Exhibit 10.2
THIS CONVERTIBLE SUBORDINATED NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN
COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER, SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A
NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
CONVERTIBLE SUBORDINATED NOTE
$3,000,000.00 July 31, 1997
San Francisco, California
FOR VALUE RECEIVED, CORTELCO SYSTEMS, INC., a Delaware corporation
("Borrower"), hereby promises to pay to CHINAVEST IV, L.P. or its assigns
("Holder"), in lawful money of the United States of America and in immediately
available funds, the principal sum of Three Million Dollars ($3,000,000.00) (the
"Loan"), together with accrued and unpaid interest thereon, payable on the date
and in the manner set forth below. This note (the "Note") is issued pursuant to
that certain Convertible Note Purchase Agreement, dated as of July 31, 1997, by
and between Borrower and Holder (the "Purchase Agreement"). Borrower, Holder,
ChinaVest IV-A, L.P. and ChinaVest IV-B, L.P. agree that if and when this Note
is converted into Series A Preferred Stock any issuance of Series A Preferred
Stock shall be made to Holder, ChinaVest IV-A, L.P. and ChinaVest IV-B, L.P.
such that they receive 86%, 9.9% and 4.1%, respectively, of such stock issuance.
Capitalized terms not otherwise defined herein, shall have the meanings set
forth in the Purchase Agreement.
1. PRINCIPAL REPAYMENT. Subject to Section 5 hereof, the outstanding
principal amount of the Loan shall be due and payable on July 31, 2002 (the
"Maturity Date"), subject to optional conversion to equity as set forth below.
Borrower shall not repay all or any part of the Loan more than 10 days prior to
the Maturity Date without the written consent of Holder.
2. INTEREST RATE. Subject to Section 5 hereof, Borrower further promises
to pay interest on the outstanding principal amount hereof from the date hereof
until payment in full, which interest shall be payable at the rate of eight
percent (8.0%) per annum simple interest or the maximum rate permissible by law,
whichever is less. Subject to earlier conversion, interest shall be payable on
the Maturity Date and shall be calculated on the basis of a 365-day year for the
actual number of days elapsed with annual compounding. If the Note is converted
in whole or in part prior to the Maturity Date, subject to Section 5 hereof, all
interest accrued thereon shall be due and payable within 60 days after the date
of such conversion.
3. PLACE OF PAYMENT. All amounts payable hereunder shall be payable at
the office of Holder, c/o ChinaVest Limited, 19/F, Dina House, 11 Duddell
Street, Central, Hong Kong, unless another place of payment shall be specified
in writing by Holder.
4. APPLICATION OF PAYMENTS. Subject to the provisions of Sections 1, 2
and 5 hereof, payments on this Note shall be applied first to accrued interest,
and thereafter to the outstanding principal balance hereof.
5. LIMITATIONS ON PAYMENTS. Notwithstanding any other provision of this
Note, prior to the payment in full by Cortelco Systems Holding Corp. ("CSHC") of
all principal, interest and other amounts due pursuant to that certain
Promissory Note dated December 16, 1993 in the original principal amount of
Eight Million Dollars ($8,000,000), as amended, from CSHC in favor of Alcatel
Network Systems, Inc. ("Alcatel"), the Borrower shall not make any payment of
principal, interest or any other amount due pursuant to this Note, whether in
cash, property, debt or other consideration. In the event of any liquidation,
dissolution or winding up of the Borrower, to the extent that the CSHC Note has
not been paid in full and such CSHC Note is secured by a security interest in
common stock of the Borrower, the pledgee or secured party holding (directly or
through any agent or bailee) such common stock shall be entitled to receive any
distribution of the assets and surplus funds of the Borrower prior to any
distribution or payment to the Holder with respect to this Note. In the event
that any payment or distribution of any kind or nature is made to the Holder in
violation of the provisions of this Section 5, such payment or distribution
shall be deemed to be held in trust by the Holder for the benefit of Alcatel or
any subsequent holder of the CSHC Note, as the case may be, and the Holder shall
upon demand remit such payment to Alcatel or such holder, as the case may be.
Notwithstanding any other provisions of this Note, until the payment in full by
CSHC of all principal, interest and other amounts due under the CSHC Note, the
Borrower and the Holder shall not, without the prior written consent of the
holder of the CSHC Note, amend, modify alter or repeal this Section 5 or the
rights of the holder of the CSHC Note hereunder. The provisions of this Section
5 are for the benefit of the holder of the CSHC Note, and such holder shall have
the right to enforce such provisions through the use of all available remedies
at law or at equity. The provisions of this Section 5 shall automatically
terminate on the Maturity Date if as of such date (i) Alcatel has voluntarily
entered into an extension of the terms of the CSHC Note beyond the Maturity
Date, or (ii) Alcatel has failed to commence commercially reasonable steps to
collect any outstanding amounts payable pursuant to the CSHC Note.
6. OPTIONAL CONVERSION. Holder has the right, at Holder's option, at any
time after July 31, 1998 and prior to payment in full of the principal balance
of this Note, to convert this Note, in accordance with the provisions of this
Section 6, in whole or in part, into that number of fully paid and nonassessable
shares of Series A Preferred Stock of the Company equal to the amount of
principal of the Note to be converted into shares of Series A Preferred Stock
divided
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by the Series A Conversion Price (as defined below). The "Series A Conversion
Price" shall be computed using the following formula:
X = Y
------------
34,141,483
Where X = the Series A Conversion Price, and
Y = 8 multiplied by the Corporation's audited
net income for the twelve (12) month period ending July 31, 1998.
Notwithstanding the foregoing or any other provisions in this Note, Holder
shall not be permitted to convert this Note into more than an aggregate of
14,632,062 shares of Series A Preferred Stock; and, if Holder converts this Note
in full, Holder shall be entitled to receive upon such conversion a minimum (in
the aggregate) of 5,121,222 shares of Series A Preferred Stock.
No fractional shares of Series A Preferred Stock shall be issued upon
conversion of this Note. In lieu of any fractional shares to which Holder would
otherwise be entitled, Borrower shall pay the cash value of that fractional
share, calculated on the basis of the price of one share of Series A Preferred
Stock.
Before Holder shall be entitled to convert this Note or a portion of this
Note into shares of Series A Preferred Stock pursuant to this Section 6, it
shall surrender the Note, duly endorsed, at the principal offices of Borrower
together with a written notice ("Conversion Notice") to Borrower of its election
to convert. Such Conversion Notice shall indicate the amount of unpaid
principal of this Note that Holder elects to convert into Series A Preferred
Stock. At its expense, Borrower shall, as soon as practicable thereafter, issue
and deliver to Holder at such principal office, a certificate or certificates
for the number of shares of Series A Preferred Stock to which Holder shall be
entitled upon such conversion (bearing such legends as may be required by this
Note and applicable state and federal securities laws in the opinion of legal
counsel for Borrower), together with a check payable to Holder for any cash
amounts payable as described above as a result of a conversion into fractional
shares of Series A Preferred Stock, and, if less than the entire remaining
unpaid principal amount of this Note is being converted, a new Note, of like
tenor and date, representing the unpaid principal amount of this Note after such
conversion. In the event of any conversion of a Note pursuant to this Section,
such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender and delivery of both such Note and the
corresponding Conversion Notice, and Holder shall be entitled to receive the
shares of Series A Preferred Stock issuable upon such conversion and shall be
treated for all purposes as the record holder of such shares of Series A
Preferred Stock on such date. Subject to Section 5 hereof, upon each conversion
of any Note pursuant to this Section 6 (whether partial or full), Borrower shall
pay to Holder thereof accrued but unpaid interest on the principal amount
converted to and including the date of conversion and shall be forever released
from its obligation to pay the principal amount so converted. Upon the
conversion of the entire unpaid principal amount of this Note, or any Note
issued in replacement thereof, Borrower shall be forever released from all its
obligations and liabilities under such Note, except for its obligation to pay
all interest accrued and unpaid under such Note to and including the date of
such conversion.
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7. SUBORDINATION. The indebtedness evidenced by this Note is hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all Borrower's Senior
Indebtedness, as hereinafter defined. As used in this Note, the term "Senior
Indebtedness" shall mean (i) all indebtedness of Borrower or with respect to
which Borrower is a guarantor, whether outstanding on the date hereof or
hereafter created or incurred, to banks, which is for money borrowed by Borrower
or a subsidiary of Borrower, whether or not secured, and (ii) any deferrals,
renewals or extensions of any such indebtedness or any note, notes or other
evidence of indebtedness issued in exchange for such Senior Indebtedness. In
the event of any conflict between this Section 7 and Section 5 hereof, the
provisions of Section 5 shall control.
If there should occur any receivership, insolvency, assignment for the
benefit of creditors, bankruptcy, reorganization, or arrangements with creditors
(whether or not pursuant to bankruptcy or other insolvency laws), sale of all or
substantially all of the assets, dissolution, liquidation, or any other
marshalling of the assets and liabilities of Borrower or if this Note should be
declared due and payable upon the occurrence of an event of default with respect
to any Senior Indebtedness, then (i) no amount shall be paid by Borrower in
respect of the principal of or interest on this Note at the time outstanding,
unless and until the Senior Indebtedness then outstanding shall be paid in full,
and (ii) no claim or proof of claim shall be filed with Borrower by or on behalf
of Holder that shall assert any right to receive any payments in respect of the
principal of and interest on this Note, except subject to the payment in full of
the Senior Indebtedness then outstanding. If there occurs an event of default
which has been declared in writing with respect to any Senior Indebtedness, or
in the instrument under which any Senior Indebtedness is outstanding, permitting
the holder of such Senior Indebtedness to accelerate the maturity thereof, then,
unless and until such event of default shall have been cured or waived or shall
have ceased to exist, or all Senior Indebtedness shall have been paid in full,
no payment shall be made in respect of the principal of or interest on this
Note. In the event that any payment is made in violation of the prohibition
contained in the preceding sentence, Holder shall pay over such amount to a
holder of Senior Indebtedness within fifteen days of demand by such holder of
Senior Indebtedness.
Subject to the rights, if any, of the holders of Senior Indebtedness under
this Section 7 to receive cash, securities and other properties otherwise
payable or deliverable to the Holder, and subject to the provisions of Section 5
hereof, nothing contained in this Section 7 shall impair, as between Borrower
and Holder, the obligation of Borrower, which is absolute and unconditional, to
pay to Holder the principal thereof and interest thereon as and when the same
become due and payable, or shall prevent Holder, upon default under this Note,
from exercising all rights, powers and remedies otherwise provided herein or
therein or by applicable laws.
8. REPLACEMENT. Borrower shall issue a new note in place of this Note or
any other previously issued note alleged to have been lost, stolen or destroyed,
upon such terms and conditions as Borrower's Board of Directors may prescribe,
including the presentation of reasonable evidence of such loss, theft or
destruction (provided that an affidavit of a holder will be satisfactory for
such purpose) and the giving of such indemnity as Borrower's Board of Directors
may request for the protection of Borrower or any transfer agent or registrar.
Upon surrender of any previously issued note that has been mutilated, Borrower
shall issue a new note in place thereof.
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9. DEFAULT. In the event of default hereunder, Borrower shall pay all
reasonable attorneys' fees and court costs incurred by Holder in enforcing and
collecting this Note.
10. WAIVER; REPRESENTATIONS. Presentment for payment, demand, notice of
dishonor, protest, notice of protest, stay of execution and all other defenses
to payment generally and notices in connection with the delivery, acceptance,
performance, default or enforcement of the payment of this Note are hereby
waived by Borrower and its successors and assigns.
11. WAIVERS AND AMENDMENTS. Neither this Note nor any provision hereof
may be changed, waived, discharged, terminated, modified or amended except upon
the written consent of Borrower and Holder.
12. HEADINGS. The headings of the various sections of this Note have been
inserted for convenience of reference only and shall not be deemed to be part of
this Note.
13. GOVERNING LAW. This Note shall be governed by and construed in
accordance with the laws of the State of California as applied to contracts
entered into and performed entirely in California by California residents,
without regard to conflicts of law principles.
14. ENTIRE AGREEMENT. This Note, the Purchase Agreement and other
documents delivered pursuant thereto, including the exhibits, constitute the
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof.
15. PAYMENT OF FEES AND EXPENSES. If any action at law or in equity is
necessary to enforce or interpret the terms of this Note, the prevailing party
shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.
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IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered as of the date first written above.
CORTELCO SYSTEMS, INC.
/s/
Stephen R. Bowling
President
Agreed to and accepted:
CHINAVEST IV, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
CHINAVEST IV-A, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
CHINAVEST IV-B, L.P.
By: /s/
-------------------------
Print Name:_________________
Title:______________________
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