assignment
shall effect a novation between Borrower and such third Person.
48.
15.3 SECTION HEADINGS. Headings and numbers have been set forth herein
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Foothill or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all parties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to fairly
accomplish the purposes and intentions of all parties hereto.
15.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended by a
Writing signed by both Foothill and Borrower.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or
payment of the Obligations by Borrower or any guarantor of the Obligations or
the transfer by either or both of such parties to Foothill of any property of
either or both of such parties should for any reason subsequently be declared to
be void or voidable under any state or federal law relating to creditors'
rights, including provisions of the Bankruptcy Code relating to fraudulent
conveyances, preferences, and other voidable or recoverable payments of money or
transfers of property (collectively, a "Voidable Transfer"), and if Foothill is
required to repay or restore, in whole or in part, any such Voidable Transfer,
or elects to do so upon the reasonable advice of its counsel, then, as to any
such Voidable Transfer, or the amount thereof that Foothill is required or
elects to repay or restore, and as to all reasonable costs, expenses, and
attorney's fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
15.10 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
49.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal in Atlanta, Georgia.
CORTELCO SYSTEMS, INC.,
a Delaware corporation
By: /s/
-------------------------
Name:_______________________
Title:______________________
Attest: /s/
---------------------
Name:_______________________
Title:______________________
(SEAL)
FOOTHILL CAPITAL CORPORATION,
a California corporation, with
an office in Atlanta, Georgia
By: /s/
-------------------------
Name:_______________________
Title:______________________
50.
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FOOTHILL NAME OF AMOUNT OF
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FACILITY STATE AND LIEN PRIOR PRIOR
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NAME ADDRESS CITY COUNTY ZIP CODE POSITION LIENOR LIEN
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