-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U4Eb53B4Xosk+qnWCDtmX8dEJ73OUm178JxMQMX7t9Exv2696hBRWl12zrtDxMiB VKar+cM2ip4gZTc52tYYOw== 0000891092-99-000482.txt : 19990816 0000891092-99-000482.hdr.sgml : 19990816 ACCESSION NUMBER: 0000891092-99-000482 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELCOTEL INC CENTRAL INDEX KEY: 0000801448 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 592518405 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15205 FILM NUMBER: 99687853 BUSINESS ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 BUSINESS PHONE: 9417580389 MAIL ADDRESS: STREET 1: 6428 PARKLAND DR CITY: SARASOTA STATE: FL ZIP: 34243 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 Commission File No. 0-15205 ELCOTEL, INC. (Exact name of registrant as specified in its charter) Delaware 59-2518405 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 6428 Parkland Drive, Sarasota, Florida 34243 (Address of principal executive offices) (Zip Code) (941) 758-0389 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ As of August 10, 1999, there were 13,499,693 shares of the Registrant's Common Stock outstanding. ELCOTEL, INC. AND SUBSIDIARIES FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 1999 INDEX Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at June 30, 1999 (unaudited) and March 31, 1999 3 Unaudited Consolidated Statements of Operations for the Three Months Ended June 30, 1999 and 1998 4 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended June 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 18 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ELCOTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
June 30, March 31, 1999 1999 ------------- ------------ (Unaudited) ASSETS Current assets: Cash $ 20 $ 16 Accounts and notes receivable, less allowance for credit losses of $1,929 and $1,970 11,904 12,209 Inventories 13,166 13,978 Income taxes receivable 2,029 1,997 Deferred tax asset - current portion 2,143 2,215 Prepaid expenses and other current assets 1,156 912 -------- -------- Total current assets 30,418 31,327 Property, plant and equipment, net 5,041 5,064 Notes receivable, less allowance for credit losses of $400 and $312 816 898 Identified intangible assets, net of accumulated amortization of $1,828 and $1,541 7,447 7,734 Capitalized software, net of accumulated amortization of $306 and $240 2,370 1,573 Goodwill, net of accumulated amortization of $1,050 and $878 23,046 23,218 Deferred tax asset 1,168 948 Other assets 447 533 -------- -------- $ 70,753 $ 71,295 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Bank overdraft $ 733 $ 1,428 Accounts payable 3,837 4,186 Accrued expenses and other current liabilities 4,096 4,197 Notes and debt obligations payable within one year 823 823 -------- -------- Total current liabilities 9,489 10,634 Notes and debt obligations payable after one year 11,308 10,355 -------- -------- 20,797 20,989 -------- -------- Commitments and contingencies -- -- Stockholders' equity: Common stock, $.01 par value, 30,000,000 shares authorized, 13,551,693 and 13,551,693 shares issued and outstanding . 136 136 Additional paid-in capital 46,667 46,667 Retained earnings 3,330 3,680 Less - cost of 52,000 shares of common stock in treasury .. (177) (177) -------- -------- Total stockholders' equity 49,956 50,306 -------- -------- $ 70,753 $ 71,295 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3
ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) Three Months Ended June 30, ---------------------------- 1999 1998 --------- --------- Revenues and net sales: Product sales $ 9,835 $ 12,770 Services 2,923 2,866 -------- -------- 12,758 15,636 -------- -------- Cost of revenues and sales: Cost of products sold 6,473 7,638 Cost of services 2,299 2,590 -------- -------- 8,772 10,228 -------- -------- Gross profit 3,986 5,408 -------- -------- Other costs and expenses: Selling, general and administrative expenses 2,544 2,851 Engineering, research and development expenses 1,333 1,575 Amortization 537 507 Interest expense, net 125 80 -------- -------- 4,539 5,013 -------- -------- Income (loss) before income tax (expense) benefit (553) 395 Income tax (expense) benefit 203 (158) -------- -------- Net income (loss) $ (350) $ 237 ======== ======== Income (loss) per common and common equivalent share: Basic $ (0.03) $ 0.02 ======== ======== Diluted $ (0.03) $ 0.02 ======== ======== Weighted average number of common and common equivalent shares outstanding: Basic 13,500 13,404 ======== ======== Diluted 13,500 13,763 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4
ELCOTEL, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended June 30, --------------------------- 1999 1998 ------- -------- Cash flows from operating activities Net income (loss) $ (350) $ 237 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 863 765 Provision for credit losses 71 45 Provisions for obsolescence and warranty expense 320 180 Stock option compensation 15 -- Deferred tax benefit (148) (27) Changes in operating assets and liabilities: Accounts and notes receivable 316 (1,048) Inventories 650 (4,022) Income taxes receivable (32) 98 Prepaid expenses and other current assets (244) 68 Other assets 73 (47) Accounts payable (349) 382 Accrued expenses and other current liabilities (274) 257 ------- ------- Net cash provided by (used for) operating activities 911 (3,112) ------- ------- Cash flows from investing activities Capital expenditures (302) (387) Capitalized software (863) (6) ------- ------- Net cash used for investing activities (1,165) (393) ------- ------- Cash flows from financing activities Net proceeds under revolving credit lines 1,149 1,740 Increase (decrease) in bank overdraft (695) 62 Principle payments on notes payable (196) (24) Proceeds from exercise of common stock options and warrants -- 155 ------- ------- Net cash provided by financing activities 258 1,933 ------- ------- Increase (decrease) in cash 4 (1,572) Cash, beginning of period 16 1,655 ------- ------- Cash, end of period $ 20 $ 83 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 5 ELCOTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. GENERAL The unaudited consolidated balance sheet at June 30, 1999 and the unaudited consolidated statements of operations and of cash flows for the three months ended June 30, 1999 and 1998 have been prepared by Elcotel, Inc. and subsidiaries (the "Company"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company at June 30, 1999, and for all periods presented, have been made. The consolidated balance sheet at March 31, 1999 has been derived from the Company's audited consolidated financial statements as of and for the year ended March 31, 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. The results of operations for the three months ended June 30, 1999 are not necessarily indicative of the results for the full fiscal year. 2. INVENTORIES Inventories at June 30, 1999 and March 31, 1999 are summarized as follows: June 30, March 31, 1999 1999 -------- ----------- Finished products $ 1,503 $ 1,875 Work-in-process 1,597 924 Purchased components 10,697 11,630 -------- -------- 13,797 14,429 Reserve for obsolescence (631) (451) ======== ======== $ 13,166 $ 13,978 ======== ======== 3. NOTES AND DEBT OBLIGATIONS PAYABLE On June 29, 1999, the Company and its bank entered into a Business Loan Agreement (the "Agreement") that provides the Company with a $2 million revolving credit line to finance export related inventory and accounts receivable. The export credit line matures on June 29, 2000. Interest on amounts borrowed under the export credit line is payable monthly at the bank's floating 30 day Libor rate plus 1.5%. Indebtedness outstanding under the Agreement is secured by substantially all of the Company's assets, including export related inventories and accounts receivable. The Agreement contains covenants and conditions similar to those contained in the Restated Loan and Security Agreement, as amended, between the Company and its bank dated November 25, 1997. As of June 30, 1999, the Company had not used the $2 million export credit line. 6 4. STOCKHOLDERS' EQUITY Changes in stockholders' equity for the three months ended June 30, 1999 are summarized as follows:
Additional Common Paid-in Retained Treasury Stock Capital Earnings Stock Total -------- -------- ---------- ---------- -------- Balance at March 31, 1999 $ 136 $ 46,667 $ 3,680 $ (177) $ 50,306 Net loss for the period (350) (350) ======== ======== ======== ======== ======== Balance at June 30, 1999 $ 136 $ 46,667 $ 3,330 $ (177) $ 49,956 ======== ======== ======== ======== ========
The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") during the year ended March 31, 1999. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity of a business during a period from transactions and events and circumstances from non-owner sources, and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income for the periods ended June 30, 1999 and 1998; therefore, statements of comprehensive income for such periods are not presented in the accompanying consolidated financial statements. 5. SUPPLEMENTAL CASH FLOW INFORMATION A summary of the Company's supplemental cash flow information for the three months ended June 30, 1999 and 1998 is as follows: 1999 1998 ----- ---- Cash paid during the period for: Interest $ 240 $ 157 Income taxes -- 85 6. EARNINGS (LOSS) PER SHARE Earnings (loss) per common share is computed in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 requires disclosure of basic earnings (loss) per share and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income by the weighted average number of shares of common stock outstanding and potential dilutive common shares outstanding during the period. The weighted average number of shares of common stock outstanding used to compute basic earnings (loss) per share for the three months ended June 30, 1999 and 1998 was 13,499,693 shares and 13,404,253 shares, respectively. There were no potential dilutive common shares outstanding during the three months ended June 30, 1999 for purposes of computing diluted earnings (loss) per share. The weighted average number of potential dilutive common shares outstanding used in the computation of diluted earnings (loss) per share for the three months ended June 30, 1998 was 359,232 shares. 7 7. DISCLOSURE ABOUT SEGMENTS AND RELATED INFORMATION The Company's reportable segments are based upon the market segments that the Company addresses. The products provided by each of the reportable segments are similar in nature. There are no transactions between the reportable segments, and external customers account for all sales revenue. The information that is provided to the chief operating decision maker to measure the profit or loss of reportable segments includes sales, cost of sales based on standards and gross profit based on standards. Operating expenses, including depreciation, amortization and interest are not included in the information provided to the chief operating decision maker to measure performance of reportable segments. The sales revenue and profit of each reportable segment for the quarters ended June 30, 1999 and 1998 is set forth below: 1999 1998 ---------------------- ---------------------- Sales Profit Sales Profit -------- ------- -------- ------- Private $ 3,892 $ 1,852 $ 6,038 $ 2,952 Telephone company 7,447 2,351 8,305 2,331 International 1,419 493 1,293 556 -------- ------- -------- ------- $ 12,758 $ 4,696 $ 15,636 $ 5,839 ======== ======= ======== ======= The Company does not allocate assets or other corporate expenses to reportable segments. A reconciliation of segment profit information to the Company's financial statements is as follows: 1999 1998 ------- ------- Total profit of reportable segments $ 4,696 $ 5,839 Unallocated cost of sales (710) (431) Unallocated corporate expenses (4,539) (5,013) ------- ------- Income (loss) before income taxes $ (553) $ 395 ======= ======= 8 Information with respect to sales of products and services during the three months ended June 30, 1999 and 1998 is set forth below: 1999 1998 ------- ------- Private segment: Payphone terminals $ 1,543 $ 2,664 Printed circuit board control modules and kits 1,858 2,930 Components and assemblies 106 191 Rates software 80 126 Operator services 173 13 Other services 132 114 ------- ------- 3,892 6,038 ------- ------- Telephone company segment: Payphone terminals 759 1,873 Printed circuit board control modules and kits 2,707 1,373 Components and assemblies 1,353 2,320 Software 10 -- Repair, refurbishment and upgrade services 2,618 2,739 ------- ------- 7,447 8,305 ------- ------- International segment: Payphone terminals 1,236 813 Printed circuit board control modules and kits 57 58 Components and assemblies 124 422 Software 2 -- ------- ------- 1,419 1,293 ------- ------- $12,758 $15,636 ======= ======= The Company sells its payphone products in the United States and in certain foreign countries. The Company's international business consists of export sales, and the Company does not presently have any foreign operations. Sales by geographic region for the three months ended June 30, 1999 and 1998 were as follows: 1999 1998 ------- ------- United States $11,338 $14,344 Canada 608 657 Latin America 771 632 Europe, Middle East and Africa 11 3 Asia Pacific 30 -- Other Areas -- -- ------- ------- $12,758 $15,636 ======= ======= 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts, except per share data, in this Management's Discussion and Analysis of Financial Condition and Results of Operations are stated in thousands. Forward Looking Statements The statements contained in this report which are not historical facts contain forward looking information regarding the Company's financial position, business strategy, plans, projections and future performance based on the beliefs, expectations, estimates, intentions or anticipations of management as well as assumptions made by and information currently available to the Company's management. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties and assumptions related to various factors that could cause the Company's actual results to differ materially from those expected by the Company, including competitive factors, customer relations, the integration of operations resulting from acquisitions, the risk of obsolescence of the Company's products, relationships with suppliers, the risk of adverse regulatory action affecting the Company's business or the business of the Company's customers, changes in the international business climate, product introduction and market acceptance, general economic conditions, seasonality, changes in industry practices, the outcome of litigation to which the Company is a party, and other uncertainties detailed in this report and in the Company's other filings with the Securities and Exchange Commission. Results of Operations The Company reported a net loss of $350, or $.03 per diluted share, for the three months ended June 30, 1999 on net sales of $12,758 as compared to net income of $237, or $.02 per diluted share, on net sales of $15,636 for the three months ended June 30, 1998. Operating results for the three months ended June 30, 1999 as compared to the three months ended June 30, 1998 reflect a decline in sales of 18.4%, a decline in gross profit of 26.3% and a decline in costs and expenses of 9.5%. The following table shows certain line items in the Company's consolidated statements of operations for the three months ended June 30, 1999 (first quarter of fiscal 2000) and 1998 (first quarter of fiscal 1999) that are discussed below together with amounts expressed as a percentage of sales and with the change expressed as a percentage increase or (decrease).
Fiscal Percent Fiscal Percent Percentage 2000 of Sales 1999 of Sales Change -------- --------- -------- -------- ---------- Net sales $ 12,758 100% $ 15,636 100% (18%) Cost of goods sold 8,772 69 10,228 65 (14) Gross profit 3,986 31 5,408 35 (26) Selling, general and administrative expenses 2,544 20 2,851 18 (11) Engineering, research and development expenses 1,333 10 1,575 10 (15) Interest expense 125 1 80 1 56 Income tax expense (benefit) (203) (2) 158 1 (228)
Net sales decreased by $2,878, or 18%, for the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 primarily due to an overall decrease in volume, a shift in sales to printed circuit board control modules versus payphone terminals and a slight decline in overall average selling prices. Sales to domestic independent payphone service providers during the first quarter of fiscal 2000 represented 31% of the Company's sales and decreased by $2,146, or 36%, to $3,892, from $6,038 for the first quarter of 10 fiscal 1999 primarily due to a decrease in volume and average selling prices. Sales to domestic telephone companies during the first quarter of fiscal 2000 represented 58% of the Company's sales and decreased by $858, or 10%, to $7,447, from $8,305 for the first quarter of fiscal 1999 primarily due to a shift in volume to printed circuit board control modules versus payphone terminals, offset by an increase in average selling prices. Export sales during the first quarter of fiscal 2000 represented 11% of the Company's sales and increased by $126, or 10%, to $1,419, from $1,293 during the first quarter of fiscal 1999 primarily due to a increase in payphone terminal sales, partially offset by a decrease in sales of parts and components. During the first quarter of fiscal 2000, sales of payphone terminals and printed circuit board control modules and related retrofit kits accounted for $8,160, or 64% of sales, as compared to $9,711 or 62% of sales, during the first quarter of fiscal 1999. Sales of payphone components and assemblies approximated $1,583, or 12% of sales, during the first quarter of fiscal 2000 as compared to $2,933, or 19% of sales, during the first quarter of fiscal 1999. Repair, refurbishment and upgrade sales approximated $2,618, or 21% of sales, during the first quarter of fiscal 2000 as compared to $2,739, or 18% of sales, during the first quarter of fiscal 1999. Software sales approximated $92 during the first quarter of fiscal 2000 as compared to $126 during the first quarter of fiscal 1999. Sales related to other services approximated $305 during the first quarter of fiscal 2000 as compared to $127 during the first quarter of fiscal 1999. The demand for the Company's products and services during the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999 was constrained by the recent merger activity among both domestic independent payphone service providers and telephone companies, and on-going disputes related to the amount and payor of dial-around compensation required by the 1996 Telecommunications Act. Also, the telephone companies and domestic independent payphone service are eliminating marginal payphone locations as part of their efforts to improve profitability, which reduced their product requirements with respect to new installations. The Company believes, but cannot assure, that the demand of domestic telephone companies for its products has begun to improve. However, the independent payphone service providers have just begun to react to the market conditions, and the Company does not believe that the demand from this segment will begin to improve until later this fiscal year. In addition, the Company believes, but cannot assure, that the final resolution of dial-around compensation (depending upon the nature of such final resolution) will increase the revenues and cash flows of payphone service providers, which may stimulate demand for the Company's products. Cost of sales and gross profit margins as a percentage of net sales approximated 69% and 31%, respectively, for the first quarter of fiscal 2000 as compared to 65% and 35%, respectively, for the first quarter of fiscal 1999. The decline in the gross profit percentage between such periods is principally attributable to the increase in the percentage of sales to telephone companies at margins lower than those achieved from other market segments and an increase in export sales of the Company's Eclipse(TM) payphone terminal at initial higher start-up manufacturing costs. The Company has commenced efforts to reduce the cost of such products, and believes, but cannot assure, that its gross profit margins will improve slightly throughout the year. The Company began to experience an improvement in gross profit margins from the telephone company segment during the first quarter of fiscal 2000 as a result of cost reductions related to printed circuit board control modules. Selling, general and administrative expenses decreased by $307, or approximately 11%, during the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999, and represented 20% of sales versus 18% of sales in the first quarter of fiscal 1999. The decrease in selling, general and administrative expenses is primarily attributable to a reduction in personnel and other operating expenses as a result of the reorganization of selling and marketing activities at the end of fiscal 1999, and a decline in variable selling expenses, which is related to the decline in sales. Engineering, research and development expenses decreased by $242, or approximately 15%, during the first quarter of fiscal 2000 as compared to the first quarter of fiscal 1999, and represented 10% of sales for both periods. The decrease in engineering, research and development expenses for the first quarter of fiscal 2000 as compared to fiscal 1999 is primarily attributable to a shift of resources towards the development of software for new products and the development of the Company's next generation 11 management software system. Software development costs capitalized during the first quarter of fiscal 2000 approximated $863. During the first quarter of fiscal 1999, no product software development costs were capitalized. The increase in net interest expense during the first quarter of fiscal 2000 as compared to the same quarter last year is primarily attributable to an increase in average outstanding indebtedness. The Company's effective tax rate declined to 37% in the first quarter of fiscal 2000 from 40% for the same quarter last year primarily due to an increase in estimated research and development credits. Impact of Inflation The Company's primary costs, inventory and labor, increase with inflation. However, the Company does not believe that inflation and changing prices have had a material impact on its business. Liquidity and Capital Resources The Company finances its operations, working capital requirements and capital expenditures from internally generated cash flows and financing available under a loan agreement between the Company and its bank. The Company believes that its anticipated cash flow from operations and financing available under the loan agreement will be sufficient to fund its working capital requirements, capital expenditures and long term debt obligations for through June 30, 2000. Financing Activities. The credit lines available to the Company pursuant to the Restated Loan and Security Agreement, as amended (the "Loan Agreement"), between the Company and its bank include a $10 million revolving credit line to finance the Company's domestic working capital requirements (the "working capital line") and a $1.5 million revolving credit line to finance the Company's capital expenditures (the "capital line"). In addition, on June 29, 1999, the Company and its bank entered into a Business Loan Agreement (the "Export Loan Agreement") that provides the Company with a $2 million revolving credit line to finance export related inventory and accounts receivable (the "export line"). Indebtedness outstanding under the Loan Agreement and the Export Loan Agreement (collectively the "Agreements") is collateralized by substantially all of the assets of the Company. The Agreements contain covenants that prohibit or restrict the Company from engaging in certain transactions without the consent of the bank, including mergers or consolidations and disposition of assets, among others. Additionally, the Agreements require the Company to comply with specific financial covenants, including covenants with respect to cash flow, working capital and net worth. Noncompliance with any of these covenants or the occurrence of an event of default, if not waived, could accelerate the maturity of the indebtedness outstanding under the Agreements. The Company borrows funds under its revolving credit lines to finance capital expenditures, increases in accounts and notes receivable and inventories and decreases in bank overdrafts (as drafts clear), accounts payable and accrued liability obligations to the extent that such requirements exceed cash provided by operations, if any. The Company also uses the financing available under its revolving credit lines to fund operations and payments on long-term debt when necessary. The Company measures its liquidity based upon the amount of funds the Company is able to borrow under its revolving credit lines, which varies based upon operating performance and the value of collateral. Indebtedness outstanding under the working capital and export lines cannot exceed the value of eligible collateral, as defined in the Agreements, consisting of accounts receivable and inventories. The working capital line matures on November 25, 2002. The export line matures on June 29, 2000. The capital line matures on July 31, 2000. Interest on amounts borrowed under the revolving credit lines is payable monthly at the bank's floating 30 day Libor rate plus 1.5% (6.668% at June 30, 1999). At June 30, 1999 12 and March 31, 1999, outstanding debt under the working capital line amounts to $6,245 and $5,185, respectively, and at June 30, 1999, the Company was able to borrow up to a maximum of $10,000 under the working capital line based on the value of eligible collateral. The Company has borrowed and has outstanding debt under the capital line of $89 at June 30, 1999. At June 30, 1999, the Company has not used the export line and was able to borrow up to a maximum of $2 million under the export line based on the value of eligible collateral. During the quarters ended June 30, 1999 and 1998, net proceeds under the Company's working capital line and capital line aggregated $1,149 and $1,740, respectively. Principal payments under the Company's mortgage, installment and other notes payable during the quarters ended June 30, 1999 and 1998 amounted to $196 and $24, respectively. Outstanding indebtedness under outstanding mortgage, installment and other notes payable aggregates $5,797 and $5,993 at June 30, 1999 and March 31, 1999, respectively. Operating Activities. Cash flows from operating activities for the three months ended June 30, 1999 and 1998 are summarized as follows: 1999 1998 ------- ------- Net income (loss) $ (350) $ 237 Non-cash charges and credits, net 1,121 963 ------- ------- 771 1,200 Changes in operating assets and liabilities: Accounts and notes receivable 316 (1,048) Inventories 650 (4,022) Accounts payable, accrued expenses and other current liabilities (623) 639 Other (203) 119 ------- ------- $ 911 $(3,112) ======= ======== The Company's operating cash flow is primarily dependent upon operating results, sales levels and related credit terms extended to customers and inventory purchases, and the changes in operating assets and liabilities related thereto. During the three months ended June 30, 1999, weaker operating performance resulted in a decline in cash flows from operations, net of non-cash charges and credits, of $429, to $771 from $1,200 for the three months ended June 30, 1998. However, during the three months ended June 30, 1999, the Company generated $140 of cash from changes in operating assets and liabilities as compared to the three months ended June 30, 1998 when the Company used $4,312 of cash to fund changes in operating assets and liabilities. The Company's operating assets and liabilities are comprised principally of accounts and notes receivable, inventories, accounts payable, accrued expenses and other current liabilities. During the three months ended June 30, 1999, the Company generated $316 and $650 of cash through reductions in accounts and notes receivable and inventories, respectively, and used $623 of cash to fund decreases in accounts payable, accrued expenses and other current liabilities. In comparison, during the three months ended June 30, 1998, the Company used $1,048 and $4,022 of cash to fund increases in accounts and notes receivable and inventories, respectively, and generated $639 of cash from increases in accounts payable, accrued expenses and other current liabilities. The Company's current ratio improved to 3.2 to 1 at June 30, 1999 as compared to 2.9 to 1 at March 31, 1999. During the three months ended June 30, 1999, the Company's current assets decreased by $909 (3%), current liabilities decreased by $1,145 (11%) and working capital increased by $236, to $20,929 at June 30, 1999 from $20,693 at March 31, 1999. Extension of credit to customers and inventory purchases 13 represent the principal working capital requirements of the Company, and material increases in accounts and notes receivable and/or inventories could have a significant effect of the Company's liquidity. Accounts and notes receivable and inventories represented in the aggregate 82% and 84% of current assets at June 30, 1999 and March 31, 1999, respectively. The Company experiences varying accounts receivable collection periods from its three customer segments, and believes that credit losses will not have a significant effect on future liquidity as a significant portion of its accounts and notes receivable are due from customers with substantial financial resources. The level of inventory maintained by the Company is dependent on a number of factors, including delivery requirements of customers, availability and lead time of components and the ability of the Company to estimate and plan the volume of its business. Investing Activities. Net cash used for investing activities during the three months ended June 30, 1999 and 1998 amounted to $1,165 and $393, respectively. The Company's investing activities include capital expenditures consisting primarily of manufacturing tooling and equipment, computer equipment and building improvements required to support operations and capitalized software, including new product software development costs. Cash used for capital expenditures during the three months ended June 30, 1999 and 1998 aggregated $302 and $387, respectively. During the three months ended June 30, 1999 and 1998, cash used to acquire software and capitalized software development costs aggregated $863 and $6, respectively. The Company has not entered into any significant commitments for the purchase of capital assets other than manufacturing tooling in an amount of approximately $500. Year 2000 Discussion The Company is continuing its efforts to assess the impact of Year 2000 on its business and address Year 2000 issues. Year 2000 issues result from computer programs designed to use two-digit date codes rather than four digits to define the applicable year. As a result, there is a risk that programs with time-sensitive software may recognize a year using "00" as the year 1900 rather than the year 2000, resulting in system miscalculations or system failures. The Company has identified several general areas in which Year 2000 concerns may be material if not resolved before January 1, 2000. These areas include (1) products and services of the Company, (2) management information systems and other systems within the Company, and (3) third parties that provide materials and services (including utilities) to the Company. The Company established a "Validation Test Plan" to assess Year 2000 compliance of all products and services currently sold or supported by the Company. This test plan was designed to identify the products and services currently supported by the Company, features of such products and services that required assessment, and the approach and resources required. The Validation Test Plan was also designed to assess Year 2000 compliance of those items in order of relative importance to the Company. The Company believes that it has completed its Year 2000 compliance testing with respect to the products and systems it currently sells and supports. In addition, the Company has completed substantially all Year 2000 software modifications to such products, and the Company believes that such products are Year 2000 compliant or Year 2000 compliant with issues. The Company continues to modify certain product software or develop Year 2000 compliant software for certain products, and believes, but cannot assure, that the products the Company presently sells and supports will be Year 2000 compliant or Year 2000 compliant with issues by December 31, 1999. The Company believes that products defined as Year 2000 compliant with issues will operate properly in year 2000 if programmed and configured in accordance with the Company's published guidelines. Based on the present status of the Company's compliance testing and remediation activities to date, the Company does not believe that it will incur material additional engineering expenses to bring the remaining products and systems it presently sells and supports into Year 2000 compliance. However, there can be no assurance that the Company's tests pursuant to its Validation Test Plan have detected or will detect all instances of Year 2000 noncompliance, that the cost of future remediation activities will not be material or that all software upgrades for all of the Company's products and systems will be available by December 31, 1999. 14 Based on the Company's compliance testing and identification of software modifications required to achieve Year 2000 compliance of its products, the only products historically sold by the Company that will not be Year 2000 compliant or compliant with issues are products the manufacture of which has been discontinued and that are no longer supported by the Company. These discontinued products are not Year 2000 compliant and the Company does not intend to bring these products into compliance, and has so notified its customers. The Company does not believe that it has an obligation to bring these discontinued products into compliance or an obligation to replace these products under its warranties since those products were last sold more than five years ago. Accordingly, the Company has not recorded any liability related to these products in its financial statements. The Company has provided information to its customers and others about its Year 2000 compliance program. The Company's web site describes each product historically supplied by the Company and its status as "compliant", "not compliant", "compliant with issues" with an attached description of the issues, or "compliance anticipated" with a projected release date. The Company has concluded that its internally managed call rating software should be rewritten to upgrade its features and to integrate the software into the Company's new open architecture management software system presently under development, in addition to the modifications required to bring the software into Year 2000 compliance. The upgrade of the Company's call rating software is being undertaken by outside consultants in conjunction with the Company's personnel at an estimated cost of approximately $150, and is expected to be completed by no later than December 31, 1999. If the Company does not complete the upgrade by December 31, 1999, the Company would not be able to provide Year 2000 compliant call rating files to its customers. However, such files are available from third parties. The risks associated with the failure of the Company's products to be Year 2000 compliant include: (1) loss of data from or an adverse impact on the reliability of data generated by the Company's products; (2) loss of functionality; (3) failure to communicate with other non-Company user applications of its customers that may not be Year 2000 compliant; and (4) potential litigation by customers with respect to products and services no longer supported. The Company purchased new business software in June 1997, and based on representations received from the vendor, the Company believes that its management information system is Year 2000 compliant. Based on the Company's internal testing, the Company believes that substantially all of the Company's related operating systems are also Year 2000 compliant with the exception of certain items which the Company does not believe are material. The Company continues to assess Year 2000 compliance of its other internal systems such as engineering, shipping, payroll and EDI systems and is upgrading these systems as required if deficiencies within these systems are deemed to be critical. The costs related to such system upgrades or acquisition of new Year 2000 compliant software to date have not been material, but the costs to complete such upgrades or acquisitions could be material. The risks associated with failure of such systems to be Year 2000 compliant are primarily the increase in administrative related functions and increased costs associated with such functions. The Company believes that all critical internal systems will be assessed and remediated by the end of the calendar year. The Company has completed an inventory and tested most of its internal computer equipment, including personal computers, related servers and software for Year 2000 compliance. Based on the Company's testing, the Company plans to spend approximately $100 to replace and upgrade such equipment and software to achieve Year 2000 compliance. The Company believes that the necessary replacements and upgrades can be completed by the end of the calendar year. The Company has relationships with various third parties in the ordinary course of business. The Company continues to assess the readiness of third parties, especially critical suppliers and others that have material relationships with the Company, by sending questionnaires, evaluating responses and identifying the risks with respect to Year 2000 plans of those third parties. The Company will continue to identify the 15 risks associated with third parties based on responses to those questionnaires and will then formulate appropriate contingency plans on a case by case basis to mitigate such risks. The Company expects to complete its assessment of the readiness of third parties by the end of the third quarter of calendar year 1999. The effect, if any, on the Company's results of operations from failure of these third parties to be Year 2000 compliant is not reasonably estimable but could be material. The Company has begun, but not yet completed, an analysis of the operational problems that would be reasonably likely to result from the failure of the Company and certain third parties to complete efforts necessary to achieve Year 2000 compliance on a timely basis. The Company's Year 2000 efforts to date have been undertaken largely with its existing engineering and information technology personnel. The Company does not separately track the costs incurred for such efforts and such costs are principally the related compensation costs for those personnel. The Company presently has no contingency plans for Year 2000 compliance problems that might arise, but will develop such contingency plans as the Company identifies situations in which Year 2000 compliance could be a problem. However, there can be no assurance that any contingency plan will be timely or effective to avoid a material disruption of the Company's operations. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, which establishes standards for accounting of derivative instruments including certain derivative instruments embedded in other contracts, and hedging activities. SFAS 133 is effective for fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires entities to recognize derivative instruments as assets and liabilities and measure them at fair value, and to match the timing of gain or loss recognition on hedging instruments with the recognition of changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or the earnings effect of the hedged forecasted transaction. Management does not believe that the adoption of SFAS 133 will have a significant impact on the Company's consolidated financial statements. During the three months ended June 30, 1999, the Company adopted Statement of Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") issued by the American Institute of Certified Public Accountants (the "AICPA"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and new cost recognition principles and identifies the characteristics of internal use software. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations, financial position or cash flows. Item 3. Quantitative and Qualitative Disclosures About Market Risks The are no material changes with regards to quantitative and qualitative disclosures about market risks from that set forth in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al. defendants. San Diego Superior Court Case No. 691635. As previously reported, this putative class action was filed in 1995 in the Superior Court of the State of California for the County of San Diego alleging that Amtel Communications, Inc. ("Amtel"), a former customer of the Company that filed for bankruptcy, conspired with its own officers and professionals, and with various telephone suppliers (including the Company) to defraud investors in Amtel by operating a Ponzi scheme. See Item 3, Legal Proceedings of Part I of the Company's Form 10-KSB for the fiscal year ended March 31, 1996 and Item 1, Legal Proceedings of Part II of the Company's Form 10-Q for the quarter ended September 30, 1996. On September 28, 1998, the Company's Motion for Summary Judgment was granted by the Court and the Court dismissed the Company from the class action. On December 11, 1998, the plaintiffs appealed the Court's decision to grant the Company's Motion for Summary Judgment and the appeal is proceeding. The Company disputes liability and intends to defend this matter vigorously, although the Company cannot predict the ultimate outcome of this litigation. 17 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: The following exhibits are filed herewith as part of this report: Exhibit No. Description of Exhibit ------- ---------------------- 10.1 Employment Agreement between Elcotel, Inc. and C. Shelton James effective as of July 20, 1999. 10.2 Retirement Agreement between Elcotel, Inc. and Tracey L. Gray effective as of June 11, 1999. 10.3 Business Loan Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.4 Commercial Security Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.5 Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.6 Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 27 Financial Data Schedule (Edgar Filing only) (b) Reports on Form 8-K: During the quarter ended June 30, 1999, the Company filed a Form 8-K Current Report dated May 26, 1999 that reported (i) the termination of negotiations concerning a possible business combination and the intention of the Company's President and Chief Executive to retire; and (ii) the adoption of a Stockholder Rights Plan. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Elcotel, Inc. ------------- (Registrant) Date: August 12, 1999 By: /s/ William H. Thompson --------------------------- William H. Thompson Senior Vice President, Administration and Finance (Principal Financial Officer) By: /s/ Scott M. Klein ---------------------- Scott M. Klein Controller (Principal Accounting Officer) 19 INDEX TO EXHIBITS Exhibit No. Description of Exhibit - ------- ---------------------- 10.1 Employment Agreement between Elcotel, Inc. and C. Shelton James effective as of July 20, 1999. 10.2 Retirement Agreement between Elcotel, Inc. and Tracey L. Gray effective as of June 11, 1999. 10.3 Business Loan Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.4 Commercial Security Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.5 Promissory Note between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 10.6 Export-Import Bank of the United States Working Capital Guarantee Program Borrower Agreement between Elcotel, Inc. and NationsBank, N.A. dated June 29, 1999. 27 Financial Data Schedule (Edgar Filing only) EX-10.1 2 EMPLOYEMENT AGREEMENT OF C. SHELTON JAMES EXHIBIT 10.1 ELCOTEL, INC. Employment Agreement of C. Shelton James This Employment Agreement (this "Agreement") is effective as of the 10th day of June, 1999 by and between Elcotel, Inc. (the "Company") and C. Shelton James ("Employee") upon the following terms and conditions: 1. Term: (a) Commencement Date: This Agreement shall commence on June 10, 1999 and supersedes and replaces in its entirety the Amended and Restated Employment Agreement dated October 20, 1998 between the Company and Employee. (b) Termination Date: Unless sooner terminated as provided in this Agreement, this Agreement shall terminate on December 10, 1999 (the "Initial Termination Date"). The Company shall have the option to extend the termination date to a date that is not earlier than 30 days and not later than 60 days after the Initial Termination Date (the "Extended Termination Date"). The Company shall exercise such option by giving the Employee at least 45 days written notice prior to the Initial Termination Date specifying the number of days (between 30 days and 60 days) that the termination date is extended. 2. Employment. Employee shall be employed by the Company as the acting President, the acting Chief Executive Officer and Chairman of the Board of Directors of the Company. Employee shall devote substantially all of his time during normal business hours to the business of the Company; provided that the Employee may continue to serve as a director of CSPI, DRS Technologies, SK Technologies, Inc., Concurrent Computer Corporation, Cyberguard Corporation and TechniSource Inc. and as the President and a Director of Fundamental Management Corporation. Employee shall provide services pursuant to this Agreement principally from the Company's executive offices in Sarasota, Florida, subject to travel required in connection with his performance of such services. Employee shall serve as the acting President and acting Chief Executive Officer of the Company while the Company searches for an individual to serve in those positions on a permanent (rather than interim) basis. If the Company appoints a permanent President or Chief Executive Officer during the term of this Agreement, Employee shall assist in the transition of management responsibilities to such permanent President or Chief Executive Officer. 3. Salary: During the term of this Agreement, the salary paid to Employee shall be Two Hundred Fifty Thousand Dollars ($250,000.00) on an annual basis. 4. Benefits: Employee shall be entitled to the same benefits as are made available to the Company's other senior executives and on the same terms and conditions as such executives (the "Benefits"). Employee shall also be entitled to a $2,000 per month non-accountable expense allowance ("Expense Allowance"). 5. Bonuses: Employee shall be entitled to receive such bonus, if any, as the board of directors of the Company or the Compensation Committee of the board determines (the "Bonus"). 6. Stock Options: (a) Employee shall be granted additional stock options to purchase an aggregate of 76,750 shares of the Company's common stock pursuant to the Company's 1991 Stock Option Plan (the "Options"). The Options shall have such exercise prices and such expiration dates as set forth on Exhibit A attached hereto and made a part hereof. The Options shall become initially exercisable as follows: 12,791 shares on each of July 10, 1999, August 10, 1999, September 10, 1999, October 10, 1999 and November 10, 1999 and 12,795 shares on December 10, 1999. The Options shall be incentive stock options to the maximum extent permitted by law and otherwise nonqualified options. Employee shall retain all options previously granted and unexercised. (b) All of Employee's stock options shall immediately vest in their entirety in the event of a Change of Control (as defined below). In addition, in the event of a termination by the Company of Employee's employment (including termination pursuant to Section 1(b)) other than for Cause (in accordance with Section 9(a) of this Agreement) or upon the death or disability of Employee (in accordance with Section 9(d) of this Agreement), all of Employee's vested employee stock options shall continue in effect for 30 days after the effective date of such termination at which time they shall terminate, except that (i) for all options granted on or after the date of this Agreement (including the Options) and for all other existing options that can be amended without increasing the exercise price in order to maintain incentive stock option status for federal income tax purposes, shall continue in effect until the termination of such option in accordance with its terms absent any termination of employment, and (ii) for all options to which (i) does not apply, shall, if not exercised within such 30 day period, be automatically extended until the termination of such option in accordance with its terms absent any termination of employment. In the event of a termination by the Company of Employee's employment for Cause (in accordance with Section 9(a) of this Agreement), all of 2 Employee's outstanding employee stock options shall immediately lapse and terminate. (c) The occurrence of any one or more of the following events shall be deemed to be a "Change of Control": (i) If any transaction occurs whereby substantially all of the assets of the Company are transferred, exchanged or sold to a non-affiliated third party other than in the ordinary course of business; (ii) If a merger or consolidation involving the Company occurs and the stockholders of the Company immediately before such merger or consolidation do not own immediately after such merger or consolidation at least fifty percent (50%) of the outstanding common stock of the surviving entity or the entity into which the common stock of the Company is converted; or (iii) If any person (including, without limitation, any individual, partnership or corporation), other than Fundamental Management Corporation and its affiliates or other than Wexford Management LLC and its affiliates, becomes the owner, directly or indirectly, of securities of the Company or its successor (or a parent company thereof) representing thirty-five (35%) or more of the combined voting power of the Company's or its successor's (or a parent's, as the case may be) securities then outstanding. 7. Business Expenses: Employee shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 8. Indemnification: Employee shall be indemnified by the Company with respect to claims made against him as a director, officer and/or employee of the Company and as a director, officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 9. Termination By the Company: Employee's employment may be terminated by the Company only as provided below: (a) For Cause: For Cause (as defined below) by written notice to Employee and payment to him of salary accrued, but not paid through the date of termination; provided however - 3 (i) If the nature of such Cause involves dishonesty, fraud, serious moral turpitude or a material violation of any applicable laws, such termination shall be effective upon the giving of such notice. (ii) If the nature of such Cause does not involve dishonesty, fraud, serious moral turpitude or a material violation of any applicable laws, such termination shall be effective upon the expiration of fifteen (15) days after the giving of such notice, unless within such fifteen-day period Employee has cured the basis of such Cause. (b) Without Cause: Without Cause by prior written notice of termination given to Employee and by compliance with the following: (i) The Company shall pay to Employee his salary and provide, at the Company's expense, the Benefits (excluding participation in the Company's 401(k) plan and any other benefits to which COBRA does not apply) and the Expense Allowance through the end of the term of this Agreement (i.e., the Initial Termination Date or Extended Termination Date depending on when the notice of termination is given) and pay the Employee Severance Pay (as defined below) beginning on the one month anniversary of the last payment of salary to Employee pursuant to this Agreement at the end of the term of this Agreement. (ii) If without Employee's written consent, Employee is required to perform his duties (other than for normal travel, consistent with performance of his services hereunder) from a geographic location other than the area consisting of Sarasota, Florida, and its surrounding counties, such requirement may, at Employee's option by notice given to the Company within ninety (90) days after the date of such requirement, be treated by him as a notice of termination of his employment by the Company without Cause. A reduction in Employee's responsibilities or a change in title as a result of the Company appointing another individual to serve as President or Chief Executive Officer shall not be deemed a breach of this Agreement or a termination of his employment by the Company without Cause. (c) Non-renewal: If this Agreement terminates pursuant to Section 1(b) because the Company does not extend the Initial Termination Date of this Agreement or the parties do not agree to extend the Employee's employment beyond the Extended Termination Date, then the Company shall pay the Employee severance pay ("Severance Pay") equal to three months of salary, payable in three equal monthly installments beginning on the one month anniversary of the termination of employment. 4 (d) Death or Permanent Disability: Upon the death or permanent disability of Employee, but only after providing him with salary accrued through the effective date of death or disability. (e) Definition of "Cause": "Cause" for purposes of termination by the Company shall be defined as (i) any act or acts by Employee of dishonesty or fraud or that constitute serious moral turpitude or a material violation of any applicable laws relating to insider trading or other securities law matters; or (ii) misconduct of a material nature that Employee knew or should have known would be materially detrimental to the Company or its business or a material breach by Employee of this Agreement. 10. Termination By Employee: (a) Employee may terminate his employment under this Agreement by reason of a breach hereof by the Company on twenty (20) days prior written notice to the Company, if such breach is not cured within such twenty day period. (b) Employee may also terminate his employment under this Agreement by giving the Company at least sixty (60) days prior written notice of termination. 11. Proprietary Information. Unless otherwise expressly agreed by Company in writing, any inventions, ideas, reports, discoveries, developments, designs, improvements, inventions, formulas, processes, techniques, "know-how," data, and other creative ideas concerning the manufacture, design, marketing or sale of pay phones (all of the foregoing to be hereafter referred to as "Proprietary Information"), whether or not patentable or registrable under copyright or similar statutes, hereinafter generated by Employee either alone or jointly with others in the course of his employment hereunder with Company relating or useful to the manufacture, design, marketing or sale of pay phones by the Company, shall be the sole property of Company. Employee hereby assigns to Company any rights which he may acquire or develop in such Proprietary Information. Employee shall cooperate with Company in patenting or copyrighting any such Proprietary Information, shall execute any documents tendered by Company to evidence its ownership thereof, and shall cooperate with Company in defending and enforcing its rights therein. Employee's obligations under this Section 11 to assist Company in obtaining and enforcing patents, copyrights, and other rights and protections relating to such Proprietary Information in any and all countries shall continue beyond the termination of his employment. Company agrees to compensate Employee at a reasonable rate for time actually spent by Employee at 5 Company's request on such assistance after termination of Employee's employment with Company. If Company is unable, after reasonable effort, to secure Employee's signature on any document or documents needed to apply for or prosecute any patent, copyright, or right or protection relating to such Proprietary Information, whether because of the Employee's physical or mental incapacity or for any other reason whatsoever, Employee hereby irrevocably designates and appoints Company and its duly authorized officers and agents as Employee's agent and attorney-in-fact, to act for and on his behalf to execute and file any such application or applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyrights, or similar protections thereon with the same legal force and effect as if executed by Employee. 12. Covenants Not To Disclose Confidential Information. (a) Employee agrees that he will not at any time or place during his employment or for three years after termination of such employment directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Employee agrees that both during the course of his employment with Company and for three years thereafter he will keep confidential from persons not associated with Company any and all Proprietary Information, special techniques, and trade secrets of Company. Upon termination of his employment for any reason whatsoever, Employee agrees to return to Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to Company's business and generated or received by Employee in the course of his employment duties with Company. (b) Employee agrees that during the course of his employment with the Company and the Restricted Period (as defined in Section 13) he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's relationship with or to Company as an employee, consultant, dealer or customer, as the case may be. (c) Employee agrees that he will not, during the course of 6 his employment with the Company and the Restricted Period (as defined in Section 13), engage in any employment or business activity in which it might reasonably be expected that confidential Proprietary Information or trade secrets of Company obtained by the Employee during the course of his employment with Company would be utilized. (d) The Employee recognizes and agrees that his violation of any terms contained in paragraphs (a), (b), or (c) of this Section 12 will cause irreparable damage to Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraphs (a), (b), or (c) of this Section 12 during the course of his employment with Company shall be a cause for his termination without notice of any rights of the Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 13. Covenant Not To Compete Unreasonably With Company. Employee further covenants and agrees that: (a) During the course of his employment with Company and the Restricted Period, Employee shall not undertake any employment or financial involvement with, or assistance of, any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones or in any other business in which the Company is engaged or has current plans to engage as of the date of termination of employment. "Restricted Period" shall mean one year following the later of (i) termination of this Agreement and (ii) the last date on which Employee is entitled to salary or severance payments pursuant to this Agreement. (b) Employee recognizes and agrees that his violation of any terms contained in paragraph (a) of this Section 13 will cause irreparable damage to Company the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition 7 to any other remedies, at law or otherwise, which Company might have. Company hereby waives any right to require a bond in connection with obtaining such an injunction. Employee further agrees that his violation of any of the terms of paragraph (a) of this Section 13 during the course of his employment with Company shall be a cause for his termination without notice of any rights of Employee under this Agreement. Such covenants shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 14. Notices: Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Employee), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: Chief Financial Officer Facsimile: 941-751-4716 If to Employee, to his most recent residence address shown on the books of the Company. Either party may change the address as to which notices to that party shall be given by giving notice in the manner provided herein. 15. Proration: To the extent that proration is not otherwise provided for in this Agreement, all amounts payable to Employee under this Agreement shall be deemed earned on a daily basis and shall be prorated based on a 365-day year. 8 16. Entire Agreement, etc.: (a) This Agreement contains the entire understanding of the parties with respect to the subject matter hereof; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, heirs, personal representatives and assigns; shall supersede and replace all prior employment agreements between the parties, including the Amended and Restated Employment Agreement dated October 20, 1998; and may be executed in one or more counterparts each of which shall be deemed an original hereof, but all of which shall constitute but one and the same agreement; and shall not be assigned by a party without the written consent of the other party and any attempted assignment without such consent shall be null and void. (b) No representation, affirmation of fact, course of prior dealings, promise or condition in connection herewith not incorporated herein shall be binding on the parties. (c) The failure by either party to insist upon strict compliance with any term, covenant or condition, or to exercise any right, contained herein shall not be deemed a waiver of such term, covenant, condition or right; and no waiver or relinquishment of any term, covenant, condition or right at any one or more times shall be deemed a waiver or relinquishment thereof at any other time or times. No waiver of any term or condition contained herein shall be binding upon the parties unless made in writing and signed by the party to be bound thereby. (d) The captions of the sections herein are for convenience only and shall not be used to construe or interpret this Agreement. (e) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida (without regard to the principles of conflicts of law) applicable to a contract executed and to be performed in such state. (f) The parties agree to submit any controversy, claim or dispute of whatever nature arising between them, including without limitation, those arising out of or relating to this Agreement or the construction, interpretation, performance, breach, termination, enforceability or validity of this Agreement or the arbitration provisions contained in this Agreement, for determination solely by binding arbitration, in Tampa, Florida by one arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator shall base his or her award or decision on applicable law and judicial precedent, shall include in such award or decision the findings of 9 fact and conclusions of law upon which the award or decision is based and shall not grant any relief or remedy that a court could not grant under applicable law. The parties agree to be conclusively bound by the award or decision of such arbitrator. Judgment on the award or decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. (g) The arbitrator's award or decision shall also include a determination as to the allocation between the parties of the payment of the costs and expenses of the arbitration (including, without limitation, fees and disbursements of counsel) on the basis that the prevailing party's costs and expenses shall be paid by the non-prevailing party. (h) Employee and the Company each hereby waive any and all rights to request or receive punitive damages in connection with any action or proceeding related to the subject matter of this Agreement. (i) Employee and the Company each hereby waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this Agreement. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first set forth above. EMPLOYEE: ELCOTEL, INC. /s/ C. Shelton James By: /s/ William H. Thompson - --------------------------- --------------------------------- C. Shelton James William H. Thompson Senior Vice President 10 Exhibit A Options Number of Shares Purchasable Exercise Price Expiration Date ----------- -------------- --------------- 6,250 $6.1875 2/20/2001 20,500 6.0000 5/22/2002 50,000 4.5625 7/13/2003 11 EX-10.2 3 RETIREMENT AGREEMENT EXHIBIT 10.2 RETIREMENT AGREEMENT THIS RETIREMENT AGREEMENT is effective as of June 11, 1999 between ELCOTEL, INC., a Delaware corporation (the "Company"), and TRACEY L. GRAY ("Gray"). Background. Gray is the President and Chief Executive Officer of the Company. Gray and the Company are parties to an Amended and Restated Employment Agreement dated as of October 20, 1998 (the "Employment Agreement"). Gray desires to retire and the parties desire to set forth the terms and conditions of Gray's retirement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: 1. Retirement of Gray. Effective on Friday, June 11, 1999 (the "Retirement Date"): (i) Gray shall retire as the President and Chief Executive Officer and as an employee of the Company and shall retire as an officer and employee of all subsidiaries of the Company, and (ii) the Employment Agreement shall terminate and be of no further force or effect, other than the provisions of Sections 11, 12 and 13 of the Employment Agreement which shall continue in effect in accordance with the terms of the Employment Agreement. Gray has elected to retire and is doing so freely and voluntarily. Gray shall be reimbursed (in accordance with Company policy) for all reasonable business expenses incurred by him on behalf of the Company prior to the Retirement Date. The parties agree that Gray's termination of employment pursuant to this Agreement shall not be deemed a termination by the Company or a termination by Gray under the Employment Agreement. 2. Consulting Period. Commencing on June 14, 1999 and continuing until July 14, 1999, unless extended to a date not later than August 13, 1999 pursuant to notice from the Acting President and Chief Executive Officer of the Company (the "Consulting Period"), Gray shall act as a consultant to the Company and its subsidiaries to assist the Company in transferring management responsibilities following Gray's retirement, and to perform such other duties as the Acting President and Chief Executive Officer of the Company may reasonably request. During the Consulting Period, the Company shall pay Gray compensation of $3,846.15 per week (pro rated for periods of less than one week) during the Consulting Period. Mr. Gray shall also be entitled during the Consulting Period to the same medical and dental insurance and other fringe benefits to which he was entitled pursuant to the Employment Agreement immediately prior to the Retirement Date, to the extent he qualifies for such benefits under the applicable plan, including without limitation, an automobile allowance, and on the same terms and conditions. Notwithstanding the foregoing, Gray shall not be entitled during the Consulting Period to reimbursement for temporary living expenses, any grant of employee stock options, or any bonuses. During the Consulting Period, Gray shall be reimbursed (in accordance with Company policy from time to time in effect) for all reasonable business expenses incurred by him in the performance of his duties. 3. Post Consulting Compensation. For a period of two years after the end of the Consulting Period (the "Post Consulting Period"), the Company shall pay Gray compensation at an annual rate of $75,000, payable in equal installments (52 installments of $2,884.62 each) every two weeks. In addition, the Company shall pay, during the Post Consulting Period, the cost of medical insurance under COBRA covering Gray or, at Gray's option or if such coverage is unavailable beyond 18 months following termination of Gray's employment because the Company's insurance carrier refuses to provide such coverage, pay Gray the amount which the Company would have paid to provide medical insurance under COBRA covering Gray during such period. 4. Stock Options. Gray shall retain all stock options issued to him under the Company's 1991 Stock Option Plan (the "Plan") that are vested as of the Retirement Date (the "Options"). The Options shall remain exercisable until the expiration date of the Option absent such termination of employment for the total number of shares purchasable under the Option as of the Retirement Date in accordance with Paragraph 10B of the Plan. Gray and the Company agree that Paragraph 10A of the Plan does not apply to the Options. 5. Indemnification. Gray shall be indemnified by the Company with respect to claims made against him as a director, officer and/or employee of the Company and as a director, officer and/or employee of any subsidiary of the Company to the fullest extent permitted by the Company's certificate of incorporation, by-laws and the General Corporation Law of the State of Delaware. 6. Covenants Not To Disclose Confidential Information. (a) Gray agrees that he will not at any time or place during the Consulting Period and for three years after the end of the Consulting Period directly or indirectly disclose to any person or firm other than Company or make, use or sell any records, ideas, files, drawings, documents, improvements, equipment, customer lists, sales and marketing techniques and devices, formulas, specifications, research, investigations, developments, inventions, processes and data, and without limiting the generality of the foregoing, anything not within the public domain (ideas in the process of being disclosed to customers shall not be considered in the public domain), belonging to Company, whether or not patentable or copyrightable, other than for the sole and exclusive benefit of Company, without the prior written consent of Company. Gray agrees that during the Consulting Period and for three years thereafter he will keep confidential from persons not associated with the Company any and all proprietary information, special techniques, and trade secrets of the Company. Upon termination of the Consulting Period, Gray agrees to return to the Company any property belonging to it, including but not limited to any and all records, notes, drawings, specifications, programs, data and other materials, and copies thereof, pertaining to the Company's business and generated or received by Gray in the course of his consulting duties with the Company. (b) Gray agrees that, during the Consulting Period and for two years thereafter, he will not directly or indirectly entice or hire away or in any other manner persuade an employee, consultant, dealer or customer of Company to discontinue that person's or firm's 2 relationship with or to the Company as an employee, consultant, dealer or customer, as the case may be. (c) Gray agrees that he will not, during the Consulting Period and for two years thereafter, engage in any employment or business activity in which it might reasonably be expected that confidential proprietary information or trade secrets of the Company obtained by Gray during the Consulting Period would be utilized. 7. Covenant Not To Compete Unreasonably With Company. Gray further covenants and agrees that: (a) During the Consulting Period and for two years thereafter, Gray shall not undertake any employment or financial involvement with, or assistance of, any person, firm, association, partnership, corporation or enterprise which is engaged in the manufacture, design, marketing or sale of pay phones or in any other business in which the Company is engaged or has current plans to engage as of the Retirement Date; provided that, notwithstanding the foregoing, Gray shall be permitted to engage in the business of owning and operating pay phone terminals through NuTel Systems. (b) Gray recognizes and agrees that his violation of the terms of any provision contained in Section 6 or 7 will cause irreparable damage to the Company the amount of which will be impossible to estimate or determine. Therefore, Gray further agrees that Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violation of any such covenant or covenants by Gray, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which Company might have. The Company hereby waives any right to require a bond in connection with obtaining such an injunction. Gray further agrees that his violation of the terms of any provision contained in Section 6 or 7 shall permit the Company to cease making further payments required under Section 2 or 3 of this Agreement. Such provisions shall be severable, and if the same be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 8. Payments. All payments to Gray under this Agreement are in lieu of, and replace in their entirety, any severance rights or payments to which Mr. Gray would otherwise be entitled under any agreement (including the Employment Agreement) or Company policy or under any state or federal law, rule or regulation in effect at the date hereof. 9. Director. Gray and the Company agree that Gray will continue to serve on the Board of Directors of the Company until the next annual meeting of stockholders. During the Consulting Period, Gray shall not be entitled to any fees as a director that the Company pays to its non-employee directors. After the Consulting Period and while Gray remains a director, Gray shall be entitled to any fees that a non-employee director receives as a member of the Board of Directors (any annual retainer fees shall be prorated for such period). While a member of the Board of Directors, Gray shall be reimbursed for reasonable expenses in attending Board and Board Committee meetings. In connection with the next annual meeting of stockholders, Gray 3 agrees not to seek nomination as a director and, if nominated and elected,agrees not to serve as a director. 10. Mutual Releases. (a) In consideration for the payments promised in Sections 2 and 3 of this Agreement and the other agreements of the Company contained herein, Gray hereby releases and forever discharges the Company and each and all of its past and present subsidiaries, parent and related corporations, companies and divisions, and their past and present directors, trustees, officers, managers, supervisors, employees, attorneys, and agents, and their predecessors, successors and assigns (all such entities and persons hereafter being referred to collectively in this Agreement as "Releasees"), from any and all claims, debts, agreements, complaints or causes of action (hereinafter, collectively, "Claims"), whether known or unknown that he ever had, now has, or may have against any or all of the Releasees, for, upon, or by reason of any cause, matter, thing or event whatsoever occurring at any time up to and including the date of this Agreement. This means that Gray is waiving and giving up any right he may have to sue the Company or any other Releasee on or for any Claims within the scope of this Section 10(a). The Claims within the scope of this section and covered by this release and waiver include, but are not limited to, (i) any Claim based on contract or in tort or common law; (ii) any Claim based on or arising under any employment laws, such as the federal Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964 or the Americans with Disabilities Act; (iii) any Claim based on or arising out of Gray's employment by the Company and/or his retirement therefrom; and (iv) any Claims for compensatory, liquidated or punitive damages, damages for emotional distress, back pay, front pay, attorneys' fees, expenses, and unpaid benefits. Gray understands that, by signing this Agreement, he waives all Claims he ever had or now has against the Company and against all other Releasees that arose or may have arisen before the date of this Agreement (including any right to a remedy or recovery in an action that may be brought on his behalf by any government agency or other person based on any Claims released herein), but does not release or waive any claims that may arise after the date of this Agreement, including any claim for breach of this Agreement. Gray further promises not to commence a lawsuit against the Company or against any other Releasee based on or asserting any Claims described in this Section. (b) The Company hereby releases and forever discharges Gray, his heirs and legal representatives from any and all Claims, whether known or unknown, that it ever had, now has, or may have against Gray, his heirs or legal representatives, for, upon or by reason of any cause, matter, thing or event whatsoever occurring at any time up to and including the date of this Agreement, but the Company does not release or waive any claims that may arise after the date of this Agreement, including any claim for breach of this Agreement. 11. Severability. All provisions of this Agreement are severable, and if any of them is determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force to the fullest extent permitted by law. 4 12. Miscellaneous. (a) This Agreement contains the entire understanding of the parties on the subject matter hereof; shall not be amended except by written agreement of the parties signed by each of them; shall be binding upon and inure to the benefit of the parties and their successors, heirs, personal representatives and permitted assigns; may be executed in one or more counterparts each of which shall be deemed an original hereof, but all of which shall constitute but one and the same agreement; and shall not be assigned by a party without the written consent of the other party. (b) The failure by either party to insist upon strict compliance with any term, covenant or condition, or to exercise any right, contained herein shall not be deemed a waiver of such term, covenant, condition or right; and no waiver or relinquishment of any term, covenant, condition or right at any one or more times shall be deemed a waiver or relinquishment thereof at any other time or times. (c) The captions of the sections herein are for convenience only and shall not be used to construe or interpret this Agreement. (d) Notices that are required or permitted hereunder shall be given by hand delivery, by delivery to a courier service providing next day delivery and proof of receipt, or by facsimile transmission (except to Gray), as follows: If to the Company at: Elcotel, Inc. 6428 Parkland Drive Sarasota, FL 34243 Attn: Chairman of the Board Facsimile: 941-751-4716 If to Gray, to his most recent residence address on the books of the Company. Either party may change the address as to which notices to that party shall be given by giving notice in the manner provided in this section. (e) This Agreement shall terminate upon the death of Gray. (f) This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Florida (without regard to the principles of conflicts of law) applicable to a contract executed and to be performed in such state. 5 (g) The parties agree to submit any controversy, claim or dispute of whatever nature arising between them, including without limitation, those arising out of or relating to this Agreement or the construction, interpretation, performance, breach, termination, enforceability or validity of this Agreement or the arbitration provisions contained in this Agreement, for determination solely by binding arbitration, in Tampa, Florida by one arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator shall base his or her award or decision on applicable law and judicial precedent, shall include in such award or decision the findings of fact and conclusions of law upon which the award or decision is based and shall not grant any relief or remedy that a court could not grant under applicable law. The parties agree to be conclusively bound by the award or decision of such arbitrator. Judgment on the award or decision rendered by the arbitrator may be entered in any court having jurisdiction thereof. (h) The arbitrator's award or decision shall also include a determination as to the allocation between the parties of the payment of the costs and expenses of the arbitration (including, without limitation, fees and disbursements of counsel) on the basis that the prevailing party's costs and expenses shall be paid by the non-prevailing party. (i) Gray and the Company each hereby waive any and all rights to request or receive punitive damages in connection with any action or proceeding related to the subject matter of this Agreement. (j) Gray and the Company each hereby waive all right to trial by jury in any action or proceeding to enforce or defend any rights under this Agreement. 13. Voluntary Nature. Gray acknowledges that he has been advised of his right to consult with an attorney before signing this Agreement and he has been given a period of at least twenty-one (21) days to consider this Agreement before signing it. Gray also represents that he has read this Agreement and understands it, that he is signing this Agreement voluntarily and of his own free will, without any duress or coercion, and that he has had a reasonable time to consider this Agreement before signing it. In deciding whether to enter into this Agreement, Gray is not relying on any promises, statements or representations other than those that are expressly set forth herein. 14. Effectiveness. This Agreement will not become effective or enforceable until seven (7) days after Gray executes it. Gray may revoke this Agreement at any time within that seven (7) day period, by sending a written notice to C. Shelton James at Elcotel, Inc., 6428 Parkland Drive, Sarasota, Florida 34243 [Fax: (941) 751-4716.] Such written notice may be sent by mail, fax or hand delivery. If a written revocation is received within that seven (7) day period, this Agreement shall be null and void for all purposes. If a written revocation is not received within that seven (7) day period, this Agreement will go into effect on the first day immediately following the expiration of said seven (7) day period ("Effective Date"). 6 IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates indicated below. THIS AGREEMENT CONTAINS A RELEASE OF CLAIMS. READ CAREFULLY BEFORE SIGNING. ELCOTEL, INC. By: /s/ C. Shelton James 7/22/99 ------------------------------------------- C. Shelton James Date Chairman of the Board /s/ Tracey L. Gray 7/22/99 ---------------------------------------------- Tracey L. Gray Date 7 EX-10.3 4 BUSINESS LOAN AGREEMENT EXHIBIT 10.3 BUSINESS LOAN AGREEMENT
- ------------------ ------------- ------------ -------------- ----------- ------------ ---------------- ------------- --------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $2,000,000.00 06-29-1999 06-29-2000 A100 - ------------------ ------------- ------------ -------------- ----------- ------------ ---------------- ------------- ---------------
- -------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: Elcotel, Inc. Lender: NationsBank, N.A. 6428 Parkland Drive P.O. Box 40329 Sarasota, FL 34243 Jacksonville, FL 32203-0329 ================================================================================ THIS BUSINESS LOAN AGREEMENT, between Elcotel, Inc. ("Borrower") and NationsBank, N.A. ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrow understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of June 29, 1999, and shall continue thereafter until all indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means Elcotel, Inc.. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Collateral. The world "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. ERISA. The word "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time and the regulations and published interpretations thereof. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." GAAP. The world "GAAP" means generally accepted accounting principles consistently applied. Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now existing, contemporaneously with or hereafter incurred or created and any renewals, modifications, extensions, substitutions or consolidations thereof, voluntary or involuntary incurred, secured or unsecured, absolute or contingent, or unliquidated; determined or undetermined, whether Borrower may be liable individually or jointly with others, or primarily or secondarily, or as guarantor, surety, or otherwise; whether recovery upon the indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means NationsBank, N.A., its successors and assigns. Loan. The world "Loan" or "Loans" means and includes any and all loans, advances, interest, costs, fees, documentary stamp tax and/or intangible taxes, debts, overdraft indebtedness, leases, drafts, letters of credit, credit cards, and business services from lender to Borrower, whether now existing, contemporaneously with, or hereafter incurred or created and any renewals, modification, extensions, substitutions or consolidations thereof, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any renewal, extension, modification, consolidation, substitute, replacement or refinancing note or notes therefor. Permitted Liens. The words "Permitted Liens" mean: (a) liens and security interests securing indebtedness owed by Borrower to Lender; (b) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (c) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (d) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (f) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. 06-29-1999 BUSINESS LOAN AGREEMENT Page 2 Loan No. (Continued) ================================================================================ Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Loan Advance and each subsequent Loan Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender in form satisfactory to Lender the following documents for the Loan: (a) the Note, (b) Security Agreements granting to Lender security interests in the Collateral, (c) Financing Statements perfecting lender's Security Interests; (d) evidence of insurance as required below; and (e) any other documents required under this Agreement or by Lender or its counsel, including without limitation any guaranties described below. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender property certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents, and such other authorizations and other documents and instruments as Lender or its counsel, in their sole discretion, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any advance a condition which would constitute an Event of Default under this Agreement. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approval of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower and each information, exhibit or report supplied to lender by Borrower, its agents or accountants truly and completely disclosed Borrower's financial condition as of the date of the statement in accordance with GAAP, and there has been no material adverse change in Borrower's financial or business condition or operations subsequent to the date of the most recent financial statement supplied to Lender and none are imminent or threatened. Borrower has no material contingent obligations except as disclosed in such financial statements. Borrower acknowledges and agrees that Lender is relying on all such financial information in entering into, continuing, renewing or extending any Loan. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Additionally, Borrower and Borrower's real and personal properties comply fully with all laws, ordinances, statutes, codes and requirements of the Americans with Disabilities Act of 1990. Hazardous Substances. The terms "hazardous waste," "hazardous substance," disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S. C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to an acknowledged by lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership, lease or use of any real or personal properties and the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, or about any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance by any prior owners or occupants of any of the properties or the Collateral, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties or the Collateral shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about any of the properties or the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any 06-29-1999 USINESS LOAN AGREEMENT Page 3 Loan No. (Continued) ================================================================================ other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral and the properties for hazardous wastes and substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to fully and promptly pay, perform, discharge and defend, indemnify and hold harmless Lender against any and all claims, orders, demands, causes of action, proceedings, judgments, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Borrower's ownership or interest in the properties or the Collateral, whether, or not the same was or should have been known to Borrower. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note and all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Permits. Borrower possesses and will continue to possess all permits, licenses, copyrights, trademarks, trade names, patents and rights thereto to conduct its business and its business does not conflict or violate any valid rights of others with respect to the foregoing. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes and will not purchase or carry margin stock (within the meaning of Regulations G,T and U of the Board of Governors of the Federal Reserve System). Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. The chief place of business of Borrower and the office or offices where Borrower keeps its records concerning the Collateral is located at 6428 Parkland Drive, Sarasota, FL 34243. Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Deposit Accounts. Maintain its primary banking accounts with Lender. Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all litigation and claims and all threatened litigation and claims affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Updates. Promptly inform Lender in writing of details of all litigation, legal or administrative proceedings, investigation or other action of similar nature, pending or threatened against Borrower, at any time during the term of this Agreement, which in part or in whole may or will render any of the above representations and warranties no longer true, accurate and correct in each and every respect. Borrower will bring such details to Lender's attention, in writing, within thirty (30) days from the date Borrower acquires knowledge of same. Financial Records. Maintain its books and records in accordance with GAAP and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement, statement of cash flow and notes to statements for the year ended, audited by a certified public accountant satisfactory to Lender, and, as soon as available, but in no event later than forty five (45) days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP and certified by Borrower as being true and correct. Provide to Lender annually for each individual Borrower and Guarantor, if any, signed and dated personal financial statements on Lender's forms and, immediately after filing, the personal income tax return filed for the past calendar year. Simultaneously with the financial information required herein of Borrower, the same information of all corporate or partnership guarantors, if any, prepare in accordance with GAAP. Promptly after the furnishing thereof, provide Lender with copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, credit, or similar agreement and not otherwise required to be furnished to Lender pursuant to any other section of this Agreement. Promptly after the sending or filing thereof, provide Lender with copies of all proxy statements, financial statements and reports which Borrower sends to its stockholders, and 06-29-1999 BUSINESS LOAN AGREEMENT Page 4 Loan No. (Continued) ================================================================================ copies of all regular, periodic, special reports, an all registration statements which Borrower files with the Securities and Exchange Commission or any governmental authority which may be substituted therefore, or with any national securities exchange. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Leverage Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than: Period Ratio ------ ----- For each fiscal year end 1.25 to 1.00 Current Ratio. Maintain a ratio of Current Assets to Current Liabilities in excess of: Period Ratio ------ ----- For each fiscal year end 1.50 to 1.00 Fixed Charge Ratio. Maintain a ratio of Adjusted Net Income to Fixed Charges of not less than: Period Ratio ------ ----- On a rolling four quarter basis 1.30 to 1.00 For purposes of this Agreement and to the extent the following terms are utilized in this Agreement, the term "Tangible Net Worth" shall mean Borrower's total assets excluding all intangible assets determined in accordance with GAAP (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements at book value) of Borrower less total Debt. The term "Debt" shall be determined in accordance with GAAP. The term "Subordinated Debt" shall mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. The term "Working Capital" shall mean Borrower's current assets at lower of cost or current market value less amounts due from any officer, director, shareholder or any entity related by common control or ownership, excluding prepaid expenses, less Borrower's current liabilities. The term "Liquid Assets" shall mean Borrower's cash on hand, marketable securities, bank deposits and Borrower's receivables. The term "Adjusted Net Income" means net income after taxes plus depreciation, amortization, lease expense, and interest expense. The term "Fixed Charges" mean interest expense plus lease expense, current maturities of long-term debt and current maturities of capital leases. The term "Cash Flow" shall mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. The term "Senior Debt" shall mean Debt less Subordinated Debt. The term "Capital Funds" shall mean Tangible Net Worth plus Subordinated Debt. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with GAAP and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, business interruption, theft, public liability insurance, and such other insurance in such amounts and covering such risks as are usually covered by businesses engaged in the same or a similar business and similarly situated with respect to Borrower's properties and operations, in form, coverages and with insurance companies reasonably acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Guaranties. Prior to disbursement of any Loan proceeds, furnish executed guaranties of the Loans in favor of Lender, on Lender's forms, and in the amounts and by the guarantors named below: Guarantors Amounts ---------- ------- Elcotel Direct, Inc. Unlimited Technology Service Group, Inc. Unlimited Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. 06-29-1999 BUSINESS LOAN AGREEMENT Page 5 Loan No. (Continued) ================================================================================ Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Substantially maintain its present executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans, and continue to engage in an efficient and economical manner in a business of the same general type as now conducted by it, provided, however, that nothing contained in this Agreement shall prevent Borrower from discontinuing any part of Borrower's business, if in Borrower's opinion, this discontinuance is in the best interests of Borrower and not disadvantageous to Lender. Maintenance. Maintain, keep and preserve Borrower's buildings and properties and every part thereof in good repair, working order, and condition and from time to time make all needful and proper repairs, renewals, replacements, additions, betterments and improvements thereto, so that at all times the efficiency thereof shall be fully preserved and maintained, ordinary wear and tear excepted. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts and records and to make copies and memoranda of Borrower's books, accounts and records. If borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense, and discuss the affairs, finances and accounts of Borrower with Lender. Compliance Certificate. Unless waived in writing by Lender, provide Lender upon Lender's request a compliance certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no default or Event of Default has occurred, or has occurred and is continuing under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business, and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, except purchase money security incurred in the normal course of business up to $500,000.00. (b) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender and except for Borrower's accounts as allowed as a permitted lien. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, wind up, liquidate, merge, reorganize, transfer, acquire or consolidate with any other entity, change ownership, dissolve, transfer or sell or acquire Collateral or assets out of the ordinary course of business, or (c) pay, declare, set aside, or allocate any dividends in cash or other property, on Borrower's stock (however, if Borrower is a Subchapter S corporation, Borrower may make distributions to each shareholder which is necessary to pay for any personal income tax liability incurred by that shareholder as a direct result of profits generated by the Subchapter S corporation) or purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) assume, endorse, be liable for or incur any agreement or obligation as surety or guarantor. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender or (e) Lender in good faith reasonably deems itself insecure even through no Event or Default shall have occurred. SEMI-ANNUL AUDITS. Semi-annual audits of Borrower's collateral will be preformed by Lender or its agent, and Borrower will be responsible for all costs incurred. The results of said audit must be satisfactory to Lender in its sole discretion. EXIMBANK GUARANTEE PROGRAM. The loan is made in connection with the Working Capital Guarantee Program of the Export-Import Bank of the United States ("Eximbank"). A condition precedent to the making of the loan is guarantee by Eximbank of 90% of the principal of, and accrued interest on, the loan. The loan shall be subject to the terms and conditions of the Master Guarantee Agreement between Eximbank and Lender dated October 1, 1994, as such Master Guarantee Agreement shall be modified, renewed, or amended from time to time (the "Master Guarantee"). EXIMBANK BORROWER AGREEMENT. Borrower shall comply with the terms of that certain Borrower Agreement of even date herewith, whereby Borrower has made certain representations, warranties and agreements in connection with the loan. In the event of any conflict on a particular subject matter between the Borrower Agreement and this Agreement, the Agreement with the most restrictive and stringent requirement on Borrower with regard to such subject matter shall control. 06-29-1999 BUSINESS LOAN AGREEMENT Page 6 Loan No. (Continued) ================================================================================ ADDITIONAL EVENTS OF DEFAULT. In addition to the Event of Default set forth above in the paragraph entitled "Events of Default," it shall be an Event of Default under this Agreement if the Master Guarantee shall be terminated or ineffective for any reason with respect to the Loan. COMPLIANCE WITH OTHER REQUIREMENTS. Borrower agrees to comply with (a) any obligations Borrower may have under Eximbank rules, regulations and procedures, and (b) the procedures of Lender's Export Programs Department, as may be in effect from time to time. LIMITATION OF AGREEMENT TO NOTE: Notwithstanding anything in this Agreement to the contrary, the Notes, Loans and Indebtedness covered by this Agreement shall be limited to the Note and Loan of even date (and any renewals, modifications, extensions, substitutions, refinancings or consolidations thereof) and the indebtedness evidenced thereby. POTENTIAL LAIBILITY. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will notify Lender of any existing or potential liabilities exceeding $500,000.00. RIGHT OF SETOFF. Borrower authorizes Lender, to the extent permitted by applicable law, to charge, withdraw or setoff all sums owing on this Agreement against any and all the accounts set forth below in the Accounts section without prior demand or notice to Borrower. ACCOUNTS. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Borrower's right, title and interest in and to, Borrower's deposits, accounts (whether checking, savings, or some other account), or securities now or hereafter in the possession of or on deposit with Lender or subsidiary including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. EVENTS OF DEFAULT. If any of the following events shall occur each shall constitute an Event of Default under this Agreement: Default on Indebtedness. An event of default as defined in any Loan or Note or demand for full payment of any Loan or Note. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. If any Affirmative Covenant herein is breached, and if Borrower or Grantor, as the case may be, has not been given a notice of a similar breach within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such failure: (a) cures the failure within thirty (30) days; or (b) if the cure requires more than thirty (30) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the failure and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation, or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, insolvency, appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor Proceedings. Commencement of foreclosure proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any grantor of collateral for the Loan. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor proceeding, and if Borrower or Grantor gives Lender written notice of the creditor proceeding and furnishes reserves or a surety bond for the creditor proceeding satisfactory to Lender. Forfeiture. The filing of formal charges under any federal or state law against any Borrower which forfeiture is the penalty. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the proceeding, and if Borrower gives Lender written notice of the proceeding and furnishes reserves or a surety bond for the proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Insecurity. Lender, in good faith reasonably deems itself insecure. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform any obligation of Borrower or of any Grantor shall not affect Lender's right o declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supersedes all prior understandings and correspondence, oral or written, with respect to the subject matter hereof. No alteration of or 06-29-1999 BUSINESS LOAN AGREEMENT Page 7 Loan No. (Continued) ================================================================================ amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define this provisions of this Agreement. Continuing Agreement. This Agreement is a continuing agreement and shall continue in effect notwithstanding that from time to time, no indebtedness may exist. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses, including reasonable attorneys' fees, incurred in connection with the preparation, execution, enforcement and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including reasonable attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States registered or certified mail, first class, postage prepaid, return receipt requested, addressed to the party to whom the notice is to be given at the address shown above; notification by facsimile is specifically not allowed. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address(es). Severabillity. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender is exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE 29, 1999. BORROWER: Elcotel, Inc. By: /s/ William H. Thompson ----------------------------------------------- William H. Thompson, Senior Vice President LENDER: NationsBank, N.A. By: /s/ Nathan Coon ------------------------------------------------ Authorized Officer ================================================================================ LASER PRO, Regu. U.S. Pat. & T.M. Off., Ver. 3.24 (C) 1999 CFI ProServices, Inc. All rights reserved. [FL-C40 P3.24a ELCOTEL.LN C25.OVL] EX-10.4 5 COMMERCIAL SECURITY AGREEMENT EXHIBIT 10.4 COMMERCIAL SECURITY AGREEMENT
- ------------------- ---------------- -------------- ----------- ---------- -------------- ----------------- -------------- --------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $2,000,000.00 06-29-1999 06-29-2000 A100 - ------------------- ---------------- -------------- ----------- ---------- -------------- ----------------- -------------- ---------
- -------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: Elcotel, Inc. Lender: NationsBank, N.A. 6428 Parkland Drive P.O. Box 40329 Sarasota, FL 34243 Jacksonville, FL 32203-0329 ================================================================================ THIS COMMERCIAL SECURITY AGREEMENT is entered into between Elcotel, Inc. (referred to below as "Grantor"); and NationsBank, N.A. (referred to below as "Lender"). For valuable consideration, Grantor grants to Lender a security interest in the Collateral to secure the indebtedness and agrees that Lender shall have the rights stated in this Agreement with respect to the Collateral, in addition to all other rights which Lender may have by law. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. Collateral. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: All accounts and general intangibles, together with the following specifically described property: All export related accounts, inventory and general intangibles. In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and where located: (a) All accessions, accessories, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, contract rights, general intangibles, instruments, rents, monies, revenues, issues, profits, payments and all other rights, arising out of a sale, lease, trade, exchange or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, condemnation or other disposition of any of the property described in this Collateral section. (e) All proceeds, refunds or rebates from the cancellation of any insurance policies or any of the property described in this Collateral section or from any warranty, service, disability or credit insurance product or policy for Grantor, for the benefit of Grantor or for any of the property described in this Collateral section. (f) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. Accounts. The word "accounts" means all accounts, instruments, documents, chattel paper, reimbursements and obligations in any form owing to Grantor arising out of the sale or lease of goods or the rendition of services by Grantor whether or not earned by performance; all credit insurance, guaranties, letters of credit, advices of credit, and other security for any of the foregoing; all merchandise returned to or reclaimed by Grantor; and Grantor's books relating to any of the foregoing. For purposes of this Agreement, Grantor's grant of accounts to Lender as Collateral includes an assignment of all accounts to Lender. General Intangibles. The words "general intangibles" mean all general intangibles, choices in action, causes of action, and all other personal property of every kind and nature (other than goods and accounts) including, without limitation, patents trademarks, trade names, service marks, copyrights, and applications for any of the above; and goodwill, trade secrets, licenses, franchises, rights under agreements, deposit accounts, tax refunds, tax refund claims, moneys due from pension funds, governmental reimbursements and Grantor's books relating to any of the foregoing. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." Grantor. The word "Grantor" means Elcotel, Inc., its successors and assigns Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the indebtedness. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon, of Grantor, or any one or more of them to Lender, as well as all claims by Lender against Grantor, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Grantor may be liable individually or jointly with others; whether Grantor may be obligated as guarantor, surety, accommodation party or otherwise, whether recovery upon such indebtedness may be or hereafter may become barred by any statue of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means NationsBank, N.A., its successors and assigns. 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 2 Loan No. (Continued) ================================================================================ Note. The word "Note" means the note or credit agreement dated June 29, 1999, in the principal amount of $2,000,000.00 from Elcotel, Inc. to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the indebtedness. Borrower. The word "Borrower" means Elcotel, Inc. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: Except as disclosed in writing delivered to Lender, (a) no entity has merged into Grantor or been consolidated, with Grantor, and Grantor's business structure and entity has not changed; (b) no entity has sold substantially all of its assets to Grantor or sold assets to Grantor outside the ordinary course of such seller's business at anytime in the past; and (c) Grantor has not changed its name or identity or used any new trade name or merged or consolidated with any other entity. All assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Grantor or any of its property have been paid in full before delinquency or before the expiration of any extension period; and Grantor has made due and timely payment or deposit of all federal, state, and local taxes, assessments, or contributions required of it by law, except only for items that Grantor is currently contesting diligently and in good faith and that have been fully disclosed in writing to Lender. Perfection of Security Interest. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby makes, constitutes and appoints Lender as its irrevocable true and lawful attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Any person dealing with Grantor shall be entitled to rely conclusively on any written or oral statement of Lender that this power of attorney is in effect. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender of any change in Grantor's name including any change to the assumed business names of Grantor. This is a continuing Security Agreement and will continue in effect even though all or any part of the indebtedness is paid in full and even though for a period of time Grantor may not be indebted to Lender. No Violation. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its certificate or articles of incorporation and bylaws do not prohibit any term or condition of this Agreement. Enforceability of Collateral. To the extent the Collateral consists of accounts, contract rights, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. At the time any account becomes subject to a security interest in favor of Lender, the account shall be a good and valid account representing an undisputed, bona fide indebtedness incurred by the account debtor, for merchandise held subject to delivery instructions or theretofore shipped or delivered pursuant to a contract of sale, or for services theretofore performed by Grantor with or for the account debtor; there shall be no setoffs or counterclaims against any such account; no agreement under which any deductions or discounts may be claimed shall have been made with the account debtor except those disclosed to Lender in writing. Aging Reports. Unless otherwise waived or modified in writing by Lender, Grantor shall from time to time hereafter but not less often than quarterly execute and deliver to Lender no later than the 15th day of each quarter end during the term of this Agreement a detailed aging of accounts by total, a summary aging of accounts by account debtor, and a reconciliation statement. Grantor will keep or will cause to be kept, accurate and complete records of the accounts and will deliver such records and other financial information to Lender as are requested, and that Lender or its designee shall have the right at any time upon request to call Grantor's place(s) of business at intervals solely determined by Lender, and without hindrance or delay, inspect, audit, make test verifications, send verification of and account to any account debtor and otherwise check and make copies of books, records, journals, orders, receipts, correspondence and other data related to the accounts or the processing or collection thereof. If any account shall be evidenced by a promissory note, trade acceptance or any other instrument for the payment of money, Grantor upon Lender's request, will promptly deliver same to Lender, properly endorsed to Lender's order. Regardless of the form of such endorsement, Grantor hereby waives presentment, demand, notice of dishonor, protest and notice of protest and all other notices to which Grantor might be entitled. Removal of Collateral. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sale of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of Florida, without the prior written consent of Lender. Transactions Involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, consign or otherwise transfer or dispose of the Collateral. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. Title: Grantor represents and warrants to Lender that it holds goods and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. Upon Lender's request, if Grantor now or hereafter has any vehicle or equipment for which a certificate of title has been or will be issued, Grantor shall immediately deliver to Lender, property endorsed, each certificate of title for such vehicle or equipment for the lien of Lender to be recorded. Maintenance and Inspection of Collateral. Grantor shall maintain all tangible Collateral in good operating condition and make all necessary repairs to preserve the Collateral's value. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, test, and audit the Collateral wherever located. 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 3 Loan No. (Continued) ================================================================================ Notice. At least thirty (30) days prior to the occurrence of any of the following events, Grantor will deliver to Lender written notice of such impending events: (i) any addition, deletion or a change in Grantor's place(s) of business and/or the location(s) of the Collateral; or (ii) any addition, deletion or change in Grantor's name, any doing business as name, trade name, fictitious name, identity or legal structure. Taxes, Assessments and Lines. Grantor will pay when due all taxes, assessments and liens upon it and the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's Interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the Lien plus any interest, costs, reasonable attorneys' fees or other charges that could accrue as a result of foreclosure or sale. Grantor will, in the event of appropriation or taking of all or any part of the Collateral, give Lender prompt written notice thereof. Lender shall be entitled to receive directly, and Grantor shall promptly pay over to Lender, any awards or other amounts payable with respect to such condemnation, requisition or other taking and in its sole discretion may apply the proceeds as it deems best without regard if any Event of Default has or has not occurred. Accounting System. Grantor at all times hereafter shall maintain a consistent system of accounting, with ledger and account cards and/or computer tapes, disks, printouts, and records that contain information pertaining to the Collateral that may from time to time be requested by Lender. Grantor shall not modify or change its method of accounting or enter into any agreement hereafter with any third-party accounting firm and/or service bureau for the preparation and and/or storage of Debtor's accounting records without said accounting firm's and/or service bureau's agreeing to provide to Lender information regarding the Collateral and Grantor's financial condition. Compliance With Governmental Requirements. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. Collateral Value. If Lender deems the value of the Collateral to be threatened by any out of the ordinary loss, dissipation, destruction, damage or other cause, or if the Collateral is decreasing in value, thereupon, or at anytime thereafter, Grantor upon demand by lender agrees to forthwith deposit with Lender, additional collateral to the satisfaction of Lender. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 49 U.S.C. Section 6901, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Grantor represents and warrants that: (a) During the period of Grantor's ownership of Grantor's properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, or about any of the properties, (b) Grantor has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Grantor nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, or about any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Grantor authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Grantor or to any other person. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral and the properties for hazardous waste. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to fully and promptly pay, perform, discharge and defend, indemnify and hold harmless Lender against any and all claims, orders, demands, causes of action, proceedings, judgments, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of this Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release occurring prior to Grantor's ownership or interest in the properties, whether or not the same was or should have been known to Grantor. The provisions of this section of this Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Environmental Compliance and Reports. Grantor shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Grantor, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter, or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Grantor's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Maintenance of Casualty Insurance. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage of the kinds and in amounts customarily insured against by businesses in the same or similar business, together with such other insurance as Lender may require with respect to the Collateral, in form, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such lender loss payable or other endorsements as Lender may require. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. GRANTOR ACKNOWLEDGES THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFACATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS. 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 4 Loan No. (Continued) ================================================================================ Application of Insurance Proceeds. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the indebtedness. Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Collateral. Lender's Duty of Care. Lender shall have no duty of care with respect to the Collateral except that Lender shall exercise reasonable care with respect to the Collateral in Lender's custody. Lender shall be deemed to have exercised reasonable care if such property is accorded treatment substantially equal to that which Lender accords its own property or if Lender takes such action with respect to the Collateral as Grantor shall request or agree to in writing, provided that no failure to comply with any such request nor any omission to do any such act requested by Grantor shall be deemed a failure to exercise reasonable care. Lender's failure to take steps to preserve rights against any parties or property shall not be deemed to be failure to exercise reasonable care with respect to the Collateral in Lender's custody. Waivers. Grantor waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension or renewal of any or all commercial paper, accounts, documents, instruments, chattel paper, and guaranties at any time held by Lender on which Grantor may in any way be liable. ASSIGNMENT AND PLEDGE OF ADDITIONAL RIGHTS. Grantor, in order to further secure the prompt and punctual payment and satisfaction of the indebtedness in favor of Lender in principal, interest, costs, expenses, attorneys' fees and other fees and charges, hereby assigns, pledges and grants to Lender a security interest in the following additional rights (the "Rights"): Options and Agreements to Sell. Any and all of Grantor's present and future options or agreements to sell the Collateral, or any part or parts thereof, including without limitation Grantor's rights to exercise and/or enforce such options or agreements. Sale Proceeds. Any and all of Grantor's present and future rights, title and interest in and to any and all cash, cash equivalent, property and other proceeds derived or to be derived from the sale, transfer, assignment and/or other distribution of the collateral, whether in cash, farm products, or otherwise, and whether from or through any federal or state government agency or program or otherwise, including without limitation all entitlements, rights to payment, and payments, in whatever form received, including but not limited to, payments under any governmental agricultural diversion programs, governmental agricultural assistance programs, the Farm Services Agency Wheat Feed Grain Program, and any other such program of the United States Department of Agriculture, warehouse receipts, chemicals and fertilizers, documents, letters of entitlement, and deficiency, conservation reserve, and diversion and storage payments, together with, Grantor's rights to receive such proceeds and Grantor's rights to enforce collection and payment thereof. Insurance Proceeds. Any and all of Grantor's present and future rights, title and interest in and to any unearned insurance premiums and proceeds of insurance affecting all or any part of the collateral, including the right to receive such unearned insurance premiums and insurance proceeds directly from the insurer and, where applicable, to enforce any rights that Grantor may have to collect such amounts. Condemnation Proceeds. Any and all Grantor's present and future rights, title and interest in and to the proceeds of any aware or claim for direct or consequential damages relating to any condemnation, expropriation, or any part of the collateral, by any governmental authority, including the right to receive such condemnation proceeds directly from such a governmental authority and, where applicable, to enforce any rights that Grantor may have to collect such condemnation proceeds. Damages. Any and all of Grantor's rights, title and interest and other claims or demands that Grantor now has or may hereafter acquire against anyone with respect to any damage to all or any part of the collateral. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. AN EVENT OF DEFAULT AS DEFINED IN THE Note or demand for payment in full of the Note. Other Defaults. Failure of Grantor to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or in any other agreement between Lender and Grantor. 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 5 Loan No. (Continued) ================================================================================ False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor under this Agreement is false or misleading in any material respect, either now or at the time made or furnished. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. Insolvency. The dissolution or termination of Grantor's existence as a going business, the insolvency of Grantor, the appointment of a receiver for any part of Grantor's property, any assignment for the benefit of creditors, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor. Creditor Proceedings. Commencement of foreclosure, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or by any governmental agency against the Collateral or any other collateral securing the indebtedness. This includes a garnishment of any of Grantor's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the creditor proceeding and if Grantor gives Lender written notice of the creditor proceeding and deposits with Lender monies or a surety bond for the creditor proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Forfeiture. The filing of formal charges under any federal or state law against Grantor or the Collateral which forfeiture is a potential penalty. However, this Event of Default shall not apply if there is a good faith dispute by Grantor as to the validity or reasonableness of the claim which is the basis of the proceeding and if Grantor gives Lender written notice of the proceeding and deposits with Lender monies or a surety bond for the proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Insecurity. Lender, in good faith, reasonably believes that a material adverse change occurred in the business, operations, financial condition, Collateral, property or prospects of Grantor. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the Florida Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: Accelerate Indebtedness. Lender may declare the entire Indebtedness, including any prepayment penalty which Grantor would be required to pay, immediately due and payable, without presentment, demand, protest, or notice, all of which are expressly waived by Grantor. Processing of Collateral. Grantor hereby agrees that Lender or its designate may do whatever Lender in its sole discretion deems to be commercially reasonable to prepare any Collateral for disposition and to dispose of any Collateral, including without limitation operating any of Lender's manufacturing or other processes relating to the Collateral. Lender may transfer Collateral into its name or that of a nominee and receive the dividends, royalties or income thereof. Lender shall have no duty as to the collection or protection of the Collateral or any income therefrom, nor as to the preservation of rights against prior parties, nor as to the preservation of any right pertaining thereto. Lender may dispose of the Collateral in its then-existing condition or, at its election, may take such measures as it deems necessary or advisable to refurbish, repair, improve, process, finish, operate, demonstrate, and prepare for sale the collateral and may store, ship, reclaim, recover, protect advertise for sale or lease, and insure the Collateral. If any Collateral consists of documents, Lender may proceed either as to the documents or as to the goods represented thereby. Lender may pay, purchase, contest, or compromise any encumbrance, charge, or lien that, in the opinion of Lender, appears to be prior or superior to its lien and pay all expenses incurred in connection therewith. Assemble Collateral. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral and Lender may remain on such premises and use the premises for the purpose of collecting, preparing, and disposing of the Collateral, without any liability for rent or occupancy charges. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. Sell the Collateral. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. Lender may adjourn any public or private sale from time to time to a reasonably specified time and place by announcement at the time and place of sale previously fixed, without further notice by publication or otherwise of the time and place of such adjourned sale, and such sale may, without further notice, be made at the time and place to which it was so adjourned. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Appoint Receiver. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become the right upon any public sale(s), and, to the extend permitted by law, upon any such private sale(s), to purchase the whole or any part of the indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. Collateral so sold shall be free of any right or equity of redemption of Grantor. Disposition of Collateral. Without demand of performance or other demand, advertisement or notice of any kind (except the notice(s) specified herein regarding the time and place of public sale or disposition or time after which a private sale or disposition is to occur) to Grantor (which all and each of demands, advertisements and/or notices are hereby expressly waived), Lender may forthwith collect, receive, appropriate and realize upon the Collateral, in full or in any part thereof, may abandon, not claim or not take possession of any Collateral, and/or may forthwith sell, lease, assign, give an option or options to purchase or sell or otherwise dispose of and deliver the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sales(s) at Lender's offices or elsewhere at such price(s) as lender may determine, for cash or on credit or for future delivery without assumption of any credit risk. 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 6 Loan No. (Continued) ================================================================================ Collect Revenues, Apply Accounts. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the indebtedness or apply it to payment of the indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, chosen in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral for cash, credit or otherwise as Lender may determine, whether or not indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; endorse and/or sign the name of Grantor on notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral; grant credit extensions of time or payment or performance or any other indulgences to anyone with respect to any account; accept the return of the goods represented by any account; or do anything else which Grantor would be legally permitted to do. To facilitate collection, Lender may notify account debtors and obligators on any Collateral to make payments directly to Lender. Lender shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any or all of the Collateral or in any way relating to the rights of Lender hereunder, including attorneys' fees and legal expenses, to the payment in whole or in part of the indebtedness, in such order as lender may elect, and only after applying such net proceeds and after the payment by Lender of any other amount required by any provision of law, need Lender account for the surplus, if any to Grantor. Obtain Deficiency. Grantor shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which Lender is entitled even if the transaction described in this subsection is a sale of accounts or chattel paper. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Grantor for any deficiency remaining on the indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Waiver. To the extent permitted by applicable law, Grantor waives all claims, damages and demands against Lender arising out of the repossession, retention, sale or disposition of the Collateral. License. Lender is hereby granted a license or other right to use, without charge, Grantor's patents, copyrights, trade secrets, technical processes, rights of use of any name, trade names, trademarks, labels, 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 Grantor's rights under all licenses (excluding Lucent Technologies license) and all franchise agreements shall inure to lender's benefit. Other Rights and Remedies. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. Cumulative Remedies. All of lender's rights and remedies, whether evidenced by this Agreement or the Relate Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any right or remedy concurrently or in any sequence shall not exclude pursuit of any other right or remedy concurrently or in any sequence, and an election to make expenditures or to take action to perform an obligation of Grantor under this Agreement, after Grantor's failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement and supersedes all prior understandings and correspondence, oral or written, with respect to the subject matter hereof. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's costs and expenses, including reasonable attorneys' fees and Lender's legal expenses, incurred in connection with the preparation, execution, protection, enforcement and collection of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's reasonable attorneys' fees and legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor also shall pay all court costs and such additional fees as may be directed by the court. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Extensions and Compromises. With respect to any Collateral or the indebtedness, Grantor assents to all extensions or postponements to the time of payment thereof or any other indulgence in connection therewith, to each substitution, exchange or release of Collateral, to the release of any party primarily or secondarily liable, to the acceptance of partial payment thereon or to the settlement or compromise thereof, all in such manner and such time or times as Lender may deem advisable. No forbearance in exercising any right or remedy on any one or more occasions shall operate as a waiver thereof on any future occasion; and no single or partial exercise of any right or remedy shall preclude any other exercise thereof or the exercise of any other right or remedy. Notices. All notices required to be given under this Agreement shall be given in writing and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States registered or certified mail, first class, postage prepaid, return receipt requested, addressed to the party to whom the notice is to be given at the address shown above; notification by facsimile is specifically not allowed. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor, notice to any Grantor will constitute notice to all Grantors. For notice purposes, Grantor agrees to keep Lender informed at all times of Grantor's current address(es). Power of Attorney. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead of Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or 06-29-1999 COMMERCIAL SECURITY AGREEMENT Page 7 Loan No. (Continued) ================================================================================ otherwise, which in the discretion of Lender may seem to be necessary or advisable, This power is given as security for the indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until the indebtedness is paid in full to Lender. Severabillity. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Agreement shall be binding upon and inure to the benefit of the parties, their successors an assigns. Time. Time is of the essence of all requirements of Grantor herein. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. ACCOUNTS. The word "accounts" means all accounts, instruments, documents, chattel paper, reimbursements an obligations in any form owing to Grantor arising out of the sale or lease of goods or the rendition of services by Grantor, whether or not earned by performance; all credit insurance, guaranties, letters of credit, advices of credit, and other security for any of the foregoing; all merchandise returned to or reclaimed by Grantor; and Grantor's books relating to any of the foregoing. For purposes of this Agreement, Grantor's grant of accounts to Lender as Collateral includes an assignment of all accounts to Lender. GENERAL INTANGIBLES. The words "general intangibles" mean all general intangibles, choices in action, causes of action, and all other personal property of every kind and nature (other than goods and accounts) including, without limitation, patents, trademarks trade names, service marks, copyrights, and applications for any of the above; and goodwill, trade secrets, licenses, (excluding Lucent Technologies license) franchises, rights under agreements, deposit accounts, tax refunds, tax refund claims, monies due from pension funds, governmental reimbursements and Grantor's books relating to any of the foregoing. INVENTORY. To the extent the collateral consists of inventory, unless otherwise waived or modified in writing by lender, Grantor shall from time to time but not less than the 15th day of each month during the term of this Agreement provide an inventory report, acceptable to Lender specifying Grantor's cost and the resale cost of Grantor's raw materials, work in process, and finished goods and such other information as Lender may reasonably request. ADDITIONAL COLLATERAL PROVISION. Notwithstanding the foregoing grant by each Borrower of a security interest in all of the Collateral, it is understood and agreed by all parties that the Borrower shall, grant to the Bank simultaneously with the execution of this Agreement and as and when issued or acquired an Assignment of proceeds of letters of credit and foreign credit insurance policies issued for the benefit of the Borrower to secure payments for accounts receivable and inventory of which is guaranteed by EximBank. Said assignment shall provide that all of said payments shall be made directly to the Bank. JURISDICTION. In connection with any litigation regarding any matter arising out of this document or any subsequent agreement between the parties to this document, each submits to the exclusive jurisdiction of the state and federal courts located in the State of Florida. JURY WAIVER; DAMAGES. THE PARTIES TO THIS DOCUMENT ACKNOWLEDGE AND AGREE THAT (1) ANY SUIT, ACTION OR PROCEEDING WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY ANY PARTY OR ANY SUCCESSOR OR ASSIGN OF ANY SUCH PARTY, ON OR WITH RESPECT TO THIS DOCUMENT OR ANY OTHER LOAN DOCUMENT OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (11) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUITE, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (111) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THS DOCUMENT AND LENDER WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS DOCUMENT. GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 29, 1999. GRANTOR: Elcotel, Inc. By: /s/ William H. Thompson ------------------------------------------------ William H. Thompson, Senior Vice President ================================================================================ LASER PRO, Reg. U.S. Pat. T.M. Off., Ver. 3.24(C)1999 CFI ProServices, Inc. All rights reserved. [FL-E40 P3.24a ELCOTEL.LNC25.OVL] EX-10.5 6 PROMISSORY NOTE EXHIBIT 10.5 PROMISSORY NOTE
- ---------------- ------------- -------------- -------------- -------------- --------------- -------------- ------------- ----------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $2,000,000.00 06-29-1999 06-29-2000 A100 - ---------------- ------------- -------------- -------------- -------------- --------------- -------------- ------------- -----------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------- Borrower: Elcotel, Inc. Lender: NationsBank, N.A. 6428 Parkland Drive P.O. Box 40329 Sarasota, FL 34243 Jacksonville, FL 32203-0329 ================================================================================ Principal Amount: $2,000,000.00 Date of Note: June 29, 1999 PROMISE TO PAY. Elcotel, Inc., jointly and severally if more than one ("Borrower"), promises to pay to NationsBank, N.A. ("Lender"), or order, in lawfully obtained money of the United States of America, the principal amount of Two Million & 00/100 Dollars ($2,000,000.00) or so much as may be outstanding, together with Interest on the unpaid balance of principal advanced from the date(s) of disbursement until paid in full as set forth herein. The principal amount of this Note may be advanced, paid and readvanced in full or part during the term of this Note provided no event of default or demand for payment exists hereunder. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 29, 2000. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning July 29, 1999, and all subsequent Interest payments are due on the same day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Payments shall be allocated between principal, interest, costs, fees, if any, at the discretion of Lender. Any payment to be debited from Borrower's designated account will be debited on the scheduled due date; however, if the scheduled due date is on a weekend or holiday, the payment will be debited on the next non-weekend/holiday day. VARIABLE INTEREST RATE. The Interest rate on this Note is subject to change from time to time based on changes in an independent index which is the Libor Rate (as defined herein) (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each 1 month period. The interest rate shall change on the first Business Banking Day of each Interest Period. For purposes hereof, the following terms shall have the following meanings: (a) "Business Banking Day" shall mean each day other than a Saturday, a Sunday or any holiday on which commercial banks in Jacksonville, Florida are closed for business; (b) "Interest Period" shall mean (I) initially, the period commencing the Date of Note and ending the day immediately preceding the first Interest Rate Change Date or (ii) subsequently, the period commencing any Interest Rate Change Date and ending on the day immediately preceding the next subsequent Interest Rate Change Date; (c) "Interest Rate Change Date" shall mean the first Business Banking Day of each 1 month period; (d) "Libor Rate" shall mean the offered rate for deposits in United States dollars in the London Interbank market for a 1 month period which appears on the Libor Rate Reference Page as of 11:00 a.m. (London time) on the day that is two London Banking Days preceding the first Business Banking Day of each Interest Period. If at least two such rates appear on the applicable Libor Rate Reference Page, the rate will be the arithmetic mean of such offered rates; (e) "Libor Rate Reference Page" shall mean either (i) the Reuters Screen LIBO Page, (ii) the Dow Jones Telerate Page 3750, or (iii) such other nationally recognized source, as from time to time may be used by Lender in its sole discretion as a reference for determining an applicable Libor Rate; (f) "London Banking Day" shall mean each day other than a Saturday, a Sunday or any holiday on which commercial banks in London, England are closed for business. The interest rate to be applied to the unpaid balance of this Note will be a per annum rate of 1.500 percentage points over the index. Lender will tell Borrower the current Index rate upon Borrower's request. NOTICE: Under no circumstances will the effective rate of interest on this Note be more than the maximum rate allowed by applicable law. Upon demand for payment of this Note, the interest rate on this Note to be applied to the unpaid balance of principal, unpaid accrued interest, costs and fees, to be applicable until paid in full, will be highest interest rate permitted by applicable law. PREPAYMENT. Borrower may pay all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $100.00, whichever is greater. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due; (b) Borrower breaks any written promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or in any written agreement related to this Note, or in any other written agreement or loan Borrower has with Lender, contingent or absolute, due or to become due, now or hereafter existing; (c) A breach of any term or condition of any security agreement, pledge agreement, mortgage loan agreement or any other agreement related to or securing this Note regardless if said document is executed by Borrower, any guarantor or a third-party not liable for this Note, upon which a cure period, if any, contained in said agreement has expired; (d) suspension, liquidation, sale or transfer of Borrower's business or assets; (e) Any representation, warranty, statement or report made or furnished to Lender by Borrower or on Borrower's behalf is false, or misleading in any material respect; (f) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy of insolvency laws; (g) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender; (h) Failure of Borrower to furnish Lender within thirty (30) days after written request by Lender, current financial statements, including income tax returns, in form satisfactory to Lender or to permit inspection of any of Borrower's books or records; (i) The issuance of any tax levy or lien against Borrower or Borrower's failure to pay, withhold, collect or remit any tax when assessed or due; (j) The filing of formal charges under any federal or state law against Borrower or Borrower's assets which forfeiture is a potential penalty; (k) Any of the events described in this default section occurs with respect to any guarantor of this Note; (l) lender in good faith reasonably deems itself insecure. 06-29-1999 PROMISSORY NOTE Page 2 Loan No. (continued) ================================================================================ LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest, costs and fees immediately due, without notice, and then Borrower will pay that amount. Upon default, or if this Note is not paid at final maturity, Lender, at its option, may add any unpaid accrued interest, costs and fees to principal and such sum will bear interest therefrom until paid, at the rate provided in this Note but in no event at an effective total interest rate on this Note greater than the rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender the amount of these costs and expenses, which includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not provided by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note shall be governed by and construed in accordance with the laws of the State of Florida. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $15.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower authorizes Lender, to the extent permitted by applicable law, to charge, withdraw or setoff all sums owing on this Note against any and all the accounts set forth below in the Accounts section without prior demand or notice to Borrower. ACCOUNTS. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all of Borrower's right, title and Interest In and to, Borrower's deposits, accounts (whether checking, savings, or some other account), or securities now or hereafter In the possession of or on deposit with Lender or subsidiary including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA, Keogh, and trust accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts may be requested orally or in writing by Borrower or by an Authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either (a) advanced In accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lenders Internal records, including daily computer printouts. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, Including any agreement made In connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith reasonably deems itself insecure under this Note or any other agreement between Lender and Borrower. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Note, as of the date of each disbursement of loan proceeds, and as of the date of any renewal, extension or modification of this Note: (a) Borrower (i) has begun analyzing the operations of Borrower and its subsidiaries and affiliates that could be adversely affected by failure to become Year 2000 compliant: (that is, computer applications, imbedded microchips and other systems will be able to perform date sensitive functions prior to and after December 31, 1999), (ii) has developed a plan for becoming Year 2000 compliant in a timely manner the implementation of which is on schedule in all material respects; and (iii) reasonably believes that it will become Year 2000 compliant for its operations and those of its subsidiaries and affiliates on a timely basis except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect upon the financial condition of Borrower; (b) Borrower reasonably believes any suppliers and vendors that are material to the operations of Borrower or its subsidiaries and affiliates will be Year 2000 compliant for their own computer applications except to the extent that a failure to do so could not reasonably be expected to have a material adverse effect upon the financial condition of Borrower; and (c) Borrower will promptly notify Lender in the event Borrower determines that any computer application which is material to the operations of Borrower, its subsidiaries or any of its material vendors or suppliers will not be fully Year 2000 compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a material adverse effect upon the financial condition of Borrower. LOAN AGREEMENT. This Note is issued pursuant to the terms and provisions of a certain Business Loan Agreement of even date between Borrower and Lender. MANDATORY PRINCIPAL PAYMENT. In addition to the principal payment schedule set forth above in the paragraph entitled "Payment," each advance hereunder shall be due and payable on the earlier on (a) immediately upon Borrower's receipt of payment from an account debtor against the corresponding account receivable, or (b) 180 days after the making of such advance. . BORROWING BASE AGREEMENT. All advances under this Note shall be subject to the provisions of the Borrowing Base Agreement of even date between Borrower and Lender. GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Borrower does not agree or intend to pay, and Lender does not agree or intend to contract for, charge, collect, take, reserve or receive (collectively referred to herein as "charge or collect"), any amount in the nature of interest or in the nature of a fee for this loan, which would in any way or event (including demand, prepayment, or acceleration) cause Lender to charge or collect more for this loan than the maximum Lender would be permitted to charge or collect by federal law or the law of the State of Florida (as applicable). Any such excess interest or unauthorized fee shall, instead of anything stated to the contrary, be applied first to reduce the principal balance of this loan, and when the principal has been paid in full, be refunded to Borrower. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All rights, powers, privileges and immunities herein granted to Lender shall extend to its successors and assigns 06-29-1999 PROMISSORY NOTE Page 3 Loan No (Continued) ================================================================================ and any other legal holder of this Note. All rights, powers, privileges and immunities of Borrower hereunder may not in any way be assigned, transferred or sold. Lender at any time is authorized to correct patent errors herein. All such parties agree that Lender may renew, modify, substitute, consolidate or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to, acknowledgment or agreement by anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. This Note constitutes the entire understanding and agreement of the parties as to the matters set forth in this Note and supersedes all prior understandings and correspondence, oral or written, with respect to the subject matter hereof. No alteration of or amendment to this Note shall be effective unless given in writing and signed by Lender. Borrower acknowledges that this Note evidences a loan made primarily for business, commercial or agricultural purposes and not primarily for personal, family or household purposes. When this Note becomes due, by default, demand or maturity, Lender may, at its option, demand, sue for, collect, or make any compromise or settlement it deems desirable with reference to any collateral pledged or granted for this Note. Lender shall not be bound to take any steps necessary to preserve any rights in any such collateral against prior parties. Lender shall have no duty with respect to collection or protection of any such collateral or of any income of any such on the collateral as to the preservation of any rights pertaining to any such collateral beyond safe custody. Borrower authorizes Lender to exchange Lender's deposit, credit and borrowing information about Borrower with third parties. Borrower agrees to indemnify and hold Lender harmless against liability for the payment for documentary stamp and Intangible taxes (including Interest and penalties) (if applicable), which may be determined to be payable with respect to this transaction. If this Note is renewed, modified, extended, substituted or consolidated, although Lender is under no duty to do so, Lender may, without Borrower's or any guarantor's consent: (a) advance the maximum amount of principal then available the day prior to said occurrence, (b) deposit said amount in Borrower's account with Lender the day prior to said occurrence, (c) withdraw said amount from Borrower's account with Lender the day after said occurrence, and (d) apply said amount to the principal amount then outstanding. Said procedures are intended to minimize Borrower's documentary stamp tax and/or Intangible tax liabilities (if applicable), although Borrower will be fully responsible for accrued interest on the amount of principal advanced for said procedure. If this Note represents a renewal, modification, extension, substitution or consolidation of a Note owed to Lender, then Borrower acknowledges and agrees that there are no claims, setoffs, avoidances, counterclaims or defenses or rights to claims, setoffs, avoidances, counterclaims or defenses to enforcement of this Note. JURISDICTION. In connection with any litigation regarding any matter arising out of this document or any subsequent agreement between the parties to this document, each submits to the exclusive jurisdiction of the state and federal courts located in the State of Florida. JURY WAIVER; DAMAGES. THE PARTIES TO THIS DOCUMENT ACKNOWLEDGE AND AGREE THAT (1) ANY SUIT, ACTION OR PROCEEDING,WHETHER CLAIM OR COUNTERCLAIM, BROUGHT OR INSTITUTED BY ANY PARTY OR ANY SUCCESSOR OR ASSIGN OF ANY SUCH PARTY, ON OR WITH RESPECT TO THIS DOCUMENT OR ANY OTHER LOAN DOCUMENT OR THE DEALINGS OF THE PARTIES WITH RESPECT HERETO, OR THERETO, SHALL BE TRIED ONLY BY A COURT AND NOT BY A JURY AND EACH PARTY WAIVES THE RIGHT TO TRIAL BY JURY; (II) EACH WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER, IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES; AND (III) THIS SECTION IS A SPECIFIC AND MATERIAL ASPECT OF THIS DOCUMENT AND LENDER WOULD NOT EXTEND CREDIT IF THE WAIVERS SET FORTH IN THIS SECTION WERE NOT A PART OF THIS DOCUMENT. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: Elcotel, Inc. By: /s/ William H. Thopmpson ----------------------------------------------- William H. Thompson, Senior Vice President "This instrument is made in connection with an international banking transaction and no Florida Documentary Stamp Tax is due hereon in accordance with Chapter 201.23 )4), F.S.:. Variable Rate. Line of Credit.LASER PRO, Reg. U.S. Pal.& T.M. Off., Ver. 3.24 (C) 1999 CF1 ProServIces, Inc. All rights reserved. [FL-D20 F3.24a P3.24a ELCOTEL.LN C25.OVL) EX-10.6 7 BORROWER AGREEMENT EXHIBIT 10.6 HAHN & HESSEN LLP DRAFT ANNEX B EXPORT-IMPORT BANK OF THE UNITED STATES WORKING CAPITAL GUARANTEE PROGRAM BORROWER AGREEMENT THIS BORROWER AGREEMENT (this "Agreement") is made and entered into by the entity identified as Borrower on the signature page hereof ("Borrower") in favor of the Export-Import Bank of the United States ("Ex-Im Bank") and the institution identified as Lender on the signature page hereof ("Lender"). RECITALS Borrower has requested that Lender establish a Loan Facility in favor of Borrower for the purposes of providing Borrower with pre-export working capital to finance the manufacture, production or purchase and subsequent export sale of Items. It is a condition to the establishment of such Loan Facility that Ex-Im Bank guarantee the payment of ninety percent (90%) of certain credit accommodations subject to the terms and conditions of a Master Guarantee Agreement and the Loan Authorization Agreement. Borrower is executing this agreement for the benefit of Lender and Ex-Im Bank in consideration for and as a condition to Lender's establishing the Loan Facility and Ex-Im Bank's agreement to guarantee such Loan Facility pursuant to the Master Guarantee Agreement. NOW, THEREFORE, Borrower hereby agrees as follows: ARTICLE I DEFINITIONS 10.1 Definition of Terms. As used in this Agreement, including the Recitals to this Agreement and the Loan Authorization Agreement, the following terms shall have the following meanings: "Accounts Receivable" shall mean Borrower's now owned or hereafter acquired (a) "accounts" (as such term is defined in the UCC), other receivables, book debts and other forms of obligations, whether arising out of goods sold or services rendered or from any other transaction; (b) rights in, to and under all purchase orders or receipts for goods or services; (c) rights to any goods represented or purported to be represented by any of the foregoing (including unpaid sellers' rights of rescission, replevin, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods); (d) moneys due or to become due to such Borrower under all purchase orders and contracts for the sale of goods or the performance of services or both by Borrower (whether or not yet earned by performance on the part of Borrower), including the proceeds of the foregoing; (e) any notes, drafts, letters of credit, insurance proceeds or other 2 instruments, documents and writings evidencing or supporting the foregoing; and (f) all collateral security and guarantees of any kind given by any other Person with respect to any of the foregoing. "Advance Rate" shall mean the rate Specified in Section (5) (C) of the Loan Authorization Agreement for each category of Collateral. "Business Day" shall mean any day on which the Federal Reserve Bank of New York is open for business." "Buyer" shall mean a Person which has entered into one or more Export Orders with Borrower. "Collateral" shall mean all property and interest in property in or upon which Lender has been granted a valid and enforceable Lien as security for the payment of all the Loan Facility Obligations including the Collateral identified in Section (6) of the Loan Authorization Agreement and all products and proceeds (cash and non-cash) thereof. "Commercial Letters of Credit" shall mean those letters of credit subject to the UCP payable in Dollars and issued or caused to be issued by Lender on behalf of Borrower for the benefit of a supplier(s) of Borrower in connection with Borrower's purchase of goods or services from the supplier in support of the export of the Items. "Country Limitation Schedule" shall mean the schedule published from time to time by Ex-Im Bank and provided to Borrower by Lender which sets forth on a country by country basis whether and under what conditions Ex-Im Bank will provide coverage for the financing of export transactions to countries listed therein. "Credit Accommodation Amount" shall mean, the sum of (a) the aggregate outstanding amount of Disbursements and (b) the aggregate outstanding face amount of Letter of Credit Obligations. "Credit Accommodations" shall mean collectively, Disbursements and Letter of Credit Obligations. "Debarment Regulations" shall mean collectively (a) the Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common Rule), 53 Fed. Reg. 19204 (May 26, 1988), (b) Subpart 9.4 (Debarment, Suspension, and Ineligibility) of the Federal Acquisition Regulations, 48 C.F.R. 9.400-9.409 and (c) the revised Governmentwide Debarment and Suspension (Nonprocurement) regulations (Common Rule), 60 Fed. Reg. 33037 (June 26, 1995). "Delegated Authority Letter Agreement" shall mean the Delegated Authority Letter Agreement, if any, between Ex-Im Bank and Lender. "Disbursement" shall mean collectively, (a) an advance of a working capital loan from Lender to Borrower under the Loan Facility, and (b) an advance to fund a drawing under a Letter of Credit issued or caused to be issued or caused to be issued by Lender for the account of Borrower under the Loan Facility. 3 "Dollars" or "$" shall mean the lawful currency of the United States. "Effective Date" shall mean the date on which (a) the Loan Documents are executed by Lender and Borrower or the date, if later, on which agreements are executed by Lender and Borrower adding the Loan Facility to an existing working capital loan arrangement between Lender and such Borrower and (b) all of the conditions to the making of the initial Credit Accommodations under the Loan Documents or any amendments thereto have been satisfied. "Eligible Export-Related Accounts Receivable" shall mean an Export-Related Account Receivable which is acceptable to Lender and which is deemed to be eligible pursuant to the Loan Documents, but in no event shall Eligible Export-Related Accounts Receivable include any Account Receivable: (a) that does not arise from the sale of Items in the ordinary course of Borrower's business; (b) that is not subject to a first perfected Lien in favor of Lender; (c) as to which any covenant, representation or warranty contained in the Loan Documents with respect to such Account Receivable has been breached; (d) that is not owned by Borrower or is subject to any right, claim or interest of another person other than the Lien in favor of Lender; (e) with respect to which an invoice has not been sent; (f) that arises from the sale of defense articles or defense services; (g) that is due and payable from a Buyer located in a country with which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (h) that does not comply with the requirements of the Country Limitation Schedule; (i) that is due and payable more than one hundred eighty (180) days from the date of the invoice; (j) that is not paid within sixty (60) calendar days from its original due date, unless it is insured through Ex-Im Bank export credit insurance for comprehensive commercial and political risk, or through Ex-Im Bank approved private insurers for comparable coverage, in which case it is not paid within ninety (90) calendar days from its due date; (k) that arises from a sale of goods to or performance of services for an employee of Borrower, a stockholder of Borrower, a subsidiary of Borrower, a Person with a controlling interest in Borrower or a Person which shares common controlling ownership with Borrower; (l) that is backed by a letter of credit unless the Items covered by the subject letter of credit have been shipped; 4 (m) that Lender or Ex-Im Bank, in its reasonable judgment, deems uncollectible for any reason; (n) that is due and payable in a currency other than Dollars, except as may be approved in writing by Ex-Im Bank; (o) that is due and payable from a military Buyer, except as may be approved in writing by Ex-Im Bank; (p) that does not comply with the terms of sale set forth in Section (7) of the Loan Authorization Agreement; (q) that is due and payable from a Buyer who (i) applies for, suffers, or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property or calls a meeting of its creditors, (ii) admits in writing its inability, or is generally unable, to pay its debts as they become due or ceases operations of its present business, (iii) makes a general assignment for the benefit of creditors, (iv) commences a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt or insolvent, (vi) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesces to, or fails to have dismissed, any petition which is filed against it in any involuntary case under such bankruptcy laws, or (viii) takes any action for the purpose of effecting any of the foregoing; (r) that arises from a bill-and-hold, guaranteed sale, sale-and-return, sale on approval, consignment or any other repurchase or return basis or is evidenced by chattel paper; (s) for which the Items giving rise to such Account Receivable have not been shipped and delivered to and accepted by the Buyer or the services giving rise to such Account Receivable have not been performed by Borrower and accepted by the Buyer or the Account Receivable otherwise does not represent a final sale; (t) that is subject to any offset, deduction, defense, dispute, or counterclaim or the Buyer is also a creditor or supplier of Borrower or the Account Receivable is contingent in any respect or for any reason; (u) for which Borrower has made any agreement with the Buyer for any deduction therefrom, except for discounts or allowances made in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the face value of each respective invoice related thereto; or (v) for which any of the Items giving rise to such Account Receivable have been returned, rejected or repossessed. "Eligible Export-Related Inventory" shall mean Export-Related Inventory which is acceptable to Lender and which is deemed to be eligible pursuant to the Loan Documents, but in no event shall Eligible Export-Related Inventory include any Inventory: (a) that is not subject to a first perfected Lien in favor of Lender; 5 (b) that is located at an address that has not been disclosed to Lender in writing; (c) that is placed by Borrower on consignment or held by Borrower on consignment from another Person; (d) that is in the possession of a processor or bailee, or located on premises leased or subleased to Borrower, or on premises subject to a mortgage in favor of a Person other than Lender, unless such processor or bailee or mortgagee or the lessor or sublessor of such premises, as the case may be, has executed and delivered all documentation which Lender shall require to evidence the subordination or other limitation or extinguishment of such Person's rights with respect to such Inventory an Lender's right to gain access thereto; (e) that is produced in violation of the Fair Labor Standards Act or subject to the "hot goods" provisions contained in 29 US.C.ss.215 or any successor statute or section; (f) as to which any covenant, representation or warranty with respect to such Inventory contained in the Loan Documents has been breached; (g) that is not located in the United States; (h) that is demonstration Inventory; (i) that consists of proprietary software (i.e. software designed solely for Borrower's internal use and not intended for resale); (j) that is damaged, obsolete, returned, defective, recalled or unfit for further processing; (k) that has been previously exported from the United States; (l) that constitutes defense articles or defense services; (m) that is to be incorporated into Items destined for shipment to a country as to which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (n) that is to be incorporated into Items destined for shipment to a Buyer located in a country in which Ex-Im Bank coverage is not available for commercial reasons as designated in the Country Limitation Schedule, unless and only to the extent that such Items are to be sold to such country on terms of a letter of credit confirmed by a bank acceptable to Ex-Im Bank; or (o) that is to be incorporated into Items whose sale would result in an Account Receivable which would not be an Eligible Export-Related Account Receivable. "Eligible Person" shall mean a sole proprietorship, partnership, limited liability partnership, corporation or limited liability company which (a) is domiciled organized, or formed, as the case may be, in the United States; (b) is in good standing in the state of its formation or otherwise authorized to conduct business in the United States; (c) is not currently suspended or debarred from doing business with the government of the United States or any instrumentality, division, agency or department thereof; (d) exports or plans to export Items; (e) operates and has operated as a going concern for at least one (1) year; 6 (f) has a positive tangible net worth determined in accordance with GAAP; and (g) has revenue generating operations relating to its core business activities for at least one year. "ERISA" shall mean the Employment Retirement Security Act of 1974 and the rules and regulations promulgated thereunder. "Export Order" shall mean a written export order or contract for the purchase by the Buyer from Borrower of any of the Items. "Export-Related Accounts Receivable" shall mean, as respects a Borrower, those Accounts Receivable arising from the sale of Items which are due and payable to such Borrower in the United States. "Export-Related Accounts Receivable Value" shall mean, at the date of determination thereof, the aggregate face amount of the Eligible Export-Related Accounts Receivable less taxes, discounts, credits, allowances and Retainages, except to the extent otherwise permitted by Ex-Im Bank in writing. "Export-Related Borrowing Base" shall mean, at the date of determination thereof, the sum of (a) the Export-Related Inventory Value multiplied by the Advance Rate applicable to Export-Related Inventory set forth in section 5(C)(1) of the Loan Authorization Agreement, (b) the Export-Related Accounts Receivable Value multiplied by the Advance Rate applicable to Export-Related Accounts Receivable set forth in Section 5(C)(2) of the Loan Authorization Agreement, (c) if permitted by Ex-Im Bank in writing, the Retainage Value multiplied by the Retainage Advance Rate set forth in Section 5(C)(3) of the Loan Authorization Agreement and (d) the other Collateral Value multiplied by the Advance Rate applicable to Other Collateral set forth in Section 5(C)(4) of the Loan Authorization Agreement. "Export-Related Borrowing Base Certificate" shall mean a certificate in form provided or approved by Lender and executed by Borrower and delivered to Lender pursuant to the Loan Documents detailing the Export-Related Borrowing Base supporting one or more Credit Accommodations which reflects, to the extent included in the Export-Related Borrowing Base, Export-Related Accounts Receivable, Eligible Export-Related Accounts Receivable, Export-Related Inventory and Eligible Export-Related Inventory balances that may have been reconciled with Borrower's general ledger, Accounts Receivable aging report and Inventory schedule. "Export-Related General Intangibles" shall mean, those General Intangibles necessary or desirable to or for the disposition of Export-Related Inventory. "Export-Related Inventory" shall mean the Inventory of Borrower located in the United States purchased, manufactured or otherwise acquired by Borrower for resale pursuant to Export Orders. "Export-Related Inventory Value" shall mean at the date of determination thereof, the lower of cost or market value of Eligible Export-Related Inventory of Borrower as determined in accordance with GAAP. 7 "Final Disbursement Date" shall mean the last date on which Lender may make a Disbursement set forth in Section (10) of the Loan Authorization Agreement or, if such date is not a Business Day, the next succeeding Business Day; provided, however, only to the extent that Lender has not received cash collateral or an indemnity with respect to Letter of Credit Obligations outstanding on the Final Disbursement Date, the Final Disbursement Date with respect to an advance to fund a drawing under a Letter of Credit shall be thirty (30) Business Days after the expiry date of the Letter of Credit related thereto. "GAAP" shall mean the generally accepted accounting principles issued by the American Institute of Certified Public Accountants as in effect from time to time. "General Intangibles" shall mean all intellectual property and other "general intangibles" (as such term is defined in the UCC), necessary or desirable to or for the disposition of Inventory. "Guarantor" shall mean each Person, if any, identified in Section (3) of the Loan Authorization Agreement who shall guarantee (jointly and severally if more than one) Borrower's obligation to repay all or a portion of the Loan Facility Obligations. "Guaranty Agreement" shall mean each agreement of Guaranty executed by each Guarantor in favor of Lender. "Inventory" shall mean all "inventory" (as such term is defined in the UCC), now or hereafter owned or acquired by Borrower, wherever located, including all inventory, merchandise, goods and other personal property which are held by or on behalf of Borrower for sale or lease or are furnished or are to be furnished under a contract of service or which constitute raw materials, work in process or materials used or consumed or to be used or consumed in Borrower's business or in the processing, production, packaging, promotion, delivery or shipping of the same, including other supplies. "ISP" shall mean the International Standby Practices-ISP98, International Chamber of Commerce Publication No. 590 and any amendments and revisions thereof. "Issuing Bank" shall mean the bank that issues a Letter of Credit, which bank is Lender itself or a bank who Lender has caused to issue a Letter of Credit by way of guarantee. "Items" shall mean the finished goods or services which are intended for export, as specified in Section (4)(A) of the Loan Authorization Agreement. "Letter of Credit" shall mean a Commercial Letter of Credit or a Standby Letter of Credit. "Letter of Credit Obligations" shall mean all outstanding obligations incurred by Lender, whether direct or indirect, contingent or otherwise, due or not due, in connection with the issuance or guarantee by Lender or the Issuing Bank of Letters of Credit. "Lien" shall mean any mortgage, security deed or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, security title, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing 8 lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the UCC or comparable law of any jurisdiction) by which property is encumbered or otherwise charged. "Loan Agreement" shall mean an agreement between Lender and Borrower setting forth the terms and conditions of the Loan Facility. "Loan Authorization Agreement" shall mean the Loan Authorization Agreement entered into between Lender and Ex-Im Bank or the Loan Authorization Notice setting forth certain terms and conditions of the Loan Facility, a copy of which is attached hereto as Annex A. "Loan Authorization Notice" shall mean the Loan Authorization executed by Lender and delivered to Ex-Im Bank in accordance with the Delegated Authority Letter Agreement setting forth the terms and conditions of each Loan Facility. "Loan Documents" shall mean the Loan Agreement, this Agreement, each promissory note (if applicable), each Guaranty Agreement and all other instruments, agreements and documents now or hereafter executed by Borrower or any Guarantor evidencing, securing, guaranteeing or otherwise relating to the Loan Facility or any Credit Accommodations made thereunder. "Loan Facility" shall mean the Revolving Loan Facility, the Transaction Specific Loan Facility or the Transaction Specific Revolving Loan Facility established by Lender in favor of Borrower under the Loan Documents. "Loan Facility Obligations" shall mean all loans, advances, debts, expenses, fees, liabilities, and obligations for the performance of covenants, tasks or duties or for payment of monetary amounts (whether or not such performance is then required or contingent, or amounts are liquidated or determinable) owing by Borrower to Lender of any kind or nature, present or future, arising in connection with the Loan Facility. "Loan Facility Term" shall mean the number of months from the Effective Date to the Final Disbursement Date as originally set forth in the Loan Authorization Agreement. "Master Guarantee Agreement" shall mean the Master Guarantee Agreement between Ex-Im Bank and Lender, as amended, modified, supplemented and restated from time to time. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, assets, operations, prospects or financial or other condition of Borrower or any Guarantor, (b) Borrower's ability to pay or perform the Loan Facility Obligations in accordance with the terms thereof, (c) the Collateral or Lender's Liens on the Collateral or the priority of such Lien or (d) Lender's rights and remedies under the Loan Documents. "Maximum Amount" shall mean the maximum principal balance of Credit Accommodations that may be outstanding at any time under the Loan Facility specified in Section (5)(A) of the Loan Authorization Agreement. "Other Assets" shall mean the Collateral, if any, described in Section 5 (C) of the Loan Authorization Agreement. 9 "Other Assets Value" shall mean, at the date of determination thereof, the value of the Other Assets as determined in accordance with GAAP. "Permitted Liens" shall mean (a) Liens for taxes, assessments or other governmental charges or levies not delinquent, or, being contested in good faith and by appropriate proceedings and with respect to which proper reserves have been taken by Borrower; provided, that, the Lien shall have no effect on the priority of the Liens in favor of Lender or the value of the assets in which Lender has such a Lien and a stay of enforcement of any such Lien shall be in effect; (b) deposits or pledges securing obligations under worker's compensation, unemployment insurance, social security or public liability laws or similar legislation; (c) deposits or pledges securing bids, tenders, contracts (other than contracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of Borrower's business; (d) judgment Liens that have been stayed or bonded; (e) mechanics', workers', materialmen's or other like Liens arising in the ordinary course of Borrower's business with respect to obligations which are not due; (f) Liens placed upon fixed assets hereafter acquired to secure a portion of the purchase price thereof, provided, that, any such Lien shall not encumber any other property of Borrower; (g) security interests being terminated concurrently with the execution of the Loan Documents; (h) Liens in favor of Lender securing the Loan Facility Obligations; and (i) Liens disclosed in Section 6 (C) of the Loan Authorization Agreement. "Person" shall mean any individual, sole proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, public benefit corporation, entity or government (whether national, federal, provincial, state, county, city, municipal or otherwise, including any instrumentality, division, agency, body or department thereof), and shall include such Person's successors and assigns. "Principals" shall mean any officer, director, owner, partner, key employee, or other Person with primary management or supervisory responsibilities with respect to Borrower or any other Person (whether or not an employee) who has critical influence on or substantive control over the transactions covered by this Agreement. "Retainage" shall mean that portion of the purchase price of an Export Order that a Buyer is not obligated to pay until the end of a specified period of time following the satisfactory performance under such Export Order. "Retainage Accounts Receivable" shall mean those portions of Eligible Export-Related Accounts Receivable arising out of a Retainage. "Retainage Advance Rate" shall mean the percentage rate specified in Section 5(C)(3) of the Loan Authorization Agreement as the Advance Rate for the Retainage Accounts Receivable of Borrower. "Retainage Value" shall mean, at the date of determination thereof, the aggregate face amount of those Retainage Accounts Receivable which are Eligible Export-Related Accounts Receivable less taxes, discounts, credits and allowances, except to the extent otherwise permitted by Ex-Im Bank in writing. 10 "Revolving Loan Facility" shall mean the credit facility or portion thereof established by Lender in favor of Borrower for the purpose of providing pre-export working capital in the form of loans and/or Letters of Credit to the manufacture, production or purchase and subsequent export sale of Items pursuant to Loan Documents under which Credit Accommodations may be made and repaid on a continuous basis based solely on the Export-Related Borrowing Base during the term of such credit facility. "Special Conditions" shall mean those conditions, if any, set forth in Section (12) of the Loan Authorization Agreement. "Specific Export Orders" shall mean those Export Orders specified in Section 5(D) of the Loan Authorization Agreement. "Standby Letter of Credit" shall mean those letters of credit subject to the ISP issued or caused to be issued by Lender for Borrower's account that can be drawn upon by a Buyer only if Borrower fails to perform all of its obligations with respect to an Export Order. "Transaction Specific Loan Facility" shall mean a credit facility or a portion thereof established by Lender in favor of Borrower for the purpose of providing pre-export working capital in the form of loans and/or Letters of Credit to finance the manufacture, production or purchase and subsequent export sale of Items pursuant to Loan Documents under which Credit Accommodations are made based solely on the Export-Related Borrowing Base relating to Specific Export Orders and once such Credit Accommodations are repaid they may not be reborrowed. "Transaction Specific Revolving Loan Facility" shall mean a Revolving Credit Facility established to provide financing of Specific Export Orders. "UCC" shall mean the Uniform Commercial Code as the same may be in effect from time to time in the jurisdiction in which Borrower or Collateral is located. "UCP" shall mean the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 and any amendments and revisions thereof. "U.S." or "United States" shall mean the United States of America and its territorial possessions. "U.S. Content" shall mean with respect to any Item all the labor, materials and services which are of U.S. origin or manufacture, and which are incorporated into an Item in the United States. "Warranty" shall mean Borrower's guarantee to Buyer that the Items will function as intended during the warranty period set forth in the applicable Export Order. "Warranty Letter of Credit" shall mean a Standby Letter of Credit which is issued or caused to be issued by Lender to support the obligations of Borrower as respects a Warranty or a Standby Letter of Credit which by its terms becomes a Warranty Letter of Credit. 11 1.02 Rules of Construction. For purposes of this Agreement, the following additional rules of construction shall apply, unless specifically indicated to the contrary: (a) wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter; (b) the term "or" is not exclusive; (c) the term "including" (or any form thereof) shall not be limiting or exclusive; (d) all references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations; (e) the words "this Agreement", "herein", "hereof", "hereunder" or other words of similar import refer to this Agreement as a whole including the schedules, exhibits, and annexes hereto as the same may be amended, modified or supplemented; (f) all references in this Agreement to sections, schedules, exhibits, and annexes shall refer to the corresponding sections, schedules, exhibits, and annexes of or to this Agreement; and (g) all references to any instruments or agreements, including references to any of the Loan Documents, shall include any and all modifications, amendments and supplements thereto and any and all extensions or renewals thereof to the extent permitted under this Agreement. 1.03 Incorporation of Recitals. The Recitals to this Agreement are incorporated into and shall constitute a part of this Agreement. ARTICLE II OBLIGATIONS OF BORROWER Until payment in full of all Loan Facility Obligations and termination of the Loan Documents, Borrower agrees as follows: 2.01 Use of Credit Accommodations. (a) Borrower shall use Credit Accommodations only for the purpose of enabling Borrower to finance the cost of manufacturing, producing, purchasing or selling the Items. Borrower may not use any of the Credit Accommodations for the purpose of: (i) servicing or repaying any of Borrower's pre-existing or future indebtedness unrelated to the Loan Facility (unless approved by Ex-Im Bank in writing); (ii) acquiring fixed assets or capital goods for use in Borrower's business; (iii) acquiring, equipping or renting commercial space outside of the United States; (iv) paying the salaries of non U.S. citizens or non-U.S. permanent residents who are located in offices outside of the United States; or (v) in connection with a Retainage or Warranty (unless approved by Ex-Im Bank in writing). (b) In addition, no Credit Accommodation may be used to finance the manufacture, purchase or sale of any of the following: (i) Items to be sold or resold to a Buyer located in a country as to which Ex-Im Bank is prohibited from doing business as designated in the Country Limitation Schedule; (ii) that part of the cost of the Items which is not U.S. Content unless such part is not greater than fifty percent (50%) of the cost of the Items and is incorporated into the Items in the United States; (iii) defense articles or defense services; or 12 (iv) without Ex-Im Bank's prior written consent, any Items to be used in the construction, alteration, operation or maintenance of nuclear power, enrichment, reprocessing, research or heavy water production facilities. 2.02 Loan Documents and Loan Authorization Agreement. (a) Each Loan Document and this Agreement have been duly executed and delivered on behalf of Borrower, and each such Loan Document and this Agreement are and will continue to be a legal and valid obligation of Borrower, enforceable against it in accordance with its terms. (b) Borrower shall comply with all of the terms and conditions of the Loan Documents; this Agreement and the Loan Authorization Agreement. 2.03 Export-Related Borrowing Base Certificates and Export Orders. In order to receive Credit Accommodations under the Loan Facility, Borrower shall have delivered to Lender an Export-Related Borrowing Base Certificate as frequently as required by Lender but at least within the past thirty (30) calendar days and a copy of the Export Order (s) (or, for Revolving Loan Facilities, if permitted by Lender, a written summary of the Export Orders) against which Borrower is requesting Credit Accommodations. If Lender permits summaries of Export Orders, Borrower shall also deliver promptly to Lender copies of any Export Orders requested by Lender. In addition, so long as there are any Credit Accommodations outstanding under the Loan Facility, Borrower shall deliver to Lender at least once each month no later than the twentieth (20th) day of such month or more frequently as required by the Loan Documents, an Export-Related Borrowing Base Certificate. 2.04 Exclusions from the Export-Related Borrowing Base. In determining the Export-Related Borrowing Base, Borrower shall exclude therefrom Inventory which is not Eligible Export-Related Inventory and Accounts Receivable which are not Eligible Export-Related Accounts Receivable. Borrower shall promptly, but in any event within five (5) Business Days, notify Lender (a) if any then existing Export-Related Inventory no longer constitutes Eligible Export-Related Inventory or (b) of any event or circumstance which to Borrower's knowledge would cause Lender to consider any then existing Export-Related Accounts Receivable as no longer constituting an Eligible Export-Related Accounts Receivable. 2.05 Financial Statements. Borrower shall deliver to Lender the financial statements required to be delivered by Borrower in accordance with Section (11) of the Loan Authorization Agreement 2.06 Schedules, Reports and Other Statements. Borrower shall submit to Lender in writing each month (a) an Inventory schedule for the preceding month and (b) an Accounts Receivable aging report for the preceding month detailing the terms of the amounts due from each Buyer. Borrower shall also furnish to Lender promptly upon request such information, reports, contracts, invoices and other data concerning the Collateral as Lender may from time to time specify. 2.07 Additional Security or Payment. (a) Borrower shall at all times ensure that the Export-Related Borrowing Base equals or exceeds the Credit Accommodation Amount. If informed by Lender or if Borrower otherwise has actual knowledge that the Export-Related Borrowing Base is at any time less than the Credit Accommodation Amount, Borrower shall, within five (5) 13 Business Days, either (i) furnish additional Collateral to Lender, in form and amount satisfactory to Lender and Ex-Im Bank or (ii) pay to Lender an amount equal to the difference between the Credit Accommodation Amount and the Export-Related Borrowing Base. (b) For purposes of this Agreement, in determining the Export-Related Borrowing Base there shall be deducted from the Export-Related Borrowing Base (i) an amount equal to twenty five percent (25%) of the outstanding face amount of Commercial Letters of Credit and Standby Letters of Credit and (ii) one hundred percent (100%) of the face amount of Warranty Letters of Credit less the amount of cash collateral held by Lender to secure Warranty Letters of Credit. (c) Unless otherwise approved in writing by Ex-Im Bank, for Revolving Loan Facilities (other than Transaction Specific Revolving Loan Facilities), Borrower shall at all times ensure that the outstanding principal balance of the Credit Accommodations that is supported by Export-Related Inventory does not exceed sixty percent (60%) of the sum of the total outstanding principal balance of the Disbursements and the undrawn face amount of all outstanding Commercial Letters of Credit. If informed by Lender or if Borrower otherwise has actual knowledge that the outstanding principal balance of the Credit Accommodations that is supported by Inventory exceeds sixty percent (60%) of the sum of the total outstanding principal balance of the Disbursements and the undrawn face amount of all outstanding Commercial Letters of Credit, Borrower shall, within five (5) Business Days, either (i) furnish additional non-Inventory Collateral to Lender, in form and amount satisfactory to Lender and Ex-Im Bank, or (ii) pay down the applicable portion of the Credit Accommodations so that the above described ratio is not exceeded. 2.08 ContinuedSecurity Interest. Borrower shall not change (a) its name or identity in any manner, (b) the location of its principal place of business, (c) the location of any of the Collateral or (d) the location of any of the books or records related to the Collateral, in each instance without giving thirty (30) days prior written notice thereof to Lender and taking all actions deemed necessary or appropriate by Lender to continuously protect and perfect Lender's Liens upon the Collateral. 2.09 Inspection of Collateral. Borrower shall permit the representatives of Lender and Ex-Im Bank to make at any time during normal business hours inspections of the Collateral and of Borrower's facilities, activities, and books and records, and shall cause its officers and employees to give full cooperation and assistance in connection therewith. 2.10 General Intangibles. Borrower owns, or is licensed to use, all General Intangibles necessary to conduct its business as currently conducted except for such General Intangibles the failure of which to own or license could not reasonably be to expected to have a Material Adverse Effect. 2.11 Notice of Certain Events. Borrower shall promptly, but in any event within five (5) Business Days, notify Lender in writing of the occurrence of any of the following: (a) Borrower or any Guarantor (i) applies for, consents to or suffers the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar fiduciary of itself or of all or a substantial part of its property or calls a meeting of its creditors, (ii) admits in writing its inability, or is generally unable, to pay its debts as they become due or ceases 14 operations of its present business, (iii) makes a general assignment for the benefit of creditors, (iv) commences a voluntary case under any state or federal bankruptcy laws (as now or hereafter in effect), (v) is adjudicated as bankrupt or insolvent, (vi) files a petition seeking to take advantage of any other law providing for the relief of debtors, (vii) acquiesces to, or fail to have dismissed within thirty (30) days, any petition filed against it in any involuntary case under such bankruptcy laws, or (vii) takes any action for the purpose of effecting any of the foregoing; (b) any Lien granted or intended by the Loan Documents to be granted to Lender ceases to be a valid and perfected Lien having the first priority subject only to Permitted Liens (or a lesser priority if expressly permitted pursuant to Section (6) of the Loan Authorization Agreement) in any of the Collateral; (c) the issuance of any levy, assessment, attachment, seizure or Lien against any of the Collateral which is not stayed or lifted within thirty (30) calendar days; (d) Borrower begins any proceeding for the liquidation of its assets or dissolution or any such proceeding is commenced against Borrower; (e) any litigation is filed which could reasonably be expected to have a Material Adverse Effect; (f) the occurrence of any default or event of default under the Loan Documents; (g) any failure to comply with any terms of the Loan Authorization Agreement; (h) any material provision of any Loan Document or this Agreement ceases to be valid, binding and enforceable in accordance with its terms; (i) the occurrence of any event which has had or could reasonably be expected to have a Material Adverse Effect; or (j) the Credit Accommodation Amount exceeds the applicable Export-Related Borrowing Base. 2.12 Insurance. Borrower will at all times carry property, liability and other insurance, with insurers acceptable to Lender, in such form and amounts, and with such deductibles and other provisions, as Lender shall require, and Borrower will provide evidence of such insurance to Lender, so that Lender is satisfied that such insurance is, at all times, in full force and effect. Each property insurance policy shall name Lender as loss payee and shall contain a lender's loss payable endorsement in form acceptable to Lender and each liability insurance policy shall name Lender as an additional insured. All policies of insurance shall provide that they may not be cancelled or changed without at least ten (10) days' prior written notice to Lender and shall otherwise be in form and substance satisfactory to Lender. Borrower will promptly deliver to Lender copies of all reports made to insurance companies. 2.13 Taxes. Borrower has timely filed all tax returns and reports required by applicable law, has timely paid all applicable taxes, assessments, deposits and contributions owing by Borrower and will timely pay all such items in the future as they became due and payable. Borrower may, however, defer payment of any contested taxes; provided, that Borrower (a) in good faith contests 15 Borrower's obligation to pay such taxes by appropriate proceedings promptly and diligently instituted and conducted; (b) notifies Lender in writing of the commencement of, and any material development in, the proceedings; (c) posts bonds or takes any other steps required to keep the contested taxes from becoming a Lien upon any of the Collateral; and (d) maintains adequate reserves therefor in conformity with GAAP. 2.14 Compliance with Laws. Borrower has complied in all material respects with all provisions of all applicable laws and regulations, including those relating to Borrower's ownership of real or personal property, the conduct and licensing of Borrower's business, the payment and withholding of taxes, ERISA and other employee matters, safety and environmental matters. 2.15 Negative Covenants. Without the prior written consent of Ex-Im Bank and Lender, Borrower shall not (a) merge, consolidate or otherwise combine with any other Person; (b) acquire all or substantially all of the assets or capital stock of any other Person; (c) sell, lease, transfer, convey, assign or otherwise dispose of any of its assets, except for the sale of Inventory in the ordinary course of business and the disposition of obsolete equipment in the ordinary course of business; (d) create any Lien on the Collateral except for Permitted Liens; (e) make any material changes in its organizational structure or identity; or (f) enter into any agreement to do any of the foregoing. 2.16 Reborrowings and Repayment Terms. (a) If the Loan Facility is a Revolving Loan Facility, provided that Borrower is not in default under any of the Loan Documents, Borrower may borrow, repay and reborrow amounts under the Loan Facility until the close of business on the Final Disbursement Date. Unless the Revolving Loan Facility is renewed or extended by Lender with the consent of Ex-Im Bank, Borrower shall pay in full the outstanding Loan Facility Obligations and all accrued and unpaid interest thereon no later than the first Business Day after the Final Disbursement Date. (b) If the Loan Facility is a Transaction Specific Loan Facility, Borrower shall, within two (2) Business Days of the receipt thereof, pay to Lender (for application against the outstanding Loan Facility Obligations and accrued and unpaid interest thereon) all checks, drafts, cash and other remittances it may receive in payment or on account of the Export-Related Accounts Receivable or any other Collateral, in precisely the form received (except for the endorsement of Borrower where necessary). Pending such deposit, Borrower shall hold such amounts in trust for Lender separate and apart and shall not commingle any such items of payment with any of its other funds or property. 2.17 Cross Default. Borrower shall be deemed in default under the Loan Facility if Borrower fails to pay when due any amount payable to Lender under any loan or other credit accommodations to Borrower whether or not guaranteed by Ex-Im Bank. 2.18 Munitions List. If any of the Items are articles, services, or related technical data that are listed on the United States Munitions List (part 121 of title 22 of the Code of Federal Regulations), Borrower shall send a written notice promptly, but in any event within five (5) Business Days, of Borrower learning thereof to Lender describing the Item(s) and the corresponding invoice amount. 16 2.18 Suspension and Debarment, etc. On the date of this Agreement neither Borrower nor its Principals are (a) debarred, suspended, proposed for debarment with a final determination still pending, declared ineligible or voluntarily excluded (as such terms are defined under any of the Debarment Regulations referred to below) from participating in procurement or nonprocurement transactions with any United States federal government department or agency pursuant to any of the Debarment Regulations or (b) indicted, convicted or had a civil judgment rendered against Borrower or any of its Principals for any of the offenses listed in any of the Debarment Regulations. Unless authorized by Ex-Im Bank, Borrower will not knowingly enter into any transactions in connection with the Items with any person who is debarred, suspended, declared ineligible or voluntarily excluded from participation in procurement or nonprocurement transactions with any United States federal government department or agency pursuant to any of the Debarment Regulations. Borrower will provide immediate written notice to Lender if at any time it learns that the certification set forth in this Section 2.19 was erroneous when made or has become erroneous by reason of changed circumstances. ARTICLE III RIGHTS AND REMEDIES 3.01 Indemnification. Upon Ex-Im Bank's payment of a Claim to Lender in connection with the Loan Facility pursuant to the Master Guarantee Agreement, Ex-Im Bank may assume all rights and remedies of Lender under the Loan Documents and may enforce any such rights or remedies against Borrower, the Collateral and any Guarantors. Borrower shall hold Ex-Im Bank and Lender harmless from and indemnify them against any and all liabilities, damages, claims, costs and losses incurred or suffered by either of them resulting from (a) any materially incorrect certification or statement knowingly made by Borrower or its agent to Ex-Im Bank or Lender in connection with the Loan Facility, this Agreement, the Loan Authorization Agreement or any other Loan Documents or (b) any material breach by Borrower of the terms and conditions of this Agreement, the Loan Authorization Agreement or any of the other Loan Documents. Borrower also acknowledges that any statement, certification or representation made by Borrower in connection with the Loan Facility is subject to the penalties provided in Article 18 U.S.C. Section 1001. 3.02 Liens. Borrower agrees that any and all Liens granted by it to Lender are also hereby granted to Ex-Im Bank to secure Borrower's obligation, however arising, to reimburse Ex-Im Bank for any payments made by Ex-Im Bank pursuant to the Master Guarantee Agreement. Lender is authorized to apply the proceeds of, and recoveries from, any property subject to such Liens to the satisfaction of Loan Facility Obligations in accordance with the terms of any agreement between Lender and Ex-Im Bank. ARTICLE IV MISCELLANEOUS 4.01 Governing Law. This Agreement and the Loan Authorization Agreement and the obligations arising under this Agreement and the Loan Authorization Agreement shall be governed by, and construed in accordance with, the law of the state governing the Loan Documents. 17 4.02 Notification. All notices required by this Agreement shall be given in the manner and to the parties provided for in the Loan Agreement. 4.03 Partial Invalidity. If at any time of the provisions of this Agreement becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, the validity nor the enforceability of the remaining provisions hereof shall in any way be affected or impaired. 4.04 Waiver of Jury Trial. BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY AND ALL RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT, PROCEEDING OR OTHER LITIGATION BROUGHT TO RESOLVE ANY DISPUTE ARISING UNDER, ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT, ANY LOAN DOCUMENT, OR ANY OTHER AGREEMENT, DOCUMENT OR INSTRUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OR OMMISSIONS OF LENDER, EX-IM BANK, OR ANY OTHER PERSON, RELATING TO THIS AGREEMENT, THE LOAN AUTHORIZATION AGREEMENT OR ANY OTHER LOAN DOCUMENT. 18 IN WITNESS WHEREOF, Borrower has caused this Agreement to be duly executed as of the 29 day of June, 1999. Elcotel, Inc. - ------------------------- (Name of Borrower) By: /s/ William H. Thompson -------------------------- (Signature) Name: William H. Thompson ------------------------ (Print or Type) Title: Senior Vice President, CFO - ---------------------------------- (Print or Type) ACKNOWLEDGED: NationsBank (wholly owned subsidiary of Bank of America) - --------------------------------------------------------- (Name of Lender) By: /s/ Michelle De Sousa ----------------------- (Signature) Name: Michelle D. Sousa --------------------- (Print or Type) Title: SVP, Trade Officer -------------------- (Print or Type) EX-27 8 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA. 3-MOS MAR-31-2000 JUN-30-1999 20 0 13,833 1,929 13,166 30,418 9,648 4,607 70,753 9,489 11,308 0 0 136 49,820 70,753 9,835 12,758 6,473 8,772 0 71 125 (553) (203) (350) 0 0 0 (350) (.03) (.03)
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