-----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, MkGOx8YMN04y0ZC/gR8CH4VjJUs9xdO/SYEiMlTBRRqVk/9NVTVdeq955lU/NuwL zV2VJGNbDk6b7G0WpgQfrA== 0000950168-02-001859.txt : 20020705 0000950168-02-001859.hdr.sgml : 20020704 20020705160655 ACCESSION NUMBER: 0000950168-02-001859 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020621 ITEM INFORMATION: Changes in control of registrant ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20020705 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDIAL CORP CENTRAL INDEX KEY: 0000230131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 942443673 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-09023 FILM NUMBER: 02697338 BUSINESS ADDRESS: STREET 1: 1180 SEMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906-2200 BUSINESS PHONE: 8049782200 MAIL ADDRESS: STREET 1: 1180 SEMMINOLE TRAIL STREET 2: P O BOX 7266 CITY: CHARLOTTESVILLE STATE: VA ZIP: 22906 8-K 1 d8k.htm FORM 8-K Prepared by R.R. Donnelley Financial -- Form 8-K
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 8-K
 
CURRENT REPORT
 
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
 
Date of Report (Date of Earliest Event Reported): June 21, 2002
 
 
COMDIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Delaware            
  
0-9023
  
94-2443673
(State or other
jurisdiction of incorporation)
  
(Commission
File Number)
  
(IRS Employer
Identification No.)
106 Cattlemen
RoadSarasota, Florida
      
34232
(Address of principal executive offices)
      
(Zip Code)
 
Registrant’s telephone number, including area code:    (941) 922-3800
 

 
Item 1.    Changes in Control of Registrant.
 
On June 21, 2002, Comdial Corporation (the “Company” or “Comdial”) completed a private placement by issuing 7% senior subordinated secured convertible promissory notes (the “Bridge Notes”) in the aggregate principal amount of $2,250,000.00 pursuant to Subscription Agreements (the “Subscription Agreements”) which provide for up to $4 million of bridge financing to the Company (the “Bridge Financing”). Proceeds of the Bridge Financing will be used for working capital and product development and delivery. The Company’s Board of Directors obtained a fairness opinion from the investment banking firm of Raymond James & Associates, Inc. in connection with this transaction. Copies of the form of Subscription Agreement and Bridge Notes are filed herewith as Exhibits 4.1 and 4.2 and are incorporated herein by reference.
 
ComVest Venture Partners, L.P. (“ComVest”) purchased $1,750,000 of the Bridge Notes and $500,000 of the Bridge Notes were purchased by Nickolas A. Branica, Comdial’s chief executive officer (“Branica”). The source of the funds for the purchase by ComVest was the working capital of ComVest.
 
Under the terms of the Bridge Financing, ComVest and Branica, as purchasers, have the right to convert $233,275.00 and $66,650.00 of the Bridge Notes, respectively (each representing 13.33% of the principal amount of their respective Bridge Notes), into shares of Common Stock at a conversion price of $0.01 per share (subject to limitation until Shareholder Approval as described herein is obtained). ComVest and Branica may also convert the balance of their respective Bridge Notes into Common Stock on different terms upon certain events of default. Pursuant to the Subscription Agreement, ComVest and Branica were granted, among other things, registration rights with respect to their respective shares of Common Stock issuable upon conversion of the Bridge Notes. ComVest may purchase up to an additional $1,750,000 of Bridge Notes, in which case ComVest would become eligible to convert additional shares at the same rates and subject to the same conditions and limitations described above.            
 
In connection with the Bridge Financing, ComVest received the right to designate a majority of the Company’s Board of Directors. Two ComVest designees, Travis Lee Provow and Joseph Wynne, have been appointed to the Company’s current four member Board of Directors and the third designee, which would give ComVest control of the Board of Directors, is expected to be appointed before the end of the third quarter of 2002.
 
On June 7, 2002, the Company entered into an advisory agreement with Commonwealth Associates, L.P. (“Commonwealth”), an affiliate of ComVest, pursuant to which the Company engaged Commonwealth to perform financial advisory and consulting services for Comdial in connection with the Bridge Financing and the restructuring of the Company’s outstanding indebtedness to Bank of America, N.A. (“Bank of America”). Commonwealth received 250,000 shares of Common Stock upon signing of the agreement (the “Advisory Shares”) and warrants to purchase 2,257,268 shares (representing 5% of the Company’s fully-diluted capital stock) at an exercise price of $0.01 per share (the “Advisory Warrants”) upon the closing of the Bridge Financing. Commonwealth will receive additional Advisory Warrants in the event the Company receives additional proceeds from the Bridge Financing. On June 21, 2002, Commonwealth distributed a portion of the Advisory Shares (an aggregate of 225,565 shares) and the Advisory Warrants (to purchase an aggregate of 1,539,120 shares) to certain of its employees and affiliates, including ComVest’s board designees.
 
As a result of the above described transactions, in accordance with Rule 13d-3 under the Securities Exchange Act of 1934 (the “Exchange Act”), ComVest is deemed to beneficially own the 23,327,500 shares of Common Stock issuable upon conversion of the Bridge Notes (subject to obtaining Shareholder Approval) and Branica is deemed to beneficially own 8,399,793 shares, including 6,665,000 shares issuable upon conversion of the Bridge Notes, warrants to purchase 825,000 shares of Common Stock and options to purchase 500,000 shares of Common Stock, each issued pursuant to an amendment to his current employment agreement with Comdial, plus certain other shares and exercisable stock options held prior to the Bridge Financing.

2

 
The following table reflects the impact of the Bridge Financing and related transactions on the Company’s capital structure. In view of its beneficial stock ownership and its right to appoint a majority of the members of the Company’s Board of Directors, ComVest may be deemed to be the majority owner of the Company and these transactions may be considered a change in control of the Company.
 
      
After Bridge
Financing Transaction
  
      
Under
Current Authorization (1)
     
Assuming Shareholder Approval
(2)
  
Outstanding Common Stock
     
34.85
%
   
22.67
%
Shares to ComVest upon conversion of Bridge Notes
     
50.67
%
   
55.94
%
Shares to Branica upon conversion of Bridge Notes
     
14.48
%
   
15.98
%
Advisory Warrants
            
5.41
%
      
  
Total
     
100
%
   
100
%
      
  
(1)
 
Represents the percentage ownership of outstanding Common Stock after the Bridge Financing and assuming conversion of 13.33% of the current aggregate principal value of Bridge Notes by ComVest and Branica ($2,250,000) at $0.01 per share, on a pro rata basis (13,742,984 and 3,926,567 shares, respectively), up to the limitation imposed by the Company’s current number of authorized shares and based upon 27,124,375 outstanding shares (representing authorized shares of 30,000,000 less 2,875,625 shares previously reserved for options, existing warrants and the Company’s convertible preferred stock).
(2)
 
Represents the percentage ownership of outstanding Common Stock after the Bridge Financing and after shareholder approval to increase the number of authorized shares and assuming full conversion of 13.33% of the current aggregate principal value of the Bridge Notes held by ComVest and Branica ($2,250,000) at $0.01 per share (representing 23,327,500 and 6,665,000 shares, respectively), full conversion of the Advisory Warrants by Commonwealth (representing 2,257,268 shares) and based upon 41,704,592 outstanding shares (which is comprised of outstanding shares held by current common stockholders (9,454,824) plus shares issuable upon full conversion of the Bridge Notes and the Advisory Warrants, and excluding shares previously reserved and shares issuable in connection with the exercise of stock options and warrants granted to Branica and Paul K. Suijk, the Company’s Senior Vice President and Chief Financial Officer, pursuant to their continued employment following the Bridge Financing (totaling in the aggregate 1,814,913 options and 1,500,000 warrant shares).
 
In addition, Michael Falk, in his capacity as Chairman and controlling equity owner of Commonwealth Associates Management Company, Inc. (“CAMC”), the general partner of Commonwealth and a manager of ComVest Management LLC, the general partner of ComVest, may be deemed to share indirect voting and dispositive power with respect to the shares beneficially owned by CAMC, ComVest and Commonwealth and may therefore be deemed to be the beneficial owner of such securities. He also holds a portion of the Advisory Shares

3

and Advisory Warrants distributed by Commonwealth. CAMC may be deemed to be the beneficial owner of the shares held by Commonwealth and ComVest Management, LLC maybe deemed to beneficially own the shares held by ComVest.
 
Prior to these transactions, the Company had 9,204,824 shares of Common Stock issued and outstanding, and 30,000,000 shares were authorized pursuant to its Restated Certificate of Incorporation. The Bridge Notes mature on the earlier of October 18, 2002 or the occurrence of certain events and are secured by a second lien (subordinated to the first lien of Bank of America) on all of the Company’s assets. The Company currently does not have sufficient authorized shares for full conversion of the Bridge Notes. The Company will seek to obtain shareholder approval to increase the amount of authorized Common Stock under its Restated Certificate of Incorporation to at least 100 million (“Shareholder Approval”). Upon receipt of Shareholder Approval, the maturity date of the Bridge Notes will be extended to June 21, 2003. In the event the contemplated longer term financing discussed below is unsuccessful, the maturity date of the Bridge Notes may be extended to January 16, 2003. The new authorized shares will also be allocated to parts of the proposed subsequent financing and a new stock option plan.
 
In connection with the Bridge Financing, ComVest entered into an agreement with Bank of America to purchase the senior secured debt position held by Bank of America in the Company (totaling approximately $14 million) and 1 million shares of the Company’s Series B Alternate Rate Convertible Preferred Stock (having an aggregate liquidation preference of $10 million) for approximately $8 million. It is expected that the buy-out, which is subject to closing conditions, will be completed in the next 90 days. In connection with its debt restructuring, Comdial will seek additional longer term financing which it expects will be in the form of a new senior bank loan and other debt or equity funding to be raised within the next 90 days. It is anticipated that the Bridge Financing will be replaced by or convert into this subsequent longer term financing. There can be no assurance that the Company will be successful in obtaining additional financing or the terms on which any such funding may be available. The completion of such financing will be subject to a number of conditions, including the Company’s ability to continue to restructure its balance sheet, including its existing accounts payable.
 
As a result of its immediate convertibility into shares of Common Stock, the issuance of the Bridge Notes required shareholder approval under the corporate governance requirements of Nasdaq’s Marketplace Rules. The failure to obtain shareholder approval prior to the issuance of the Bridge Notes may result in the Company’s shares being delisted from the Nasdaq SmallCap Market®. The Company expects to request a hearing on this matter. However, there can be no assurance the Company will be successful in its effort to retain its listing. In the event the Company’s common stock is delisted, it will be eligible to be traded on the NASD’s OTC-BB provided that the Company is current in its SEC filings under the Exchange Act at such time.
 
In connection with and upon consummation of the initial closing of the Bridge Financing, Mr. David P. Berg and Mr. Robert P. Collins stepped down from the Board of Directors and were replaced by the appointments of Mr. Provow and Mr. Wynne, designees of Comvest. ComVest also has the right to designate a third director pending the Company’s providing an information statement pursuant to the Exchange Act to shareholders. Due to the changes in the Board, the Company intends to add an additional two independent Directors as the current make-up of the Audit Committee does not comply with Nasdaq rules. In connection with the transaction, each of the Company’s executive officers and directors executed an Irrevocable Limited Proxy, dated June 21, 2002 in favor of ComVest granting ComVest the right to vote all securities owned by such directors and executive officers solely with respect to the Shareholder Approval.
 
Any subsequent conversion of the Bridge Notes into common stock by ComVest and/or Branica will be reported by the Company in a subsequent filed Form 8-K or Form 10-Q.
 
The Company filed a press release on June 24, 2002 relating to the above, which is attached hereto as Exhibit 99.1 and is incorporated herein by reference. Any description herein or in the press release of the terms of

4

Bridge Financing, the Subscription Agreements, the Bridge Notes or other related events or matters is qualified in its entirety by reference to such exhibits.
 
Item 7.    Financial Statements and Exhibits.
 
(c)  Exhibits
 
See Exhibit Index.
 
Forward-Looking Statements
 
This Form 8-K contains statements that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including Comdial Corporation’s ability to obtain additional funding for its business, its ability to maintain its listing with Nasdaq, the risks associated with the outsourcing of its manufacturing requirements, including international risk factors, its ability to meets its obligations to its suppliers and its lenders, its ability to achieve its operational goals and to generate positive cash flow, any unfavorable outcomes of pending disputes or litigation and the various other factors set forth from time to time in Comdial’s filings with the SEC, including but not limited to Comdial’s most recent Form 10-K and 10-Q. Comdial Corporation undertakes no obligation to publicly update or revise the forward-looking statements made in this press release to reflect events or circumstances after the date of this Form 8-K or to reflect the occurrence of unanticipated events.

5

 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
COMDIAL CORPORATION
By:
  
/s/    PAUL K. SUIJK        
   
Paul K. Suijk
Senior Vice President and
Chief Financial Officer
 
Dated:  July 5, 2002

6

 
EXHIBIT INDEX
 
Exhibit Number
   
Exhibit
  4.1
   
Form of Subscription Agreement.
  4.2
   
Form of Senior Subordinated Secured Convertible Note issued by Comdial Corporation.
  4.3
   
General Security Agreement between Comdial Corporation and ComVest Venture Partners, L.P., as agent, dated June 21, 2002.
  4.4
   
Advisory Warrant to purchase Common Stock issued by Comdial Corporation to Commonwealth Associates, L.P.
10.1
   
Form of Lock-Up Agreement by and between officers and directors and Comdial Corporation.
10.2
   
Form of Irrevocable Limited Proxy granted by officers and directors to ComVest Venture Partners, L.P.
10.3
   
Amendment to Employment Agreement by and between Nicholas Branica and Comdial Corporation dated June 21, 2002.
99.1
   
Press Release dated June 24, 2002, announcing the Company’s Bridge Financing transaction.

7
EX-4.1 3 dex41.txt FORM OF SUBSCRIPTION AGREEMENT EXHIBIT 4.1 Form of Subscription Agreement COMDIAL CORPORATION BRIDGE SUBSCRIPTION AGREEMENT (this "Subscription Agreement") made as of this 20th day of June, 2002 between Comdial Corporation, a corporation organized under the laws of the State of Delaware with offices at 106 Cattlemen Road, Sarasota, Florida 34232 (the "Company"), and the undersigned (the "Subscriber"). WHEREAS, the Company desires to issue in a private placement to "accredited investors" (the "Placement") a minimum of 20 (the "Minimum Offering") and a maximum of 40 (the "Maximum Offering") units ("Units") (or fractions thereof) on the terms and conditions set forth herein and in the exhibits hereto, and the Subscriber desires to acquire the number of Units set forth on the signature page hereof; and WHEREAS each Unit shall consist of: $100,000 principal amount of 7% senior subordinated secured convertible promissory notes substantially in the form attached hereto as Exhibit A (the "Notes"); WHEREAS, the Notes shall be (i) secured by a second lien on the Company's assets pursuant to the terms of a security agreement in the form attached hereto as Exhibit B (the "Security Agreement") and (ii) subject to a subordination agreement with Bank of America, N.A. in the form attached hereto as Exhibit C (the "Subordination Agreement"); and WHEREAS, 13.33% of the principal amount of the Notes are convertible into shares of the Company's common stock at the conversion rate of $.01 per share (the "Note Conversion Shares"); and WHEREAS, the balance of the Notes are convertible into shares of the Company's common stock on the terms set forth in the Notes upon certain defaults by the Company (the "Default Conversion Shares"); and WHEREAS, the Note Conversion Shares and Default Conversion Shares (if applicable) are entitled to registration rights on the terms set forth in this Subscription Agreement; and WHEREAS, the Placement is being made pursuant to a Term Sheet dated June 10, 2002 between the Company and ComVest Venture Partners, L.P. ("ComVest"); and WHEREAS, the Subscriber is delivering simultaneously herewith a completed confidential investor questionnaire (the "Questionnaire"). NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto do hereby agree as follows: I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY AND COVENANTS OF SUBSCRIBER 1.1 Subscription for Units. Subject to the terms and conditions hereinafter set forth, the Subscriber hereby subscribes for and agrees to purchase from the Company such number of Units as is set forth upon the signature page hereof at a price equal to $100,000 per Unit and the Company agrees to sell such Units to the Subscriber for said purchase price. The purchase price is payable by certified or bank check made payable to Comdial Corporation or by wire transfer of funds, contemporaneously with the execution and delivery of this Subscription Agreement. 1.2 Reliance on Exemptions. The Subscriber acknowledges that the Placement has not been reviewed by the United States Securities and Exchange Commission (the "SEC") or any state agency because of the Company's representations that this is intended to be a nonpublic offering exempt from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act") and state securities laws. The Subscriber understands that the Company is relying in part upon the truth and accuracy of, and the Subscriber's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Subscriber set forth herein and in the Questionnaire order to determine the availability of such exemptions and the eligibility of the Subscriber to acquire the Units. 1.3 Investment Purpose. The Subscriber represents that the Notes comprising the Units are being purchased for its own account, for investment purposes only and not for distribution or resale to others in contravention of the registration requirements of the 1933 Act. The Subscriber agrees that it will not sell or otherwise transfer the Notes, the Note Conversion Shares or, if applicable, the Default Conversion Shares (collectively, the "Securities") unless they are registered under the 1933 Act or unless an exemption from such registration is available. 1.4 Accredited Investor. The Subscriber represents and warrants that it is an "accredited investor" as such term is defined in Rule 501 of Regulation D promulgated under the 1933 Act, as indicated by its responses to the Questionnaire, and that it is able to bear the economic risk of any investment in the Units. The Subscriber further represents and warrants that the information furnished in the Questionnaire is accurate and complete in all material respects. 1.5 Risk of Investment. The Subscriber recognizes that the purchase of Units involves a high degree of risk in that: (i) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Securities; (ii) transferability of the Securities is limited; and (iii) the Company may require substantial additional funds to operate its business and there can be no assurance that the Maximum Offering will be completed or that any other funds will be available to the Company, in addition to all of the other risks set forth in the Company's SEC Documents (as defined in Section 2.5 hereof). 1.6 Information. The Subscriber acknowledges that the Company has made available for its review: (a) the Company's Annual Report on Form 10-K for the year ended December 31, 2001, (b) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2002, and (c) the Company's Proxy Statement for the annual meeting of shareholders held on May 17, 2002, and hereby represents that: (i) the Subscriber has been furnished by the Company during the course of this transaction with all information regarding the Company which it has requested; and (ii) that the Subscriber has been afforded the opportunity to ask questions of and receive answers from duly authorized officers of the 2 Company concerning the terms and conditions of the Placement, and any additional information which it has requested, if any. 1.7 No Representations. The Subscriber hereby represents that, except as expressly set forth in (a) this Subscription Agreement, (b) the Notes, (c) the Security Agreement, (d) the Subordination Agreement, and (e) all exhibits, schedules and appendices which are part of the aforementioned documents, (collectively, the "Offering Documents"), no representations or warranties have been made to the Subscriber by the Company or any agent, employee or affiliate of the Company, and in entering into this transaction the Subscriber is not relying on any information other than that contained in the Offering Documents, the SEC Documents and the results of independent investigation by the Subscriber. 1.8 Tax Consequences. The Subscriber acknowledges that the Placement may involve tax consequences and that the contents of the Offering Documents do not contain tax advice or information. The Subscriber acknowledges that he must retain his own professional advisors to evaluate the tax and other consequences of an investment in the Units. 1.9 Transfer or Resale. The Subscriber understands that Rule 144 (the "Rule") promulgated under the 1933 Act requires, among other conditions, a one-year holding period prior to the resale (in limited amounts) of securities acquired in a non-public offering without having to satisfy the registration requirements under the 1933 Act. The Subscriber understands and hereby acknowledges that the Company is under no obligation to register the securities comprising the Units under the 1933 Act, with the exception of certain registration rights covering the resale of the Note Conversion Shares and Default Conversion set forth in Article V hereof. 1.10 Legends. The Subscriber understands that the certificates or other instrument representing the Securities, until such time as they have been registered under the 1933 Act, shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such certificates or other instruments): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A REASONABLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS, OR (II) UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. The legend set forth above shall be removed and the Company shall issue a certificate or other instrument without such legend to the holder of the Securities upon which it is stamped, if (a) such Securities are being sold by the holder pursuant to an effective registration statement under the 1933 Act, (b) such holder delivers to the Company an opinion of counsel, in a reasonably satisfactory and acceptable form to the Company directed to the Company or expressly providing that the Company may rely thereon, that a disposition of the Securities is being made pursuant to 3 an exemption from such registration, or (c) such holder provides the Company with reasonable assurance that a disposition of the Securities will be made pursuant to the Rule. 1.11 No General Solicitation. The Subscriber represents that the Subscriber was not induced to invest by any of the following: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over the news or radio; and (ii) any seminar or meeting whose attendees were invited by any general solicitation or advertising. 1.12 Validity; Enforcement. If the Subscriber is a corporation, partnership, trust or other entity, the Subscriber represents and warrants that: (a) it is authorized and otherwise duly qualified to purchase and hold the Units; and (b) that this Subscription Agreement has been duly and validly authorized, executed and delivered and constitutes the legal, binding and enforceable obligation of the undersigned. 1.13 Address. The Subscriber hereby represents that the address of Subscriber furnished by the Subscriber at the end of this Subscription Agreement is the undersigned's principal residence if the Subscriber is an individual or its principal business address if it is a corporation or other entity. 1.14 Foreign Subscriber. If the Subscriber is not a United States person, such Subscriber hereby represents that it has satisfied itself as to the full observance of the laws of its jurisdiction in connection with any invitation to subscribe for the Securities comprising the Units or any use of this Subscription Agreement, including: (a) the legal requirements within its jurisdiction for the purchase of the Units; (b) any foreign exchange restrictions applicable to such purchase; (c) any governmental or other consents that may need to be obtained; and (d) the income tax and other tax consequences, if any, that may be relevant to the purchase, holding, redemption, sale or transfer of the Securities. Such Subscriber's subscription and payment for, and his or her continued beneficial ownership of the Securities, will not violate any applicable securities or other laws of the Subscriber's jurisdiction. II. REPRESENTATIONS BY THE COMPANY The Company represents and warrants to the Subscriber, except as set forth in the disclosure schedules attached hereto: 2.1 Securities Law Compliance. The offer, offer for sale, and sale of the Units have not been registered under the 1933 Act. The Units are to be offered, offered for sale and sold in reliance upon the exemptions from the registration requirements of Section 4 of the 1933 Act. The Company will use its best efforts to conduct the Placement in compliance with the requirements of Regulation D of the General Rules and Regulations under the 1933 Act and applicable state "blue sky" laws, and the Company will file all appropriate notices of offering with the SEC. The Company has prepared the Offering Documents. The Offering Documents will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. If at any time prior to the completion of the Placement or other termination of this Subscription Agreement any event shall occur as a result of which it might become necessary to amend or supplement the Offering Documents so that they do not include 4 any untrue statement of any material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances then existing, not misleading, the Company will promptly notify the Subscriber and will supply the Subscriber with amendments or supplements correcting such statement or omission. 2.2 Organization and Qualification. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction in which it is organized, and has the requisite power and authorization to own its properties and to carry on its business as now being conducted except as may be provided by the Company's agreements with Bank of America. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership of property or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. As used in this Subscription Agreement, "Material Adverse Effect" means any material adverse effect on the business, properties, assets, operations, results of operations, financial condition or prospects of the Company, or on the transactions contemplated hereby, or by the other Offering Documents or the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Offering Documents. The Company does not have any operating subsidiaries other than as set forth in the Offering Documents and all of the non-operating subsidiaries are wholly-owned by the Company. 2.3 Capitalization. The authorized, issued and outstanding capital stock of the Company prior to the consummation of the transactions contemplated hereby is set forth in Schedule 2.3 to this Subscription Agreement. All of such outstanding shares have been and are, or upon issuance will be duly authorized, validly issued, fully paid and non-assessable. Except as disclosed in Schedule 2.3, (i) no shares of the Company's capital stock are subject to preemptive rights under Delaware law or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding debt securities issued by the Company; (iii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company, or contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, any shares of capital stock of the Company; (iv) there are no agreements or arrangements under which the Company is obligated to register the sale of any of their securities under the 1933 Act; (v) there are no outstanding securities of the Company that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to redeem a security of the Company; (vi) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Securities as described in the Offering Documents that shall not have been waived prior to the initial closing of the Placement (the "Initial Closing"); and (vii) the Company does not have any stock appreciation rights or "phantom stock" plans or agreements or any similar plan or agreement. To the knowledge of the Company, all prior sales of securities of the Company were either registered under the 1933 Act and applicable state securities laws or exempt from such registration, and, to the knowledge of the Company, no security holder has any rescission rights with respect thereto. 5 2.4 Subsidiaries and Investments. Other than as set forth in Schedule 2.4 to this Subscription Agreement, the Company has no subsidiaries, and the Company does not own, directly or indirectly, any capital stock or other equity ownership or proprietary interests in any other corporation, association, trust, partnership, joint venture or other entity. 2.5 SEC Documents; Financial Statements. Since December 31, 2001, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934 (the "Exchange Act") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC Documents"). The Company has made available to the Subscriber or its representatives copies of the SEC Documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (a) as may be otherwise indicated in such financial statements or the notes thereto, or (b) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments that would not be material). The Company has no reason to believe its independent auditors will withhold their consent to the inclusion of their audit opinion concerning the Company's financial statements which are to be included in any Registration Statement. 2.6 Absence of Changes. Since March 31, 2002, other than as set forth in the SEC Documents and Schedule 2.6 to this Subscription Agreement, the Company has not (i) incurred any debts, obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business and consistent with past practices, having individually or in the aggregate a Material Adverse Effect, (ii) made or suffered any changes in its contingent obligations by way of guaranty, endorsement (other than the endorsement of checks for deposit in the usual and ordinary course of business), indemnity, warranty or otherwise, (iii) discharged or satisfied any liens or paid any obligation or liability other than current liabilities shown on the balance sheet dated as of March 31, 2002, and current liabilities incurred since the date of the balance sheet dated as of March 31, 2002, in each case in the usual and ordinary course of business and consistent with past practices, (iv) mortgaged, pledged or subjected to lien any of its assets, tangible or intangible, (v) sold, transferred or leased any of its assets except in the usual and ordinary course of business and consistent with past practices, (vi) cancelled or compromised any debt or claim, or waived or released any right, of material value, (vii) suffered any physical damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties, business or prospects of the Company, (viii) entered into any transaction other than in 6 the usual and ordinary course of business except for this Subscription Agreement and the other Offering Documents and the related agreements referred to herein and therein, (ix) encountered any labor difficulties or labor union organizing activities, (x) made or granted any wage or salary increase or entered into any employment agreement, (xi) issued or sold any shares of capital stock or other securities or granted any options with respect thereto, or modified any equity security of the Company, (xii) declared or paid any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding equity securities, (xiii) suffered or experienced any change in, or condition affecting, its condition (financial or otherwise), properties, assets, liabilities, business operations, results of operations or prospects other than changes, events or conditions in the usual and ordinary course of its business and consistent with past practices, having (either by itself or in conjunction with all such other changes, events and conditions) a Material Adverse Effect or (xiv) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted. 2.7 Title. Except as set forth in or contemplated by Schedule 2.7 to this Subscription Agreement, the Company has good and marketable title to all properties and assets owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are not significant or important in relation to the Company's business; all of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee or sublessee are in full force and effect, and the Company is not in default in any material respect with respect to any of the terms or provisions of any of such leases or subleases, and no material claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continued possession of the leased or subleased premises or assets under any such lease or sublease. The Company owns or leases all such properties as are necessary to its operations as described in the Offering Documents. 2.8 Proprietary Rights. Except as set forth on Schedule 2.8, the Company owns, or is duly licensed to use or possess, or possesses exclusive and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, trade secrets, processes, formulations, technology or know-how used in the conduct of its business (the "Proprietary Rights"). Except as set forth on Schedule 2.8 to this Subscription Agreement, the Company has not received any notice of any claims, nor does it have any knowledge of any threatened claims, and knows of no facts which would form the basis of any claim, asserted by any person to the effect that the sale or use of any product or process now used or offered by the Company or proposed to be used or offered by the Company infringes on any patents or infringes upon the use of any such Proprietary Rights of another person and, to the best of the Company's knowledge, no others have infringed the Company's Proprietary Rights. 2.9 Litigation. Except as set forth in or contemplated by Schedule 2.9 to this Subscription Agreement, there is no material action, suit, investigation, customer complaint, claim or proceeding at law or in equity by or before any arbitrator, court, governmental instrumentality or agency, self-regulatory organization or body or public board now pending or, to the knowledge of the Company, threatened against the Company of any of the Company's officers or directors in their capacities as such (or basis therefor known to the Company), the adverse outcome of which would have a Material Adverse Effect. Except as set forth on 7 Schedule 2.9, the Company is not subject to any judgment, order, writ, injunction or decree of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign that have a Material Adverse Effect. 2.10 Non-Defaults; Non-Contravention. Except as set forth in or contemplated by Schedule 2.10 to this Subscription Agreement, the Company is not in violation of or default under, nor will the execution and delivery of this Subscription Agreement or any of the other Offering Documents or consummation of the transactions contemplated herein or therein result in a violation of or constitute a default in the performance or observance of any obligation under: (i) its Certificate of Incorporation, or its By-laws; or (ii) any indenture, mortgage, contract, material purchase order or other agreement or instrument to which the Company is a party or by which it or its property is bound, where such violation or default would have a Material Adverse Effect; or (iii) any material order, writ, injunction or decree of any court of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including, to the Company's knowledge, federal and state securities laws and regulations and the rules and regulations of The Nasdaq Stock Market, Inc.), where such violation or default would have a Material Adverse Effect, and there exists no condition, event or act that constitutes a default under any of the foregoing, which in either case would have a Material Adverse Effect. 2.11 Taxes. The Company has filed all tax returns that are required to be filed by it or otherwise met its disclosure obligations to the relevant agencies and all such returns are true and correct. The Company has paid or adequately provided for all tax liabilities of the Company as reflected on such returns or pursuant to any assessments received by it or that it is obligated to withhold from amounts owing to any employee, creditor or third party. The Company has properly accrued all taxes required to be accrued by GAAP consistently applied. The income tax returns of the Company have never been audited by any government or regulatory authorities. The Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to any tax assessment or deficiency. 2.12 Compliance With Laws; Licenses, Etc. Except as set forth on Schedule 2.12, the Company has not received notice of any violation of or noncompliance with any laws, ordinances, regulations and orders applicable to its business that would have a Material Adverse Effect and that has not been cured. The Company has all material licenses and permits and other governmental certificates, authorizations and permits and approvals (collectively, "Licenses") required by every government or regulatory body for the operation of its business as currently conducted and the use of its properties. The Licenses are in full force and effect and to the Company's knowledge no violations currently exist in respect of any License and no proceeding is pending or threatened to revoke or limit any thereof. 2.13 Authorization; Enforcement; Validity. The Company has the requisite corporate power and authority to enter into and perform its obligations under this Subscription Agreement and the other Offering Documents, to file and perform its obligations under the Offering Documents, and to issue the Securities in accordance with the terms of the Offering Documents. The execution and delivery of the Offering Documents by the Company and the consummation by the Company of the transactions contemplated by the Offering Documents, including without limitation the issuance of the Securities, have been duly authorized by the Company's board of directors and no further consent or authorization is required by the 8 Company, its board of directors or its stockholders. This Section 2.13 is subject to the exceptions set forth on Schedule 2.13. 2.14 Authorization of Securities; Shareholder Approval. The issuance, sale and delivery of the Notes have been duly authorized by all requisite corporate action of the Company. When so issued, sold and delivered in accordance with the Offering Documents for the consideration set forth therein, the Notes will be duly executed, issued and delivered and will constitute valid and legal obligations of the Company enforceable in accordance with their respective terms and, in each case, will not be subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing. Upon receipt of shareholder approval of an increase in the Company's authorized Common Stock to at least 100,000,000 shares (the "Approval") and the filing of an amendment to the certificate of incorporation of the Company, the issuance, sale and delivery by the Company of the Note Conversion Shares will be duly authorized by all requisite corporate action of the Company and the Note Conversion Shares will be duly reserved for issuance upon conversion of all or any of the Notes and when so issued, sold, paid for and delivered for the consideration set forth in the Offering Documents, the Note Conversion Shares will be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive or any other similar rights of the stockholders of the Company or others which rights shall not have been waived prior to the Initial Closing. Until such Approval is obtained, the maximum possible number of Note Conversion Shares based on the Company's existing capitalization have been duly authorized and reserved for issuance upon conversion of the Notes. This Section 2.14 is subject to the exceptions set forth on Schedule 2.14. 2.15 Exemption from Registration. Assuming the accuracy of the information provided by the respective Subscribers in the Subscription Agreements, the offer and sale of the Units pursuant to the terms of this Subscription Agreement are exempt from the registration requirements of the 1933 Act and the rules and regulations promulgated thereunder. To the Company's knowledge, the Company is not disqualified from the exemption under Regulation D by virtue of the disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated thereunder. 2.16 Registration Rights. Except as set forth in Schedule 2.16 to this Subscription Agreement, no person has any right to cause the Company to effect registration under the 1933 Act of any securities of the Company. 2.17 Brokers. Neither the Company nor any of its officers, directors, employees or stockholders has employed any broker or finder in connection with the transactions contemplated by this Subscription Agreement. 2.18 Title to Securities. When the Notes have been duly delivered to the purchasers participating in the Placement and payment shall have been made therefor, the several purchasers shall receive from the Company good and marketable title to such securities free and clear of all liens, encumbrances and claims whatsoever (with the exception of claims arising through the acts or omissions of the purchasers and except as arising from applicable federal and state securities laws), and the Company shall have paid all taxes, if any, in respect of the original issuance thereof. 9 2.19 Takeover Protections; Rights Agreement. The Company and the Board have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Certificate of Incorporation or the laws of the state of its incorporation which is or could become applicable to the Subscriber as a result of the transactions contemplated by this Subscription Agreement, including without limitation, the Company's issuance of the Securities and the Subscriber's ownership of the Securities. The Company has not adopted a shareholder rights plan or similar arrangement relating to accumulations of beneficial ownership of Common Stock or a change in control of the Company. 2.20 Right of First Refusal. No person, firm or other business entity is a party to any agreement, contract or understanding, written or oral entitling such party to a right of first refusal with respect to offerings by the Company other than Commonwealth Associates, L.P 2.21 Exchange Listing. The Company's Common Stock has been designated for quotation or listed on the Nasdaq SmallCap Market ("Nasdaq") and trading in the Common Stock has not been suspended by the SEC or Nasdaq. Except as disclosed on Schedule 2.21 to this Subscription Agreement, the Company has received no communication, written or oral, from the SEC or Nasdaq regarding the suspension or delisting of the Common Stock from Nasdaq, and the Company is not in violation of the listing requirements of Nasdaq as in effect on the date hereof and has no actual knowledge of any facts which would reasonably lead to delisting or suspension of the Common Stock by Nasdaq in the foreseeable future. 2.22 Consents. Except as contemplated by this Subscription Agreement, to the Company's knowledge, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under or contemplated by the Offering Documents. Except as otherwise provided in the Offering Documents, all consents, authorizations, orders, filings and registrations that the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company is unaware of any facts or circumstances that might prevent the Company from obtaining or effecting any of the foregoing. 2.23 No General Solicitation. None of the Company, any of its affiliates, and, to the Company's knowledge, any person acting on its behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the 1933 Act) in connection with the offer or sale of the Securities. 2.24 No Integrated Offering. None of the Company, any of its affiliates, and any person acting on its behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Securities under the 1933 Act or cause the Placement to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable stockholder approval provisions, including without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its affiliates and any person acting on its behalf have taken any action or steps 10 referred to in the preceding sentence that would require registration of any of the Securities under the 1933 Act or cause the Placement to be integrated with other offerings. 2.25 Foreign Corrupt Practices. Neither the Company nor any director, officer, agent, employee or other person acting on behalf of the Company has, in the course of its actions for, or on behalf of, the Company, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds, (ii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended, or (iii) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. III. TERMS OF SUBSCRIPTION 3.1 Offering Period. The offering period for the Placement will continue until the earlier of (a) 11:59 PM Eastern time on September 30, 2002 or the sale of the Maximum Offering (the "Termination Date"); provided, however, that the offering period for the Minimum Offering will terminate on June 30, 2002 (the "Minimum Deadline"). Provided the Minimum Offering shall have been subscribed for on or prior to the Minimum Deadline, funds representing the sale thereof shall have cleared, and all conditions to closing set forth in Section 4 have been satisfied or waived by the Subscribers, the Initial Closing shall take place at the offices of counsel to ComVest, Loeb & Loeb, 345 Park Avenue, New York, New York 10154, within three business days thereafter. At the Initial Closing, payment for the Units issued and sold by the Company shall be made against delivery of the Notes comprising such Units. Subsequent closings (each of which shall be deemed a "Closing" hereunder) shall take place at any time prior to the Termination Date as may be mutually agreed to by the Company and ComVest. The date of the last closing of the Placement is hereinafter referred to as the "Final Closing" and the date of any Closing hereunder is hereinafter referred to as a "Closing Date." 3.2 Expenses. Simultaneously with payment for and delivery of the Units at the closing of the Placement and subject to the following sentence, the Company shall reimburse ComVest for up to $50,000 of its accountable expenses, including legal fees, due diligence expenses and travel expenses (subject to increase with the consent of the Company) 3.3 Certificates. The Subscriber hereby authorizes and directs the Company, upon any applicable Closing in the Placement, to deliver the Notes to be issued to such Subscriber pursuant to this Subscription Agreement either (a) to the Subscriber's address indicated in the Questionnaire, or (b) directly to the Subscriber's account maintained with Commonwealth Associates, L.P. IV. CONDITIONS TO CLOSING. The Subscriber's obligation to purchase the Units is subject to the satisfaction of the following conditions, any one or more of which may be waived or modified by the Subscribers. 4.1 Bank Restructuring. Bank of America (the "Bank") shall have entered into an agreement with ComVest pursuant to which ComVest shall have the right to acquire (a) 11 all of the existing debt owed by the Company to the Bank and (b) all of the shares of Series B preferred stock of the Company beneficially owned by the Bank (the "Bank Restructuring"). 4.2 Officers' Certificate. ComVest shall have received a certificate of the Company, signed by the Chief Executive Officer and Chief Financial Officer thereof, that, to such officers' best knowledge after due inquiry (a) the representations and warranties contained in Section 2 hereof are true and accurate in all material respects as of the Closing, (b) the Company has no more than approximately 9.5 million shares of Common Stock outstanding (approximately 12.3 million on a fully-diluted basis), and (c) except as set forth in the SEC Documents, the Company has no outstanding indebtedness other than accounts payable and capital lease obligations incurred in the ordinary course of business. 4.3 Opinion of Counsel. The Subscriber shall have received the opinion of Shumaker, Loop & Kendrick, LLP, counsel to the Company, substantially to the effect that: (a) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Each of the Company's operating subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation. The Company is duly qualified as a foreign corporation to do business and is in good standing in the State of Florida and in each other jurisdiction in which the ownership or leasing of its properties or conduct of its business requires such qualification, except where the failure to so qualify or be licensed would not have a Material Adverse Effect; (b) The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under this Subscription Agreement and each of the other Offering Documents, including issuance of the Notes and the Warrants in accordance with the terms thereof. The execution and delivery of the Offering Documents by the Company, the performance of the obligations of the Company thereunder and the consummation by it of the transactions contemplated therein have been duly authorized by the Board and, to the extent required, by the shareholders of the Company (other than the Company's obligation to comply with NASD Marketplace Rules). The Offering Documents have been duly executed and delivered by the Company. (c) The issuance and sale of the Notes have been duly authorized. The Note Conversion Shares are duly authorized and reserved for issuance in accordance with the Offering Documents, and when issued and paid for in accordance with the Offering Documents, the Note Conversion Shares will be validly issued, fully paid and non-assessable and free of all taxes, liens, charges and preemptive rights with respect to the issue thereof. (d) Based in part upon, and subject to the accuracy as to factual matters of, the Subscribers' representations in Article I of this Subscription Agreement, the Notes may be issued to the Subscribers pursuant to the Offering Documents without registration under the Securities Act of 1933, as amended. (e) Other than the Company's obligation to comply with NASD Marketplace Rules, no authorization, approval, consent, filing or other order of any Federal or state governmental body, regulatory agency, self-regulatory organization or stock exchange or market, or to such counsel's knowledge, any court, is required to be obtained by the Company to enter 12 into and perform its obligations under the Offering Documents or for the issuance and sale of the Notes as contemplated by the Offering Documents, except such as have been made or will be made by the Company. (f) To such counsel's knowledge, there is no action, suit, proceeding, inquiry or investigation before or by any arbitrator, court, public board or body or any governmental agency or self-regulatory organization pending or threatened against the Company or any of the properties of the Company that might materially and adversely affect the Company or its business, operations, properties or financial condition, or that might materially adversely affect the transactions or other acts contemplated by the Offering Documents. (g) The execution, delivery and performance by the Company of the Offering Documents, the consummation by the Company of the transactions contemplated thereby and the compliance by the Company with the terms thereof does not violate, conflict with or constitute a default under the Company's Certificate of Incorporation, as amended to date, the Company's Bylaws as currently in effect or any other material contract, agreement or arrangement by which the Company is bound, or any applicable law, rule, regulation, judgment, order or decree actually known to the Company's counsel of any governmental agency or court having jurisdiction over the Company or any of its properties or business, in each case, other than as set forth in the Schedules to this Agreement and other than the Company's obligation to comply with NASD Marketplace Rules. 4.4 Opinion of Tax Counsel. The Company shall have received the opinion of KPMG confirming (1) the Company's insolvency immediately preceding execution of this Agreement, with respect to application of IRC ss.382 (regarding change of control of a loss corporation), based upon an independent valuation of the Company's assets by Raymond James; (2) the Company will be allowed a reduction of its net operating loss carryforwards to the extent of cancellation of indebtedness income resulting from the Bank Restructuring (as defined in Section 4.1 hereof) and (3) the Company will sustain certain limitations in accordance with provisions of IRC ss. 382 regarding utilization of net operating losses for all periods subsequent to execution of this Agreement. 4.5 Subsequent Financing. The letter of intent dated June 10, 2002 between the Company and Commonwealth Associates, L.P. with respect to a $8 to $12 million subordinated note financing shall be in full force and effect. 4.6 Shareholder Approval. To the extent permitted by federal and state securities laws, the Company shall have received proxies from each of the executive officers and directors of the Company agreeing to vote in favor of the Approval. 4.7 Lock-Up Agreements. ComVest shall have received agreements from each executive officer and director of the Company to the effect that such person shall not sell, assign or transfer any of their securities of the Company in the public market until the registration statement covering the resale of the Note Conversion Shares has been declared effective by the SEC. 13 4.8 Investment by Management. Existing members of the Company's management shall have subscribed for at least one-sixth (1/6) of the Units subscribed for in the Placement, up to a maximum investment of five Units ($500,000). 4.9 Board of Directors. The Board shall have been reconfigured to consist of one-half of members appointed by ComVest. The Board shall have resolved to appoint one additional member designated by ComVest on the tenth day following the filing of an information statement or proxy statement with the SEC and mailing thereof to shareholders in compliance with the provisions of Section 14(f) of the Exchange Act. 4.10 Due Diligence Review. The Subscriber shall have completed and been satisfied with the results of its due diligence investigation of the Company, including, without limitation, the Company's financial statements, projections, expense budgets, business prospects, capital structure, contractual arrangements, background searches and other customary matters. 4.11 Material Adverse Event. There shall not have occurred, at any time prior to the closing of this subscription (i) any domestic or international event, act or occurrence that has materially disrupted, or in the Subscriber's opinion will in the immediate future materially disrupt, the securities markets; (ii) a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange or the Nasdaq - Amex Stock Exchange; (iii) any outbreak of major hostilities or other national or international calamity; (iv) any banking moratorium declared by a state or federal authority; (v) any moratorium declared in foreign exchange trading by major international banks or other persons; (vi) any material interruption in the mail service or other means of communication within the United States; (vii) any material adverse change in the business, properties, assets, results of operations, or financial condition of the Company; or (viii) any material adverse change in the market for securities in general or in political, financial, or economic conditions. V. REGISTRATION RIGHTS 5.1 Automatic Registration. The Company hereby agrees with the holders of the Securities or their transferees (other than a transferee who acquires shares pursuant to Rule 144 or an effective registration statement) (collectively, the "Holders") that no later than six months following the date of the Initial Closing, the Company shall prepare and file a registration statement under the 1933 Act with the SEC covering the resale of the Note Conversion Shares and, if applicable to the extent legally permissible, the Default Conversion Shares (collectively, the "Reserved Shares"), and the Company will use its reasonable best efforts to cause such registration to become effective within three months thereafter. The Company's obligation to keep the registration statement effective shall continue until the earlier of (a) the date that all of the Reserved Shares have been sold pursuant to Rule 144 under the 1933 Act or an effective registration statement, or (b) such time as the Reserved Shares are eligible for immediate resale pursuant to Rule 144(k) under the 1933 Act. 5.2 "Piggyback" Registration Rights. At any time after the Initial Closing, if the Company shall determine to proceed with the actual preparation and filing of a new registration statement under the 1933 Act in connection with the proposed offer and sale of any of its securities by it or any of its security holders (other than a registration statement on Form S-4, S-8 or other limited purpose form), the Company will give written notice of its 14 determination to all record holders of the Reserved Shares. Upon the written request from any Holders (the "Requesting Holders"), within 15 days after receipt of any such notice from the Company, the Company will, except as herein provided, cause all of the Reserved Shares covered by such request (the "Requested Stock") held by the Requesting Holders to be included in such registration statement, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Requested Stock; provided, further, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any registration. If any registration pursuant to this Section 5.2 shall be underwritten in whole or in part, the Company may require that the Requested Stock be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. In such event, the Requesting Holders shall, if requested by the underwriters, execute an underwriting agreement containing customary representations and warranties by selling stockholders and a lock-up on Reserved Shares not being sold. If in the good faith judgment of the managing underwriter of such public offering the inclusion of all of the Requested Stock would reduce the number of shares to be offered by the Company or interfere with the successful marketing of the shares of stock offered by the Company, the number of shares of Requested Stock otherwise to be included in the underwritten public offering may be reduced pro rata (by number of shares) among the Requesting Holders and all other holders of registration rights who have requested inclusion of their securities or excluded in their entirety if so required by the underwriter. To the extent only a portion of the Requested Stock is included in the underwritten public offering, those shares of Requested Stock which are thus excluded from the underwritten public offering and any other securities of the Company held by such holders shall be withheld from the market by the Holders thereof for a period, not to exceed 90 days, which the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. The obligation of the Company under this Section 5.2 shall not apply after the earlier of (a) the date that all of the Reserved Shares have been sold pursuant to Rule 144 under the 1933 Act or an effective registration statement, or (b) such time as the Reserved Shares are eligible for immediate resale pursuant to Rule 144(k) under the 1933 Act. 5.3 Registration Procedures. To the extent required by Sections 5.1 or 5.2, the Company will: (a) prepare and file with the SEC a registration statement with respect to such securities, and use its reasonable best efforts to cause such registration statement to become and remain effective; (b) prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective; (c) furnish to the Holders participating in such registration and to the underwriters of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (d) use its reasonable best efforts to register or qualify the securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as the Holders may reasonably request in writing within 20 days following the original filing of 15 such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified; (e) notify the Holders, promptly after it shall receive notice thereof, of the time when such registration statement has become effective or a supplement to any prospectus forming a part of such registration statement has been filed; (f) notify the Holders promptly of any request by the SEC for the amending or supplementing of such registration statement or prospectus or for additional information; (g) prepare and file with the SEC, promptly upon the request of any Holders, any amendments or supplements to such registration statement or prospectus which, in the opinion of counsel for such Holders (and concurred in by counsel for the Company), is required under the 1933 Act or the rules and regulations thereunder in connection with the distribution of Common Stock by such Holders; (h) prepare and promptly file with the SEC and promptly notify such Holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such securities is required to be delivered under the 1933 Act, any event shall have occurred as the result of which any such prospectus or any other prospectus as then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading; and (i) advise the Holders, promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued. The Holders shall cooperate with the Company in providing the information necessary to effect the registration of their Reserved Shares, including completion of customary questionnaires. Failure to do so may result in exclusion of such Holders' Reserved Shares from the registration statement. 5.4 Expenses. (a) With respect to the any registration required pursuant to Section 5.1 or 5.2 hereof, all fees, costs and expenses of and incidental to such registration, inclusion and public offering (as specified in paragraph (b) below) in connection therewith shall be borne by the Company, provided, however, that the Holders shall bear their pro rata share of the underwriting discount and commissions and transfer taxes. (b) The fees, costs and expenses of registration to be borne by the Company as provided in paragraph (a) above shall include, without limitation, all registration, filing, and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the 16 Company, fees of counsel to the Holders (not to exceed $15,000 in the aggregate) and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and qualified (except as provided in 5.4(a) above). Fees and disbursements of counsel for the Holders in excess of $15,000 and any other expenses incurred by the Holders not expressly included above shall be borne by the Holders (on a pro rata basis if and to the extent required by state securities laws). 5.5 Indemnification. (a) The Company will indemnify and hold harmless each Holder of Reserved Shares which are included in a registration statement pursuant to the provisions of Sections 5.1 and 5.2 hereof, its directors and officers, and any underwriter (as defined in the 1933 Act) for such Holder and each person, if any, who controls such Holder or such underwriter within the meaning of the 1933 Act, from and against, and will reimburse such Holder and each such underwriter and controlling person with respect to, any and all loss, damage, liability, cost and expense to which such Holder or any such underwriter or controlling person may become subject under the 1933 Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, damage, liability, cost or expenses arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by or on behalf of such Holder, such underwriter or such controlling person in writing specifically for use in the preparation thereof. (b) Each Holder of Reserved Shares included in a registration pursuant to the provisions of Sections 5.1 or 5.2 hereof will indemnify and hold harmless the Company, its directors and officers, any controlling person and any underwriter from and against, and will reimburse the Company, its directors and officers, any controlling person and any underwriter with respect to, any and all loss, damage, liability, cost or expense to which the Company or any controlling person and/or any underwriter may become subject under the 1933 Act or otherwise, insofar as such losses, damages, liabilities, costs or expenses are caused by any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was so made in reliance upon and in strict conformity with written information furnished by or on behalf of such Holder specifically for use in the preparation thereof. Promptly after receipt by an indemnified party pursuant to the provisions of paragraph (a) or (b) of this Section 5.5 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said paragraph (a) or (b), 17 promptly notify the indemnifying party of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise under this Section except to the extent the defense of the claim is prejudiced. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, provided, however, if counsel for the indemnifying party concludes that a single counsel cannot under applicable legal and ethical considerations, represent both the indemnifying party and the indemnified party, the indemnified party or parties have the right to select separate counsel to participate in the defense of such action on behalf of such indemnified party or parties; provided that there shall be no more than one such separate counsel. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said paragraph (a) or (b) for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless (i) the indemnified party shall have employed counsel in accordance with the provisions of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action or (iii) the indemnifying party has, in its sole discretion, authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. VI. MISCELLANEOUS 6.1 Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Subscription Agreement must be in writing and will be deemed to have been delivered: (a) upon receipt, when delivered personally, (b) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party), or (c) one (1) business day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Comdial Corporation 106 Cattlemen Road Sarasota, Florida 34232 Telephone: (941) 922-3800 Facsimile: (941) 925-7989 Attention: Paul K. Suijk, Chief Financial Officer With a copy to: Shumaker, Loop & Kendrick, LLP 101 East Kennedy Boulevard, Suite 2800 Tampa, Florida 33602 Telephone: (813) 229-7600 18 Facsimile: (813) 229-1660 Attention: Darrell C. Smith If to the Subscriber, to its address and facsimile number set forth at the end of this Subscription Agreement, or to such other address and/or facsimile number and/or to the attention of such other person as specified by written notice given to the Company five (5) days prior to the effectiveness of such change. Written confirmation of receipt (a) given by the recipient of such notice, consent, waiver or other communication, (b) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission, or (c) provided by an overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (a), (b) or (c) above, respectively. 6.2 Entire Agreement; Amendment. This Subscription Agreement supersedes all other prior oral or written agreements between the Subscriber, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Subscription Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Subscriber makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Subscription Agreement may be amended or waived other than by an instrument in writing signed by the Company and the holders of at least a majority of the principal amount of the Notes then outstanding (or if prior to the Closing, the Subscribers purchasing at least a majority of the Units to be purchased at the Closing), or if the Notes have been repaid or converted in full, the holders of at least a majority of the Reserved Shares then outstanding. Without the written consent of all holders, no such amendment shall be effective to the extent that it applies to less than all of the holders of the Securities then outstanding on a uniform non-discriminatory basis or increases the liability of a holder. 6.3 Severability. If any provision of this Subscription Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Subscription Agreement in that jurisdiction or the validity or enforceability of any provision of this Subscription Agreement in any other jurisdiction. 6.4 Governing Law; Jurisdiction; Jury Trial. All questions concerning the construction, validity, enforcement and interpretation of this Subscription Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New York or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the federal courts sitting in the Southern District of New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof 19 to such party at the address for such notices to it under this Subscription Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereby irrevocably waives any right it may have, and agrees not to request, a jury trial for the adjudication of any dispute hereunder or in connection with or arising out of this Subscription Agreement or any transaction contemplated hereby. 6.5 Headings. The headings of this Subscription Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Subscription Agreement. 6.6 Successors And Assigns. This Subscription Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Notes and the Warrants. The Company shall not assign this Subscription Agreement or any rights or obligations hereunder without the prior written consent of the holders of at least a majority the Securities then outstanding, except by merger or consolidation. The Subscriber may assign some or all of its rights hereunder without the consent of the Company, provided, however, that any such assignment shall not release the Subscriber from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption, which consent shall not be unreasonably withheld. 6.7 Survival. The representations and warranties of the Company and the Subscriber contained in Articles I and II and the agreements set forth in this Article VI shall survive the Final Closing for a period of two years. 6.8 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Subscription Agreement and the consummation of the transactions contemplated hereby. 6.9 No Strict Construction. The language used in this Subscription Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party, notwithstanding anything herein to the contrary. 6.10 Legal Representation. The Subscriber acknowledges that: (a) it has read this Subscription Agreement and the exhibits hereto; (b) it understands that the Company has been represented in the preparation, negotiation, and execution of this Subscription Agreement by Shumaker, Loop & Kendrick, LLP, counsel to the Company; (c) it understands that ComVest has been represented by Loeb & Loeb LLP and that such counsel has not represented and is not representing any other Subscriber; (d) it has either been represented in the preparation, negotiation, and execution of this Subscription Agreement by legal counsel of its own choice, or has chosen to forgo such representation by legal counsel after being advised to seek such legal representation; and (e) it understands the terms and consequences of this Subscription Agreement and is fully aware of its legal and binding effect. 20 6.11 Expenses of Enforcement. The Company shall pay all fees and expenses (including reasonable fees and expenses of counsel and other professionals) incurred by the Subscriber or any successor holder of Securities in enforcing any of its rights and remedies under this Subscription Agreement. 6.12 Confidentiality; Required Press Release. The Subscriber agrees that it shall keep confidential and not divulge, furnish or make accessible to anyone, the confidential information concerning or relating to the business or financial affairs of the Company, if any, contained in the Offering Documents to which it becomes privy until such information has been publicly disclosed by the Company or until such information is no longer material. The Company agrees that within two business days after the closing of this subscription, it shall issue a press release which shall set forth all of the material terms of the Placement, including pricing. 6.13 Information/Proxy Statement. The Company agrees to use its reasonable best efforts to file the information or proxy statement referred to in Section 4.9 hereof with the SEC and to initiate the mailing of the same to shareholders on or prior to July 15, 2002. 6.14 Counterparts. This Subscription Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party; provided that a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature. 6.15 Notice to Residents of Florida: The Notes offered herein have not been registered with the Florida Division of Securities. Pursuant to Florida Statutes, Section 517.061(11)(a)(5), an investor may elect, within three (3) business days after delivery of their Subscription Agreement and the purchase price for the Notes, to withdraw their subscription and receive a full refund (without interest) of such purchase price. This withdrawal will be without any further liability to any person. To accomplish such withdrawal, an investor should send a letter or telegram to the Company, indicating the intention to withdraw, postmarked prior to the end of the third business day after delivery of funds to the Company, return receipt requested, to ensure that it is received and to evidence the time when it is mailed. Any oral requests for rescission should be accompanied by a request for written confirmation that the oral request was received on a timely basis. [remainder of page intentionally left blank] 21 IN WITNESS WHEREOF, the parties have executed this Subscription Agreement as of the day and year first written above. __________________________________ __________________________________________ Signature of Subscriber Signature of Co-Subscriber __________________________________ __________________________________________ Name of Subscriber Name of Co-Subscriber [please print] [please print] __________________________________ __________________________________________ Address of Subscriber Address of Co-Subscriber __________________________________ __________________________________________ Social Security or Taxpayer Social Security or Taxpayer Identification Identification Number of Subscriber Number of Co-Subscriber __________________________________ Subscriber's Account Number at Commonwealth Associates __________________________________ Dollar Amount of Units Subscribed For *If Subscriber is a Registered Representative with an NASD member firm, have the following acknowledgment signed by the appropriate party: The undersigned NASD member firm Subscription Accepted: acknowledges receipt of the notice required by Rule 3040 of the NASD Conduct Rules. COMDIAL CORPORATION _____________________________________ By:___________________________ Name of NASD Member Name: Paul Suijk Title: Chief Financial Officer By___________________________________ ______________________________ Dollar Amount of Subscription Accepted Authorized Officer Accepted 22 EX-4.2 4 dex42.txt FORM SENIOR SUBORDINATED SECURED CONVERTIBLE NOTE 1 EXHIBIT 4.2 Form of Senior Subordinated Secured Convertible Note Issued by Comdial Corporation THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY NOTE ISSUED IN EXCHANGE FOR THIS NOTE OR ANY SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF THE COMPANY AND PAYEE HEREUNDER ARE SUBJECT TO THE SUBORDINATION PROVISIONS SET FORTH IN SECTION 2 HEREOF. IN THE EVENT OF A CONFLICT BETWEEN ANY TERMS OF THIS NOTE AND THE TERMS OF SUCH SECTION 2, THE TERMS OF SECTION 2 SHALL GOVERN. ---------------------------------------------------------------- COMDIAL CORPORATION No. ___ $___________ Senior Subordinated Secured Convertible Note Comdial Corporation, a Delaware corporation (the "Company"), for value received, hereby promises to pay to the order of _________ (the "Payee") at the offices of the Company on the earlier of (the "Maturity Date"): (i) October 18, 2002; (ii) a merger or combination of the Company in which the shareholders of the Company prior to the transaction own less than a majority of the outstanding shares of the surviving or combined entity after such transaction; (iii) the sale of all or substantially all of the assets of the Company to one or more third parties; (iv) the purchase by a single entity or person or group of affiliated entities or persons of issued and outstanding shares of the Company representing more than 50% of the voting power; or (v) the Company raises in excess of $14,000,000 in aggregate gross proceeds through the sale, in one or more transactions, of any debt or equity securities, the principal sum of _______________ Dollars ($______) or such lesser principal amount as shall at such time be outstanding hereunder (the "Principal Amount"). The Maturity Date specified in clause (i) above shall be extended to January 16, 2003 if Commonwealth Associates, L.P. ("Commonwealth") is unable or unwilling to complete the private placement contemplated by the term sheet dated June 10, 2002 between the Company and Commonwealth (the "Commonwealth Financing"), and shall be extended to June 20, 2003 upon the Company's receipt of shareholder approval of an amendment to the Company's certificate of incorporation to increase the authorized common stock to at least 100,000,000 shares (the "Approval") if the Commonwealth Financing has been completed. Each payment by the Company pursuant to this Note shall be made without set-off or counterclaim and shall be made in lawful currency of the United States of America and in immediately available funds. Interest on this Note shall accrue on the Principal Amount outstanding from time to time at a rate per annum computed in accordance with Section 3 hereof and shall be payable quarterly in arrears on each March 31, June 30, September 30 and December 31 commencing September 30, 2002 (each, an "Interest Payment Date"). All payments by the Company hereunder shall be applied first to pay any interest which is due, but unpaid, then to reduce the Principal Amount. The Company (i) waives presentment, demand, protest or notice of any kind in connection with this Note and (ii) agrees to pay to the Payee, on demand, all costs and expenses (including reasonable legal fees and expenses) incurred in connection with the enforcement and collection or this Note. This Note is issued in connection with a bridge financing (the "Placement") of identical notes (together with this Note, the "Notes") pursuant to a bridge subscription agreement (the "Subscription Agreement") between the Company and the Payee and a Term Sheet dated June 10, 2002 between the Company and ComVest Venture Partners, L.P. ("ComVest"), copies of which are available for inspection at the Company's principal office. Notwithstanding any provision to the contrary contained herein, this Note is subject and entitled to those terms, conditions, covenants and agreements contained in the Subscription Agreement that are expressly applicable to the Notes. Any transferee of this Note, by its acceptance hereof, assumes the obligations of the Payee in the Subscription Agreement with respect to the conditions and procedures for transfer of this Note. Reference to the Subscription Agreement shall in no way impair the absolute and unconditional obligation of the Company to pay both principal hereof and interest hereon as provided herein. The obligations of the Company under the Notes are secured by a second lien on substantially all of the Company's assets, including its intellectual property rights, as set forth in and pursuant to a General Security Agreement (the "Security Agreement") of even date herewith. 1. Prepayment. This Note may be prepaid in whole or in part at any time upon fifteen (15) days' prior written notice to the Payee and must be prepaid to the extent of any and all net proceeds (after payment of commissions) received from the sale of securities by the Company in any financing transaction. 2. Subordination. The Company, for itself, its successors and assigns, covenants and agrees, and the Payee and each successive holder of this Note, by its acceptance of this Note, likewise covenants and agrees (expressly for the benefit of the present and future holders of the Senior Debt (as hereinafter defined)), that the payment of principal of, and interest on, this Note is hereby expressly subordinated in right of payment to the prior payment in full of the principal of, premium (if any) and interest on, all Senior Debt of the Company (other than the Notes), hereafter incurred or created. "Senior Debt" means, collectively, (i) all Indebtedness for Borrowed Money (and all renewals, extensions, refundings, amendments and modifications of any such Indebtedness for Borrowed Money); and (ii) all payment obligations of the Company pursuant to any capitalized lease with an entity that is not an affiliate of the Company, unless by the terms of the instrument creating or evidencing any such indebtedness it is expressly provided that such indebtedness is not superior in right of payment to the Notes. "Indebtedness for Borrowed Money" means (i) all secured payment obligations of the Company to a bank, insurance company, finance company or other institutional lender or other entity regularly engaged in the business of extending credit in the form of borrowed money, 2 provided such entity is not an affiliate of the Company (each of the foregoing, an "Institutional Lender") in respect of extensions of credit to the Company (or to a subsidiary of the Company to the extent such obligations are guaranteed by the Company pursuant to a written guarantee executed by the appropriate officers of the Company) and (ii) all obligations, contingent or otherwise, relative to the face amount of all asset-based letters of credit, whether or not drawn, and banker's acceptances, in each case issued for the account of the Company (other than such as may be for the benefit of an affiliate of the Company). The provisions of this Section 2 are not for the benefit of the Company, but are solely for the purpose of defining the relative rights of the holders of the Senior Debt, on the one hand, and the holders of the Notes, on the other hand. Nothing contained herein (i) shall impair, as between the Company and the holder of this Note, the obligations of the Company, which are absolute and unconditional, to pay to the holder hereof all amounts payable in respect of this Note as and when the same shall become due and payable in accordance with the terms hereof or (ii) is intended to or shall affect the relative rights of the holder of this Note and the creditors of the Company, or (iii) shall prevent the holder of this Note from exercising all rights, powers and remedies otherwise permitted by applicable law or upon a default or Event of Default under this Note as set forth in these subordination provisions. 3. Computation of Interest. All computations of interest hereunder shall be made based on the actual number of days elapsed in a year of 365 days (including the first day but excluding the last day during which any such Principal Amount is outstanding). A. Base Interest Rate. Subject to Sections 3B and 3C below, the outstanding Principal Amount shall bear interest at the rate of seven percent (7%) per annum. B. Penalty Interest. In the event this Note is not repaid on the Maturity Date, the rate of interest applicable to the unpaid Principal Amount shall be adjusted to twelve percent (12%) per annum from the Maturity Date until repayment; provided, that in no event shall the interest rate exceed the Maximum Rate provided in Section 3C below. C. Maximum Rate. In the event that it is determined that, under the laws relating to usury applicable to the Company or the indebtedness evidenced by this Note ("Applicable Usury Laws"), the interest charges and fees payable by the Company in connection herewith or in connection with any other document or instrument executed and delivered in connection herewith cause the effective interest rate applicable to the indebtedness evidenced by this Note to exceed the maximum rate allowed by law (the "Maximum Rate"), then such interest shall be recalculated for the period in question and any excess over the Maximum Rate paid with respect to such period shall be credited, without further agreement or notice, to the Principal Amount outstanding hereunder to reduce said balance by such amount with the same force and effect as though the Company had specifically designated such extra sums to be so applied to principal and the Payee had agreed to accept such extra payment(s) as a premium-free prepayment. All such deemed prepayments shall be applied to the principal balance payable at maturity. In no event shall any agreed-to or actual exaction as consideration for this Note exceed the limits imposed or provided by Applicable Usury Laws in the jurisdiction in which the Company is resident applicable to the use or detention of money or to forbearance in seeking its collection in the jurisdiction in which the Company is resident. 3 4. Covenants of Company. A. Affirmative Covenants. So long as this Note shall be outstanding, the Company covenants and agrees to the following: (i) Taxes and Levies. The Company will promptly pay and discharge all material taxes, assessments, and governmental charges or levies imposed upon the Company or upon its income and profits, or upon any of its property, before the same shall become delinquent, as well as all material claims for labor, materials and supplies which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided, however, that the Company shall not be required to pay and discharge any such tax, assessment, charge, levy or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings and the Company shall set aside on its books adequate reserves in accordance with generally accepted accounting principles ("GAAP") with respect to any such tax, assessment, charge, levy or claim so contested. (ii) Maintenance of Existence. The Company will do or cause to be done all things reasonably necessary to preserve and keep in full force and effect its corporate existence, rights and franchises and comply with all laws applicable to the Company, except where the failure to comply would not have a material adverse effect on the Company or otherwise in connection with an acquisition of the Company. (iii) Maintenance of Property. The Company will at all times maintain, preserve, protect and keep its property used or useful in the conduct of its business in good repair, working order and condition, and from time to time make all needful and proper repairs, renewals, replacements and improvements thereto as shall be reasonably required in the conduct of its business. (iv) Books and Records. The Company will at all times keep true and correct books, records and accounts reflecting all of its business affairs and transactions in accordance with GAAP. (v) Notice of Certain Events. The Company will give prompt written notice (with a description in reasonable detail) to the Payee of the occurrence of any Event of Default or any event which, with the giving of notice or the lapse of time, would constitute an Event of Default. B. Negative Covenants. So long as this Note shall be outstanding, the Company covenants and agrees to the following: (i) Liquidation, Dissolution. The Company will not liquidate or dissolve, consolidate with, or merge into or with, any corporation or entity, except that (1) any wholly-owned subsidiary may merge with another wholly-owned subsidiary or with the Company (so long as the Company is the surviving corporation and no Event of Default shall occur as a result thereof) and (2) the Company may complete a merger or consolidation if the surviving entity has cash and cash equivalents and/or net assets which are either (a) equal to or greater than the then outstanding Principal Amount and accrued interest on the Notes or (b) equal to or greater than the Company's cash and cash equivalents and/or net assets immediately prior to such merger or consolidation. 4 (ii) Sales of Assets. The Company will not sell, transfer, lease or otherwise dispose of, or grant options, warrants or other rights with respect to, all or substantially all of its properties or assets to any person or entity other than in connection with a transaction covered by clause (i) above unless this Note is repaid in full prior to or in connection with such transaction; provided that this clause (ii) shall not restrict any disposition made in the ordinary course of business and consisting of (a) capital goods which are obsolete or have no remaining useful life; or (b) finished goods inventories. (iii) Transactions with Affiliates. The Company will not enter into any transaction, including, without limitation, the purchase, sale, lease or exchange of property, real or personal, the purchase or sale of any security, the borrowing or lending of any money, or the rendering of any service, with any person or entity affiliated with the Company (including officers, directors and shareholders owning 3% or more of the Company's outstanding capital stock), except upon terms not less favorable than would be obtained in a comparable arms-length transaction with any other person or entity not affiliated with the Company except (a) transactions valued at less than $25,000 entered into in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms not less favorable than would be obtained in a comparable arms-length transaction with any other person or entity not affiliated with the Company, (b) transactions with ComVest, Commonwealth or any of their respective affiliates, or (c) transactions approved by a majority of the independent members of the Board of Directors. (iv) Investments. The Company will not purchase, own, invest in or otherwise acquire, directly or indirectly, any stock or other securities or make or permit to exist any investment or capital contribution or acquire any interest whatsoever in any other person or entity or permit to exist any loans or advances for such purposes except for investments in direct obligations of the United States of America or any state thereof or any agency thereof, obligations guaranteed by the United States of America or any state thereof and certificates of deposit or other obligations of any bank or trust company organized under the laws of the United States or any state thereof and having capital and surplus of at least $500,000,000; provided, however, that nothing contained in this clause (iv) shall preclude the Company from making acquisitions, organizing and making advances to subsidiaries, and entering into joint ventures or other business arrangements for the purpose of expanding its business. (v) Proration of Payments. The Company shall not make or permit any payment or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of the Principal Amount or interest payable hereunder in excess of the Payee's pro rata share of payments then being made in respect of all Notes. (vi) Indebtedness. Except for the Senior Debt, the Company will not create, incur, assume or suffer to exist, contingently or otherwise, any indebtedness for borrowed money that is either (i) pari passu or senior in right of payment to the Notes, (ii) subordinated in right of payment to the Notes if such indebtedness is due and payable prior to the Maturity Date, or (iii) at the time of incurrence would preclude the timely repayment of this Note or otherwise render the Company unable to pay its debts as they become due. 5 (vii) Negative Pledge. The Company will not hereafter create, incur, assume or suffer to exist any mortgage, pledge, hypothecation, assignment, security interest, encumbrance, lien (statutory or other), preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement and any financing lease) (each, a "Lien") upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens granted to secure indebtedness incurred to finance the acquisition (whether by purchase or capitalized lease) of tangible assets, but only on the assets acquired with the proceeds of such indebtedness; (b) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) Liens (other than Liens arising under the Employee Retirement Income Security Act of 1974, as amended, or Section 412(n) of the Internal Revenue Code of 1986, as amended) incurred in the ordinary course of business in connection with workers' compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (e) judgment Liens in existence less than sixty (60) days after the entry thereof or with respect to which execution has been stayed; (f) rights of return granted by the Company to supply houses; and (g) any other Permitted Liens (as defined in the Security Agreement). (viii) Dividends. The Company will not declare or pay any dividends or distributions on its outstanding capital stock other than as may be provided for in any currently existing certificates of designation or certificates of amendment with respect to shares of preferred stock. (ix) Acceleration of Payments. The Company shall not make any accelerated payment under any agreement, lease, loan or any other similar instrument, whether due to settlement, entry of judgment or otherwise, which shall exceed $50,000 in any one instance or $100,000 in the aggregate. Notwithstanding the preceding sentence, the Company shall be permitted to pay the accounts payable reflected on the balance sheet of the Company 6 contained in the most recently filed Quarterly Report on Form 10-Q and other payables which are incurred in the ordinary course of business. (x) Executive Compensation and Retention. Except as the Company may be obligated to do pursuant to any existing employment agreement and except for options and bonuses to be granted to executive officers as set forth on Schedule 2.3 to the Subscription Agreement, the Company shall not increase the cash or non-cash compensation payable to Nickolas A. Branica, Paul K. Suijk, Ralph R. Dyer, Kenneth W. Noack and Carla K. Luke, or hire any new senior executives without the approval of the majority of the independent members of the Board. (xi) Issuance of Securities. Except as otherwise provided for herein, the Company shall not, without the prior written consent of the Required Holders, issue any securities that are redeemable or otherwise provide for cash payments to the holders thereof if such payments can be made prior to the Maturity Date. In addition, except for any debt or equity securities issued in connection with any capital raising transaction with Commonwealth and except as otherwise provided for herein, the Company shall not issue any debt or equity securities in connection with any capital raising transactions. Notwithstanding the foregoing, if Commonwealth is unwilling or unable to complete the Commonwealth Financing on or prior to September 9, 2002, the Company shall have the right to issue debt or equity securities in connection with a comparable capital raising transaction. 5. Events of Default. A. The term "Event of Default" shall mean any of the events set forth in this Section 5A: (i) Non-Payment of Obligations. The Company shall default in the payment of the Principal Amount when and as the same shall become due and payable, whether by acceleration or otherwise, or shall default in the payment of accrued interest on this Note which default shall not be cured within ten (10) business days after the applicable Interest Payment Date. (ii) Non-Performance of Affirmative Covenants. The Company shall default in any material respect in the due observance or performance of any covenant set forth in Section 4A, which default shall continue uncured for ten (10) days. (iii) Non-Performance of Negative Covenants. The Company shall default in any material respect in the due observance or performance of any covenant set forth in Section 4B. (iv) Non-Performance of Other Obligations. The Company shall default in the due observance or performance of any other material covenant or agreement on the part of the Company to be observed or performed pursuant to the terms hereof, which default shall continue uncured for five (5) days after such default has been discovered by the Company. 7 (v) Bankruptcy, etc. The Company shall: (a) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Company or any of its property, or make a general assignment for the benefit of creditors; (b) in the absence of such application, consent or acquiesce in, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Company or for any part of its property; (c) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Company and, if such case or proceeding is not commenced by the Company or converted to a voluntary case, such case or proceeding shall be consented to or acquiesced in by the Company or shall result in the entry of an order for relief or shall remain for 60 days undismissed; or (d) take any corporate or other action authorizing or in furtherance of, any of the foregoing. (vi) Breach of Representations or Warranties. Any material representation or warranty of the Company contained in the Subscription Agreement or Warrants is or shall be incorrect in any material respect when made. (vii) Cross-Acceleration. Any indebtedness for borrowed money of the Company or any subsidiary in an aggregate principal amount exceeding $50,000 (1) shall be duly declared to be or shall become due and payable prior to the stated maturity thereof, or (2) shall not be paid as and when the same becomes due and payable, including any applicable grace period. B. Action if Bankruptcy. If any Event of Default described in clauses (v)(a) through (c) of Section 5A shall occur, the outstanding Principal Amount of this Note and all other obligations hereunder shall automatically be and become immediately due and payable, without notice or demand. C. Action if Other Event of Default. If any Event of Default (other than any Event of Default described in clauses (v)(a) through (c) of Section 5A) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Holders may, upon notice to the Company, declare all or any portion of the outstanding Principal Amount of this Note, together with interest accrued thereon to be due and payable and any or all other obligations hereunder to be due and payable, whereupon the full unpaid Principal Amount, such accrued interest and any and all other such obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand, or presentment. D. Remedies. Subject to the provisions of Section 5C and 7A hereof, in case any Event of Default shall occur and be continuing, the holders of not less than 25% of the outstanding aggregate Principal Amount of the Notes may proceed to protect and enforce their rights by a proceeding seeking the specific performance of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note or may proceed to enforce the payment of this Note or to enforce any other legal or equitable rights as such holders shall determine. 8 6. Conversion of Note. A. Optional Conversion into Subsequent Financing. (i) In the event that prior to the Maturity Date, the Company completes a subsequent private placement of debt or equity securities, including, but not limited to, the Commonwealth Financing (a "Subsequent Financing"), then the Payee shall have the right, at its option, to have the outstanding Principal Amount cancelled as payment for the Payee's investment in the same securities sold in the Subsequent Financing. The securities issuable upon conversion of this Note in accordance with this Section 6A(i) are referred to herein as the "Conversion Securities". The Payee may exercise its right of conversion after receipt of a notice from the Company of such contemplated financing. After receipt of notice from the Company, Payee must notify the Company in writing within 10 business days of its intention to exercise its right of conversion or such right shall be deemed waived (ii) The Payee's investment in the Subsequent Financing pursuant to Section 6A(i) above shall be on the same terms and conditions as other investors in such transaction and Payee agrees to take such further action with respect to such Subsequent Financing as may be reasonably requested by the Company. Upon cancellation of this Note in connection with the Payee's investment in the Subsequent Financing, all accrued and unpaid interest shall be due and payable in cash. B. Partial Optional Conversion. Subject to the limitations set forth in this Section 6B, the Payee shall have the right at any time or from time to time to convert up to 13.33% of the original Principal Amount into shares of the Company's common stock (the "Common Stock") at a conversion price of $.01 per share. Until the Approval is obtained, the Notes shall be convertible, on a pro rata basis among all holders, only for the maximum number of Conversion Shares permissible under the Company's existing capital structure at the time of conversion. The shares of Common Stock issuable upon conversion of this Note in accordance with this Section 6B and Section 6C below are referred to herein as the "Conversion Shares." C. Optional Conversion upon Event of Default. In the event that the Company is in default under this Note, the Payee shall have the right, at its option, to convert all or any of the outstanding Principal Amount and any accrued but unpaid interest into shares of Common Stock at a conversion price per share equal to 90% of the average closing price of the Common Stock for the five trading days immediately prior to the date of the notice of conversion (or, if the Common Stock has ceased trading, the average closing price for the last five available trading days). Upon cancellation of this Note pursuant to this Section 6C, all accrued and unpaid interest that has not been converted into Common Stock shall be due and payable in cash. D. Mechanics of Conversion. Before the Payee shall be entitled to convert this Note into the Conversion Securities or the Conversion Shares pursuant to Sections 6A, 6B or 6C hereof, the Payee shall surrender this Note, duly endorsed, at the office of the Company, and shall give written notice to the Company at its principal corporate office, of the election to convert some or all of the Principal Amount of the same and shall state therein the name or names in which the certificate or certificates for the Conversion Securities or Conversion Shares are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver to the Payee, , a certificate or certificates for the number of Conversion Securities or Conversion Shares to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to 9 have been made immediately prior to the close of business on the date of such surrender of the Note to be converted, and the person or persons entitled to receive the Conversion Securities or Conversion Shares issuable upon such conversion shall be treated for all purposes as the record holder or holders of such securities as of such date. If less than the entire Principal Amount is converted, the amount converted shall be treated as a payment of the Principal Amount in the order of maturity. E. Cash Payments. No fractional shares (or scrip representing fractional shares) of Common Stock shall be issued upon conversion of this Note. In the event that the conversion of the Principal Amount of this Note would result in the issuance of a fractional share of Common Stock the Company shall pay a cash adjustment in lieu of such fractional share to the holder of this Note based upon the applicable conversion price. F. Stamp Taxes, etc. The Company shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of this Note; provided, however, that the Company shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of this Note, and the Company shall not be required to issue or deliver any such certificate unless and until the person requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the Company's satisfaction that such tax has been paid. G. Validity of Stock. All shares of Common Stock that may be issued upon conversion of this Note will, upon issuance by the Company in accordance with the terms of this Note, be validly issued, free from all taxes and liens with respect to the issuance thereof (other than those created by the holders), free from all pre-emptive or similar rights and fully paid and non-assessable. H. Reservation of Shares. The Company covenants and agrees that it shall reserve the maximum number of shares of Common Stock available for issuance and/or delivery upon conversion of the Notes out of its authorized but unissued shares. The Company agrees to use its reasonable best efforts to obtain, on or prior to August 31, 2002, the Approval. If the Approval is obtained, the Company agrees that it will at all time thereafter have authorized and reserved, solely for the purpose of such possible conversion, out of its authorized but unissued shares, the maximum number of shares of its Common Stock available to provide for the exercise of the conversion rights contained in this Note. I. Notice of Certain Transactions. In case at any time: (i) The Company shall declare any dividend upon, or other distribution in respect of, its Common Stock; (ii) The Company shall offer for subscription to the holders of its Common Stock any additional shares of stock of any class or any other securities convertible into shares of stock or any rights to subscribe thereto; (iii) There shall be any capital reorganization or reclassification of the capital stock of the Company, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another corporation (other than a merger with a 10 subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification); or (iv) There shall be a voluntary or involuntary dissolution; liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall cause to be mailed to the Payee at the earliest practicable time (and, in any event not less than 10 days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or such reorganization, reclassification, sale, consolidation, merger or dissolution, liquidation or winding-up shall take place, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the applicable conversion price and the kind and amount of the shares of stock and other securities and property deliverable upon the conversion of this Note. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger or dissolution, liquidation or winding-up, as the case may be. Nothing herein shall be construed as the consent of the holder of this Note to any action otherwise prohibited by the terms of this Note or as a waiver of any such prohibition. J. Notice of Maturity Date. The Company shall give written notice to the Payee not less than 10 business days prior to the occurrence of an event described in clause (ii), (iii), (iv) or (v) of the first paragraph of this Note which is expected to result in the Maturity Date. 7. Amendments and Waivers. A. The provisions of this Note, including, but not limited to, any decision to convert the Note, any waiver of the restrictive covenants or adjustment provision and any change to a conversion price, may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Company and the Holders of not less than 50% in Principal Amount of the Notes then outstanding (the "Required Holders"); provided, however, that no such amendment, modification or waiver which would (i) modify this Section 7A, (ii) extend the Maturity Date for more than one year, or (iii) reduce the Principal Amount or any amounts payable hereunder or (iv) not be uniformed and non-discriminatory as to any particular Note, shall be made without the consent of the Payee of each Note so affected. B. Except as provided herein, no failure or delay on the part of the Payee in exercising any power or right under this Note shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Company in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Payee shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. 11 C. To the extent that the Company makes a payment or payments to the Payee, and such payment or payments or any part thereof are subsequently for any reason invalidated, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all rights and remedies therefor, shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. D. After any waiver, amendment or supplement under this section becomes effective, the Company shall mail to the Payee a copy thereof. 8. Miscellaneous A. Registered Holder. The Company may consider and treat the person in whose name this Note shall be registered as the absolute owner thereof for all purposes whatsoever (whether or not this Note shall be overdue) and the Company shall not be affected by any notice to the contrary. In case of transfer of this Note by operation of law, the transferee agrees to notify the Company of such transfer and of its address, and to submit appropriate evidence regarding such transfer so that this Note may be registered in the name of the transferee. This Note is transferable only on the books of the Company by the Holder hereof, in person or by attorney, on the surrender hereof, duly endorsed. Communications sent to any registered owner shall be effective as against all Holders or transferees of the Note not registered at the time of sending the communication. B. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. Sections 5-1401 and 5-1402 of the General Obligations Law of the State of New York shall apply to this Note and the Company hereby waives any right to stay or dismiss on the basis of forum non conveniens any action or proceeding brought before the courts of the State of New York sitting in New York County or of United States of America for the Southern District of New York and hereby submits to the jurisdiction of such courts. C. Notices. Unless otherwise provided, all notices required or permitted under this Note shall be in writing and shall be deemed effectively given (i) upon personal delivery to the party to be notified, (ii) upon confirmed delivery by Federal Express or other nationally recognized courier service providing next-business-day delivery, or (iii) three business days after deposit with the United States Postal Service, by registered or certified mail, postage prepaid and addressed to the party to be notified, in each case at the address set forth below, or at such other address as such party may designate by written notice to the other party (provided that notice of change of address shall be effective upon receipt by the party to whom such notice is addressed). If sent to Payee, notices shall be sent to the address set forth in the Subscription Agreement. 12 If sent to the Company, notices shall be sent to the following address: Comdial Corporation 106 Cattlemen Road Sarasota, Florida 34232 Attention: Paul Suijk D. Parties in Interest. All covenants, agreements and undertakings in this Note binding upon the Company or the Payee shall bind and inure to the benefit of the successors and permitted assigns of the Company and the Payee, respectively, whether so expressed or not. E. Waiver of Jury Trial. THE PAYEE AND THE COMPANY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS NOTE OR ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE PAYEE OR THE COMPANY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PAYEE'S PURCHASE OF THIS NOTE. IN WITNESS WHEREOF, the Company has caused this Note to be signed in its name by its duly authorized officer. COMDIAL CORPORATION By ________________________________ Name: Paul K. Suijk Title: Chief Financial Officer 13 EX-4.3 5 dex43.txt GENERAL SECURITY AGREEMENT Exhibit 4.3 General Security Agreement between Comdial Corporation and ComVest Venture Partners, L.P., as agent, dated June 21, 2002 THE RIGHTS OF THE SECURED PARTY AND THE INVESTORS UNDER THIS SECURITY AGREEMENT SHALL BE SUBORDINATED TO THE EXTENT AND IN THE MANNER PROVIDED IN THAT CERTAIN SUBORDINATION AGREEMENT BETWEEN THE SECURED PARTY, THE INVESTORS AND BANK OF AMERICA, N.A. (THE "SUBORDINATION AGREEMENT"). THE SECURED PARTY, THE INVESTORS AND SUBSEQUENT HOLDERS OF THE NOTES (AS DEFINED BELOW), BY ACCEPTANCE THEREOF, ACKNOWLEDGE AND AGREE TO BE BOUND BY THE SUBORDINATION AGREEMENT. GENERAL SECURITY AGREEMENT (Floating Lien) SECURITY AGREEMENT, dated as of June 21, 2002, between Comdial Corporation, a Delaware corporation with its principal executive office located at 106 Cattlemen Road, Sarasota, Florida 34232 (the "Debtor"), and ComVest Venture Partners, L. P., a Delaware limited partnership with offices at 830 Third Avenue, New York, New York 10022, as agent (the "Agent") for the investors (the "Investors") from time to time set forth on Annex I hereto (the Agent, acting in such capacity, the "Secured Party"); W I T N E S S E T H : WHEREAS, Debtor and the Investors, including the Agent, are parties to a series of 7% senior subordinated secured promissory notes in the aggregate principal amount of up to $4,000,000 issued by Debtor from time to time in a private placement (herein collectively, as at any time amended, extended, restated, renewed or modified, the "Notes"); WHEREAS, it is a condition to the willingness of the Investors to make the loan evidenced by the Notes that Debtor enter into this Agreement and grant to the Secured Party, for the ratable benefit of the Investors, the security interest provided for herein; WHEREAS, the term "Notes" shall be deemed to include any promissory notes issued as payment of interest on the Notes; and WHEREAS, the Investors have appointed the Agent pursuant to the Agency Appointment Agreement attached as Exhibit 3 hereto. NOW, THEREFORE, FOR VALUE RECEIVED, IT IS AGREED: Section 1. Terms. Unless otherwise defined herein, capitalized terms used in this Agreement shall have the meaning specified therefor in the Notes. As used herein the following terms shall have the meanings specified and shall include in the singular number the plural and in the plural number the singular: "Assigned Agreements" shall mean all contracts and agreements of Debtor (other than contracts or agreements which by their terms expressly prohibit the granting of any Lien (as hereinafter defined) thereon). "Collateral" means all of Debtor's right, title and interest in and under or arising out of each and all of the following: All personal property and fixtures of Debtor of any type or description, wherever located and now existing or hereafter arising or acquired, including but not limited to the following: (i) all of Debtor's goods including, without limitation: (a) all inventory, including without limitation, equipment held for lease, whether raw materials, in process or finished, all material or equipment usable in processing the same and all documents of title covering any inventory (as such term is defined in the Uniform Commercial Code, as in effect from time to time in the State of New York (the "NYUCC")) (all of the foregoing, "Inventory"), including without limitation that located at the locations listed on Schedule 1-A annexed hereto; (b) Except for the equipment subject to liens set forth in Schedule 1-B hereto (for so long as such lessors and/or lenders set forth in Schedule 1-B hereto maintain a security interest in such equipment), all equipment (the "Equipment") employed in connection with Debtor's business, together with all present and future additions, attachments and accessions thereto and all substitutions therefor and replacements thereof, including without limitation that located at the locations listed on Schedule 1-A annexed hereto; (ii) all of Debtor's present and future accounts, accounts receivable, general intangibles, as such terms are defined in the NYUCC, and all contracts and contract rights (herein sometimes referred to as "Receivables"), including but not limited to Debtor's rights (including rights to payment) under all Assigned Agreements, together with (a) all claims, rights, powers or privileges and remedies of Debtor relating thereto or arising in connection therewith including, without limitation, all rights of Debtor to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing or any property which is the subject of the Assigned Agreements, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action which (in the opinion of the Secured Party) may be necessary or advisable in connection with any of the foregoing, 2 (b) all liens, security, guaranties, endorsements, warranties and indemnities and all insurance and claims for insurance relating thereto or arising in connection therewith, (c) all rights to property forming the subject matter of the Receivables including, without limitation, rights to stoppage in transit and rights to returned or repossessed property, (d) all writings relating thereto or arising in connection therewith including without limitation, all notes, contracts, security agreements, guaranties, chattel paper and other evidence of indebtedness or security, all powers-of-attorney, all books, records, ledger cards and invoices, all credit information, reports or memoranda and all evidence of filings or registrations relating thereto, (e) all catalogs, computer and automatic machinery software and programs, and the like pertaining to operations by Debtor in, on or about any of its plants or warehouses, all sales data and other information relating to sales or service of products now or hereafter manufactured on or about any of its plants, and all accounting information pertaining to operations in, on or about any of its plants, and all media in which or on which any of the information or knowledge or data is stored or contained, and all computer programs used for the compilation or printout of such information, knowledge, records or data, and (f) all accounts, contract rights, general intangibles and other property rights of any nature whatsoever arising out of or in connection with the foregoing, including without limitation, payments due and to become due, whether as repayments, reimbursements, contractual obligations, indemnities, damages or otherwise; (iii) all other personal property of Debtor of any nature whatsoever, including, without limitation, all accounts, bank accounts, deposits, credit balances, contract rights, inventory, general intangibles, goods, equipment, instruments, chattel paper, machinery, furniture, furnishings, fixtures, tools, supplies, appliances, plans and drawings, together with all customer and supplier lists and records of the business, and all property from time to time described in any financing statement signed by Debtor naming the Agent as secured party; (iv) all of Debtor's right, title, and interest in and to any shares of capital stock of the respective corporations identified on Schedule 1-C hereto (the "Issuers"), represented by the certificates identified on Schedule 1-C, together with the certificates representing any such shares, and all other shares of capital stock of whatever class of the Issuers, now or hereafter owned by Debtor, in each case together with the certificates evidencing the same (collectively, the "Stock Collateral"); 3 (v) All shares, securities, money or property representing a dividend on any of the Stock Collateral, or representing a distribution of return of capital upon or in respect of the Stock Collateral, or resulting from a split-up, revision, reclassification and other like change of the Stock Collateral or otherwise received in exchange therefor, and any subscription warrants, rights or options issued to the holders of, or otherwise in respect of, the Stock Collateral; (vi) Without affecting the obligations of Debtor under any provision prohibiting such action hereunder or under the Notes, in the event of any consolidation or merger in which an Issuer is not the surviving corporation, all shares of each class of the capital stock of the successor corporation formed by or resulting from such consolidation or merger; (vii) any and all of Debtor's right, title and interest in its intellectual property, including, without limitation, (a) each of the Trademarks (as hereinafter defined) and the goodwill of the business symbolized by each of the Trademarks, all customer lists and other records of Debtor relating to the distribution of products bearing the Trademarks (as hereinafter defined) and each of the registrations described in Schedule 1-D hereto; (b) each of the Patents (as hereinafter defined) and each of the registrations listed on Schedule 1-D hereto; (c) each of the tradenames listed on Schedule 1-D hereto (the "Tradenames"); (d) each of the Copyrights (as hereinafter defined) and each of the applications, registrations and recordings thereof listed on Schedule 1-D hereto, and all derivative works, extensions or renewals thereof ; (d) any and all proceeds of the foregoing, including, without limitation, any claims by Debtor against third parties for infringement of the Trademarks, the Patents and/or the Copyrights (collectively, the "Intellectual Property"); (viii) all additions, accessions, replacements, substitutions or improvements and all products and proceeds including, without limitation, proceeds of insurance, of any and all of the Collateral described in clauses (i) through (vii) above; and (ix) any consideration received from the sale, exchange, lease or other disposition of any asset or property which constitutes Collateral, any other value received as a consequence of the possession of any Collateral and any payment received from any insurer or other person or entity as a result of the destruction, loss, theft or other involuntary conversion of whatever nature of any asset or property that constitutes Collateral. "Copyrights" mean all copyrights, copyrighted works or any item which embodies such copyrighted work of the United States or any other country, all applications therefor, all right, title and interest therein and thereto, and all registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Copyright Office or in any similar office or agency of the United States, and State thereof or any other country or any political subdivision thereof, and all derivative works, extensions or renewals thereof. 4 "Indebtedness for Borrowed Money" means all secured payment obligations of Debtor (whether outstanding on the date hereof or hereinafter) to Bank of America, N.A. ("BOA") or any other bank, insurance company, finance company or other institutional lender or other entity regularly engaged in the business of extending credit in the form of borrowed money, provided such entity is not an affiliate of Debtor. "Instrument" shall have the meaning specified in Article 3 of the NYUCC and shall also include any other writing which evidences a right to the payment of money and is not itself a security agreement or lease and is of a type which is in the ordinary course of business transferred by delivery with any necessary endorsement or assignment. "Lien" means any mortgage, pledge, hypothecation, assignment, security interest, deposit arrangement, encumbrance (including any easement, right of way, zoning restriction and the like), lien (statutory or other) or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease involving substantially the same economic effect as any of the foregoing and the filing of any financing statement under the NYUCC or comparable law of any jurisdiction). "Material Adverse Effect" means a material adverse effect on the financial condition of the Company and its subsidiaries, taken as a whole. "Patents" mean (i) all letters patent of the United States or any other country, all right, title and interest therein and thereto, and all applications, registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or province thereof or any other country or any political subdivision thereof, all whether now owned or hereafter acquired by Debtor, including, but not limited to, those described in Schedule 1-D hereto, and (ii) all reissues, continuations, continuations-in-part, extensions or divisionals thereof and all licenses thereof. "Permitted Liens" means: (a) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with generally accepted accounting principles shall have been set aside on its books; (b) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (c) Liens (other than Liens arising under the Employee Retirement Income Security Act of 1974, as amended, or Section 412(n) of the Internal Revenue Code of 1986, as amended) incurred in the ordinary course of business in connection with workers' compensation, 5 unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (d) Judgment Liens in existence less than 60 days after the entry thereof or with respect to which execution has been stayed; (e) Ground leases in respect of real property on which facilities owned or leased by Debtor or any of its subsidiaries are located; (f) Easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the business of Debtor and its subsidiaries taken as a whole; (g) Any interest or title of a lessor secured by a lessor's interest under any lease of real property on which facilities owned or leased by Debtor or any of its subsidiaries are located; (h) Leases or subleases granted to others not interfering in any material respect with the business of Debtor and its subsidiaries taken as a whole; (i) A Lien on any asset securing indebtedness (including capitalized lease obligations) incurred or assumed for the purpose of financing the purchase price (including capitalized lease payments in the nature thereof) of such asset, provided that such Lien attaches only to the asset acquired with the proceeds of such indebtedness and attaches concurrently with or within ten (10) days following the acquisition thereof; (j) Liens existing on the date hereof as disclosed on Schedule 1-E hereto; and (k) Liens with respect to the Senior Indebtedness. "Person" means any natural person, corporation, firm, association, partnership, joint venture, limited liability company, joint-stock company, trust, unincorporated organization, government, governmental agency or subdivision, or any other entity, whether acting in an individual, fiduciary or other capacity. "Receivables" has the meaning specified therefor in clause (ii) of the definition of Collateral. "Secured Obligations" means all obligations of Debtor, whether for fees, expenses or otherwise, now existing or hereafter arising under this Agreement and the Notes, including, without limitation, full and prompt payment and performance of (i) all principal and interest on 6 the Notes when and as due, whether at maturity, by acceleration, or otherwise and (ii) all obligations of Debtor at any time and from time to time under this Agreement. "Senior Indebtedness" means, collectively, (a) all Indebtedness for Borrowed Money (and all renewals, deferrals, extensions, refundings, amendments, modifications and replacements of any such Indebtedness for Borrowed Money) and (b) all payment obligations of Debtor pursuant to any capitalized lease with an entity that is not an affiliate of Debtor, unless by the terms of the instrument creating or evidencing any such indebtedness it is expressly provided that such indebtedness is not superior in right of payment to the Notes. "Termination Date" means the date on which all the Notes have been paid in full or converted into securities of Debtor. "Trademarks" means (i) all trademarks, trade names, trade styles, service marks, prints and labels on which said trademarks, trade names, trade styles and service marks have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all right, title and interest therein and thereto, and all applications, registrations and recordings thereof, including, without limitation, applications, registrations and recordings in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or province thereof, or any other country or any political subdivision thereof, all whether now owned or hereafter acquired by Debtor, including, but not limited to, those described in Schedule 1-D annexed hereto and made a part hereof, and (ii) all reissues, extensions or renewals thereof and all licenses thereof. Section 2. Security Interests; Subordination. (a) As security for the payment and performance of all Secured Obligations, and subject to the last sentence of this Section 2, Debtor does hereby create, grant and assign to the Secured Party, for its own benefit and for the ratable benefit of the Investors, a continuing security interest in all of the Collateral, whether now existing or hereafter arising or acquired and wherever located, subject to the priority, if any, of Permitted Liens (the "Security Interest"). Without limiting the foregoing, the Secured Party is hereby authorized to file one or more financing statements, continuation statements or such other documents, including, without limitation, the Assignment of Security (Trademarks) attached hereto as Exhibit 1, for the purpose of perfecting, confirming, continuing, enforcing or protecting the Security Interest. (b) The Secured Party hereby acknowledges and agrees that the Security Interest granted hereunder shall be subordinate and junior to any security interest granted in connection with any Indebtedness for Borrowed Money, and any refinancings or replacements thereof. Notwithstanding anything to the contrary in this Security Agreement and in the Notes, the indebtedness evidenced by the Notes, and all rights of the Secured Party hereunder, shall be subordinate to the rights of the Senior Indebtedness. In addition, the Security Interest and any payment of the principal amount of, accrued interest on, fees and expenses relating to, and any other indebtedness evidenced by the Notes shall be subordinated to the extent and in the manner provided in that certain Subordination Agreement between Investors and BOA (the "Subordination Agreement"). 7 Section 3. General Representations, Warranties and Covenants. Debtor represents, warrants and covenants, which representations, warranties and covenants shall survive execution and delivery of this Agreement, as follows: (a) This Agreement is made with full recourse to Debtor and pursuant to and upon all the warranties, representations, covenants, and agreements on the part of Debtor contained herein, in the Notes and otherwise made in writing in connection herewith or therewith. (b) Except for the Security Interest of the Secured Party therein and Permitted Liens, Debtor is, and as to Collateral acquired from time to time after the date hereof Debtor will be, the owner of all the Collateral free from any lien, security interest, encumbrance or other right, title or interest of any Person (other than Permitted Liens) and Debtor shall defend the Collateral against all claims and demands of all Persons at any time claiming the same or any interest therein adverse to the Secured Party (other than Permitted Liens). (c) To the Company's knowledge, there is no financing statement, assignment of trademark, or assignment of patent (or similar statement or instrument of registration under the law of any jurisdiction) now on file or registered in any public office covering any interest of any kind in the Collateral, or intended to cover any such interest, which has not been terminated or released by the secured party named therein and so long as the Notes remain outstanding or any of the Secured Obligations of Debtor remain unpaid, Debtor will not execute and there will not be on file in any public office any financing statement, assignment of trademark, or assignment of patent (or similar statement or instrument of registration under the law of any jurisdiction) or statements relating to the Collateral, except (i) financing statements, assignment of trademark, or assignment of patent filed or to be filed in respect of and covering the Security Interest of the Secured Party hereby granted and provided for and (ii) with respect to Permitted Liens. (d) The chief executive office and chief place of business of Debtor is located at the address of Debtor listed on the signature page hereof, and Debtor will not move its chief executive office and chief place of business except to such new location as Debtor may establish in accordance with the last sentence of this Section 3(d). The originals of all Assigned Agreements and all documents (as well as all duplicates thereof) evidencing all Receivables and all other contract rights or accounts and other property of Debtor and the only original books of account and records of Debtor relating thereto are, and will continue to be, kept at such chief executive office or at such new location as Debtor may establish in accordance with the last sentence of this Section 3(d). Debtor shall establish no such new location until (i) it shall have given to the Secured Party not less than 30 days' prior written notice of its intention to do so, clearly describing such new location and providing such other information in connection therewith as the Secured Party may reasonably request, and (ii) with respect to such new location, it shall have taken such action, satisfactory to the Secured Party (including, without limitation, all action required by Section 7 hereof), to maintain the Security Interest of the Secured Party in the Receivables intended to be granted at all times fully perfected and in full force and effect. (e) Debtor has no Collateral located outside of the states identified on Schedule 1-A or other states in which inventory may be held on consignment. 8 (f) The name of Debtor is as set forth on the signature page hereto and Debtor shall not change such name, conduct its business in any other name or take title to the Collateral in any other name while this Agreement remains in effect. Debtor has never had any name, or conducted business under any name in any jurisdiction, other than its name set forth on the signature page hereto, during the past six years other than as set forth in Schedule 3(f) annexed hereto. (g) At Debtor's own expense, Debtor will: (i) without limiting the provisions of the Notes, keep the Collateral fully insured at all times with financially sound and responsible insurance carriers against loss or damage by fire and other risks, casualties and contingencies and in such manner and to the same extent that like properties are customarily so insured by other entities engaged in the same or similar businesses similarly situated and keep adequate insurance at all times against liability on account of damage to persons and properties and under all applicable workers' compensation laws, by financially sound and reputable insurers and in amounts usually carried by similar businesses, for the benefit of Debtor and the Secured Party, (ii) upon request by the Secured Party, promptly deliver the insurance policies or certificates thereof to the Secured Party, and (iii) keep the Collateral necessary for its business in good condition at all times (normal wear and tear excepted) and maintain the same in accordance with all material manufacturer's specifications and requirements. Upon any failure of Debtor to comply with its obligations pursuant to this Section 3(g), the Secured Party may at its option and after 20 days' prior notice to Debtor, and without affecting any of its other rights or remedies provided herein or as a secured party under the NYUCC, procure the insurance protection it deems necessary and/or cause repairs or modifications to be made to the Collateral and the cost of either or both of which shall be a lien against the Collateral added to the amount of the indebtedness secured hereby and payable on demand with interest at a rate per annum equal to 7%. (h) Subject to the Senior Indebtedness, Debtor hereby assigns to the Secured Party all of Debtor's right, title and interest in and to any and all moneys which may become due and payable with respect to the Collateral under any policy insuring the Collateral (except proceeds relating to tangible personal property which are applied to restoration or replacement), including return of unearned premium, and, upon the occurrence and continuance of an Event of Default (as defined in the Notes) and subject to the terms of the Senior Indebtedness, shall cause any such insurance company to make payment directly to the Secured Party for application to amounts outstanding under the Notes in accordance with the terms of the Notes and, to the extent not provided therein, in such order as the Secured Party shall determine. (i) Debtor will not use the Collateral in material violation of any statute or ordinance of which it has knowledge or applicable insurance policy and will promptly pay all material taxes and assessments levied against the Collateral; provided that Debtor shall not be required to pay any such tax or assessment that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained. (j) Debtor will not sell, transfer, change the registration, if any, dispose of, attempt to dispose of all or substantially all of the Collateral unless the proceeds from the sale are allocated to repay the Notes. 9 (k) Debtor will not assert against the Secured Party any claim or defense which Debtor may have against any seller of the Collateral or any part thereof or against any other Person with respect to the Collateral or any part thereof. (l) Debtor will indemnify and hold the Secured Party harmless from and against any loss, liability, damage, costs and expenses whatsoever arising from Debtor's use, operation, ownership or possession of the Collateral or any part thereof. (m) Debtor will maintain the confidentiality of all customer lists and not sell or otherwise dispose of such lists except that Debtor shall deliver copies thereof to the Secured Party upon its request, which may be made at any time and from time to time after an Event of Default (as such term is defined in the Notes). (n) In addition to, and not in limitation of, the foregoing, with respect to the Intellectual Property, Debtor hereby represents and warrants: (i) Subject to Permitted Liens and except as set forth in Schedule 1-D hereto, Debtor has the sole, full and clear title to the Trademarks shown on Schedule 1-D hereto for the goods and services covered by the registrations thereof and, to Debtor's knowledge, such registrations are valid and subsisting. (ii) Debtor will perform all acts and execute all documents, to the extent reasonable, including, without limitation, assignments for security in form suitable for filing with the United States Patent and Trademark Office, substantially in the form of Exhibit 1 hereof, requested by the Secured Party at any time to evidence, perfect, maintain, record and enforce the Secured Party's interest in the Patents and Trademarks or otherwise in furtherance of the provisions of this Agreement, and Debtor hereby authorizes the Secured Party to execute and file one or more financing statements (and similar documents) or copies thereof or of this Agreement with respect to the Intellectual Property signed only by the Secured Party. (iii) Except as set forth on Schedule 1-D, to Debtor's knowledge, none of the Trademarks used in the business of Debtor have been abandoned or invalidated, and, except to the extent that the Secured Party, upon 10 days' prior written notice by Debtors, shall consent, and except to the extent such Debtor has a valid business purpose for doing otherwise (so long as any action on the part of any such Debtor would not have a Material Adverse Effect on Debtor's business), Debtor (either itself or through licensees) will continue to use the Trademarks on each and every trademark class of goods in order to maintain the Trademarks in full force free from any claim of abandonment for nonuse and Debtor will not (nor will it permit any licensee thereof to) do any act or knowingly omit to do any act whereby any Trademark may become abandoned or invalidated, and Debtor shall notify the Secured Party immediately if it knows of any reason or has reason to know that any pending application or issued Trademark may become abandoned or invalidated. 10 (iv) Subject to Permitted Liens and except as set forth on Schedule 1-D, Debtor has the sole, full and clear title to each of the Patents shown on Schedule 1-D hereto and the issued Patents are subsisting. Except as set forth in Schedule 1-D, to Debtor's knowledge, none of the Patents used in the business of Debtor has been abandoned or dedicated, and, except to the extent that the Secured Party, upon 10 days' prior written notice by Debtor, shall consent, and except to the extent Debtor has a valid business purpose for doing otherwise (so long as any action on the part of Debtor would not have a Material Adverse Effect on Debtor's business), Debtor will not do any act, or omit to do any act, whereby the Patents may become abandoned or dedicated and shall notify the Secured Party immediately if it knows of any reason or has reason to know that any pending application or issued Patent may become abandoned or dedicated. (v) Subject to Permitted Liens and except as set forth on Schedule 1-D, Debtor has the sole, full and clear title to each of the Copyrights shown on Schedule 1-D hereto and the issued Copyrights are subsisting. Except as set forth in Schedule 1-D, to Debtor's knowledge, none of the Copyrights used in the business of Debtor has been abandoned or dedicated, and, except to the extent that the Secured Party, upon 10 days' prior written notice by Debtor, shall consent, and except to the extent Debtor has a valid business purpose for doing otherwise (so long as any action on the part of Debtor would not have a Material Adverse Effect on Debtor's business), Debtor will not do any act, or omit to do any act, whereby the Copyrights may become abandoned or dedicated and shall notify the Secured Party immediately if it knows of any reason or has reason to know that any pending application or issued Copyright may become abandoned or dedicated. (vi) In no event shall Debtor, either itself or through any agent, employee, licensee or designee, (A) file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office, and/or an application for the registration of any Copyright with the United States Copyright Office, or any similar office or agency of the United States, any state or province thereof, any other country or any political subdivision thereof, (B) file any assignment of any patent, trademark, or copyright which Debtor may acquire from a third party, with the United States Patent and Trademark Office and/or the United States Copyright Office, any similar office or agency of the United States, any state or province thereof, any other country or any political subdivision thereof, unless Debtor shall promptly notify the Secured Party thereof, and, upon request of the Secured Party, execute and deliver any and all assignments, agreements, instruments, documents and papers as the Secured Party may reasonably request to evidence the Secured Party's interest in such Patent, Trademark and/or Copyright and the goodwill and general intangibles of Debtor relating thereto or represented thereby, and Debtor hereby constitutes the Secured Party its attorney-in-fact to execute and file all such writings for the foregoing purposes, all acts of such attorney being hereby ratified and confirmed, such power being coupled with an interest is irrevocable until the Secured Obligations are paid in full. 11 (vii) Except to the extent that the Secured Party, upon prior written notice from Debtor, shall consent (which consent shall not be unreasonably withheld), Debtor will not assign, sell, mortgage, lease, transfer, pledge, hypothecate, grant a security interest in or lien upon, encumber, grant an exclusive or non-exclusive license (except in the ordinary course of business), or otherwise dispose of any of the Intellectual Property, and nothing in this Agreement shall be deemed a consent by the Secured Party to any such action except as expressly permitted herein. (viii) As of the date hereof neither Debtor nor any affiliate or subsidiary thereof owns any Patents, Trademarks or Copyrights registered in, or the subject of pending applications in, the United States Patent and Trademark Office and/or the United States Copyright Office or any similar office or agency of the United States, any state or province thereof, any other country or any political subdivision thereof, other than those described in Schedule 1-D hereto. (ix) Except to the extent Debtor has a valid business purpose for doing otherwise (so long as any action on the part of Debtor would not have a Material Adverse Effect on Debtor's business), Debtor will take all reasonable and necessary steps in any proceeding before the United States Patent and Trademark Office and/or the United States Copyright Office, or any similar office or agency of the United States, any state or province thereof, any other country or any political subdivision thereof, to maintain each application and registration of the Trademarks, Patents and Copyrights, including, without limitation, filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings (except to the extent that dedication, abandonment or invalidation is permitted under paragraphs (ii) and (iii) hereof); provided, however, that Debtor shall not be required to take any such actions with respect to the Patents, Trademarks or Copyrights identified on Schedule 3(n)(ix). (x) Debtor agrees that the Secured Party does not assume, and shall have no responsibility for, the payment of any sums due or to become due under any agreement or contract included in the Intellectual Property or the performance of any obligations to be performed under or with respect to any such agreement or contract by Debtor, and Debtor hereby agrees to indemnify and hold the Secured Party harmless with respect to any and all claims by any person relating thereto other than such that are caused by Secured Party's gross negligence or willful misconduct. (xi) Debtor agrees that if it, or any affiliate or subsidiary thereof, learns of any use by any person of any term or design likely to cause confusion with any material Trademark, it shall promptly notify the Secured Party of such use and, if requested by the Secured Party, shall join with the Secured Party, at its expense, in such action as the Secured Party, in its reasonable discretion may deem advisable for the protection of the Secured Party's interest in and to such Trademarks. 12 (xii) All licenses of Trademarks and Patents which Debtor has granted to third parties are set forth in Schedule 3(n)(xii) hereto. (xiii) Subject to Permitted Liens, if Debtor shall acquire title to any new registered Trademarks, Patents and/or Copyrights, the provisions of this Agreement shall automatically apply thereto. Debtor shall promptly notify the Secured Party in writing of any rights to any new registered Trademarks, Patents and/or Copyrights acquired by Debtor after the date hereof and of any registrations issued or applications for registration made after the date hereof. Concurrently with the filing of an application for registration for any Trademarks, Patents and/or Copyrights, Debtor shall execute, deliver and record in all places where this Agreement is recorded an appropriate agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance reasonably satisfactory to the Secured Party, pursuant to which Debtor shall grant a security interest to the extent of its interest in such registration as provided herein to the Secured Party. Section 4. Special Provisions Concerning Assigned Agreements. Debtor represents, warrants and agrees as follows: (a) The Assigned Agreements constitute the legal, valid and binding obligations of Debtor and, to the best of its knowledge, the other parties thereto, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer, fraudulent conveyance and other similar laws affecting the enforcement of creditors' rights and remedies generally. (b) Debtor will perform and discharge each and every material obligation, covenant and agreement to be performed or discharged by Debtor under the Assigned Agreements, except for any such nonperformance resulting from a default by any other party thereto. (c) At the request of the Secured Party, and at the sole cost and expense of Debtor, Debtor will use its reasonable best efforts to enforce or secure the performance of each and every material obligation, covenant, condition and agreement contained in the material Assigned Agreements to be performed by the other parties thereto. (d) Debtor will not modify, amend or agree to vary any of the material Assigned Agreements in any respect likely to have a Material Adverse Effect other than in the ordinary course of business, or otherwise act or fail to act in a manner likely (directly or indirectly) to entitle any party thereto to claim that Debtor is in default under the terms thereof, except for any such action or failure to act resulting from a default by any other party thereto. (e) Debtor will not terminate or permit the termination of any material Assigned Agreement, except in accordance with its terms, other than in the ordinary course of business. (f) Without the prior written consent of the Secured Party, Debtor will not, other than in the ordinary course of business, waive or in any manner release or discharge any party to any material Assigned Agreement from any of the material obligations, covenants, conditions and 13 agreements to be performed by it under such Assigned Agreement including, without limitation, the obligation to make all payments in the manner and at the time and places specified. (g) After the occurrence and during the continuance of an Event of Default prior to the Maturity Date (as such term is defined in the Notes) and acceleration of the Notes pursuant to the terms of the Notes ("Acceleration"), subject to the terms of the Senior Indebtedness, Debtor will hold any payments received by it which are assigned and set over to the Secured Party by this Agreement for and on behalf of the Secured Party and turn them promptly over to the Secured Party forthwith in the same form in which they are received (together with any necessary endorsement) for application to amounts outstanding under the Notes in accordance with the terms of the Notes and, to the extent not provided therein, in such order as the Secured Party shall determine. (h) Debtor will appear in and defend every action or proceeding arising under, growing out of or in any manner connected with the Assigned Agreements or the obligations, duties or liabilities of Debtor and any assignee thereunder. (i) Should Debtor fail to make any payment or to do any act as herein provided after 30 days' notice by the Secured Party, the Secured Party may (but without obligation on the Secured Party's part to do so and without notice to or demand on Debtor and without releasing Debtor from any obligation hereunder) make or do the same in such manner and to such extent as the Secured Party may deem necessary to protect the Security Interests provided hereby, including specifically, without limiting the general powers, the right to appear in and defend any action or proceeding purporting to affect the Security Interests provided hereby and Debtor, and the Secured Party may also perform and discharge each and every obligation, covenant and agreement of Debtor contained in any Assigned Agreement and, in exercising any such powers, pay necessary costs and expenses, employ counsel and incur and pay reasonable attorneys' fees. (j) Upon the request of the Secured Party, Debtor will send to the Secured Party copies of all material notices, documents and other papers furnished or received by it with respect to any of the material Assigned Agreements. Section 5. Special Provisions Concerning Receivables. (a) As of the time when each Receivable arises, Debtor shall be deemed to have warranted as to each such Receivable that such Receivable and all papers and documents relating thereto are genuine and in all respects what they purport to be, and that all papers and documents relating thereto: (ii) will be signed by the account debtor named therein (or such account debtor's duly authorized agent) or otherwise be binding on the account debtor; (iii) will represent the genuine, legal, valid and binding obligation of the account debtor evidencing indebtedness unpaid and owed by such account debtor arising out of the performance of labor or services or the sale and delivery of merchandise or both; 14 (iv) to the extent evidenced by writings, will be the only original writings evidencing and embodying such obligation of the account debtor named therein; and (b) Debtor will keep and maintain at Debtor's own cost and expense satisfactory and complete records of the Receivables, including, but not limited to, records of all payments received, all credits granted thereon, all merchandise returned and all other dealings therewith, and Debtor will make the same available to the Secured Party, at Debtor's own cost and expense, at any and all reasonable times during the existence of an Event of Default upon demand of the Secured Party. Subject to the terms of the Senior Indebtedness, Debtor shall, at Debtor's own cost and expense, deliver the Receivables (including, without limitation, all documents evidencing the Receivables) and such books and records to the Secured Party or to its representatives upon its demand at any time during the existence of an Event of Default and, if prior to the Maturity Date, Acceleration. If the Secured Party shall so request during the existence of an Event of Default, Debtor shall legend, in form and manner satisfactory to the Secured Party, the Receivables and other books, records and documents of Debtor evidencing or pertaining to the Receivables with an appropriate reference to the fact that the Receivables have been assigned to the Secured Party and that the Secured Party has a security interest therein, subject to the Senior Indebtedness. (c) Except in the ordinary course of business prior to an Event of Default and, if prior to the Maturity Date, Acceleration, Debtor will not rescind or cancel any indebtedness evidenced by any Receivable or modify any term thereof or make any adjustment with respect thereto, or extend or renew the same, or compromise or settle any dispute, claim, suit or legal proceeding relating thereto, or sell any Receivable or interest therein, without the prior written consent of the Secured Party, except that, subject to the prior approval of a majority of the independent directors of Debtor's Board of Directors, Debtor may grant discounts in connection with the prepayment of any Receivable in an amount which is customary in the line of business in which Debtor is engaged and consistent with Debtor's past practices. (d) Debtor will duly fulfill all material obligations on its part to be fulfilled under or in connection with the Receivables and, subject to the terms of the Senior Indebtedness, will do nothing to impair the rights of the Secured Party in the Receivables. (e) Debtor shall endeavor to collect or cause to be collected from the account debtor named in each Receivable, as and when due (including, without limitation, Receivables which are delinquent, such Receivables to be collected in accordance with generally accepted lawful collection procedures) any and all amounts owing under or on account of such Receivable, and credit forthwith upon receipt thereof all such amounts as are so collected to the outstanding balance of such Receivable. The costs and expenses (including attorney's fees) of such collection shall be borne by Debtor. (f) If any of the Receivables becomes evidenced by an Instrument (other than a check received in payment of a Receivable and deposited in the ordinary course of business), Debtor will notify the Secured Party thereof, and, upon request by the Secured Party, promptly deliver such Instrument to the Secured Party appropriately endorsed to the order of the Secured Party as further security for the satisfaction in full of the Secured Obligations. 15 (g) Subject to the terms of the Senior Indebtedness, upon request of the Secured Party, at any time when an Event of Default and, if prior to the Maturity Date, Acceleration shall exist, Debtor shall promptly notify (in manner, form and substance reasonably satisfactory to the Secured Party) all Persons who are at any time obligated under any Receivable that the Secured Party possesses a Security Interest in such Receivable and that all payments in respect thereof are to be made to such account as the Secured Party directs. Section 6. Special Provisions Concerning Equipment. Subject to the terms of the Senior Indebtedness, Debtor will do nothing to impair the rights of the Secured Party in the Equipment. Debtor shall cause the Equipment to at all times constitute and remain personal property. Debtor retains all liability and responsibility in connection with the Equipment and the liability of Debtor to pay the Secured Obligations shall in no way be affected or diminished by reason of the fact that such Equipment may be lost, destroyed, stolen, damaged or for any reason whatsoever unavailable to Debtor. Section 7. Financing Statements; Documentary Stamp Taxes. (a) Debtor will, at its own expense, make, execute, endorse, acknowledge, file and/or deliver to the Secured Party from time to time such lists, descriptions and designations of Inventory, warehouse receipts, bills of lading, documents of title, vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Collateral and other property or rights covered by the Security Interest hereby granted, which the Secured Party reasonably deems appropriate or advisable to perfect, preserve or protect its Security Interest in the Collateral. Debtor hereby constitutes the Secured Party its attorney-in-fact to execute and file in the name and on behalf of Debtor such additional financing statements as the Secured Party may reasonably request, such acts of such attorney being hereby ratified and confirmed; such power, being coupled with an interest, is irrevocable until the Secured Obligations are paid in full. Further, to the extent permitted by applicable law, Debtor authorizes the Secured Party to file any such financing statements without the signature of Debtor. Debtor will pay all applicable filing fees and related expenses in connection with any such financing statements. (b) Debtor agrees to procure, pay for, affix to any and all documents and cancel any documentary tax stamps required by and in accordance with, applicable law and Debtor will indemnify and hold the Secured Party harmless against any liability (including interest and penalties) in respect of such documentary stamp taxes. Section 8. Termination of this Agreement. This Agreement shall terminate upon the Termination Date and the Agent, at the request and expense of Debtor, will promptly execute and deliver to Debtor a proper instrument or instruments (including Uniform Commercial Code termination statements on Form UCC-3) acknowledging the satisfaction and termination of this Agreement, and will duly assign, transfer and deliver to Debtor (without recourse and without representation and warranty) such of the collateral as may be in the possession of the Agent and as has not thereto been sold or otherwise applied or released pursuant to this Agreement. 16 Section 9. Special Provisions Concerning Remedies and Sale. Subject to the terms of the Senior Indebtedness, in addition to any rights and remedies now or hereafter granted under applicable law and not by way of limitation of any such rights and remedies, during the existence of an Event of Default and, if prior to the Maturity Date, Acceleration, the Secured Party shall have all of the rights and remedies of a secured party under the NYUCC as enacted in any applicable jurisdiction in addition to the rights and remedies provided herein, in the Notes and in any other agreement executed in connection with the Notes whereby Debtor has granted any Lien to the Secured Party. Subject to the terms of the Senior Indebtedness, without in any way limiting the foregoing, during the existence of an Event of Default and, if prior to the Maturity Date, Acceleration, upon the giving of notice to Debtor of Secured Party's intent to pursue any one or all of the following or any other remedies the Secured Party shall have the right, in the name of Debtor or in the name of the Secured Party or otherwise: (i) to ask for, demand, collect, receive, compound and give acquittance for the Receivables or any part thereof; (ii) to extend the time of payment of, compromise or settle for cash, credit or otherwise, and upon any terms and conditions, any of the Receivables; (iii) to endorse the name of Debtor on any checks, drafts or other orders or instruments for the payment of moneys payable to Debtor which shall be issued in respect of any Receivable; (iv) to file any claims, commence, maintain or discontinue any actions, suits or other proceedings deemed by the Secured Party necessary or advisable for the purpose of collecting or enforcing payment of any Receivable; (v) to make test verifications of the Receivables or any portion thereof; (vi) to notify any or all account debtors under any or all of the Receivables to make payment thereof directly to the Secured Party for the account of the Secured Party and to require Debtor to forthwith give similar notice to the account debtors; (vii) to require Debtor forthwith to account for and transmit to the Secured Party in the same form as received all proceeds (other than physical property) of collection of Receivables received by Debtor and, until so transmitted, to hold the same in trust for the Secured Party and not commingle such proceeds with any other funds of Debtor; (viii) to take possession of any or all of the Collateral and, for that purpose, to enter, with the aid and assistance of any Person or Persons and with or without legal process, any premises where the Collateral, or any part thereof, are, or may be, placed or assembled, and to remove any of such Collateral; (ix) to execute any instrument and do all other things necessary and proper to protect and preserve and realize upon the Collateral and the other rights contemplated hereby; 17 (x) upon notice to such effect, to require Debtor to deliver, at Debtor's expense, any or all Collateral to the Secured Party at a place designated by the Secured Party; (xi) without obligation to resort to other security, at any time and from time to time, to sell, re-sell, assign and deliver all or any of the Collateral, in one or more parcels at the same or different times, and all right, title and interest, claim and demand therein and right of redemption thereof, at public or private sale, for cash, upon credit or for future delivery, and at such price or prices and on such terms as the Secured Party may determine, with the amounts realized from any such sale to be applied to the Secured Obligations in the manner determined by the Secured Party; (xii) to cause Debtor not to make any further use of the Trademarks or Patents or any mark similar thereto and/or Copyrights for any purpose; (xiii) upon 10 days' prior notice to Debtor, to license, whether general, special or otherwise, and whether on an exclusive or nonexclusive basis, any of the Patents or Trademarks, throughout the world for such term or terms, on such conditions, and in such manner, as the Secured Party shall in its sole discretion determine; (xiv) to enforce, at any time (without assuming any liability or obligation thereunder), against any licensee or sublicensee, all rights and remedies of Debtor in, to and under any one or more license agreements with respect to the Intellectual Property, and take or refrain from taking any action under any thereof, and Debtor hereby releases the Secured Party from, and agrees to hold the Secured Party free and harmless from and against any claims arising out of, any action taken or omitted to be taken with respect to any such license agreement; (xv) upon 10 days' prior notice to Debtor, to assign, sell, or otherwise dispose of, the Intellectual Property or any part thereof, either with or without special or other conditions or stipulations, with power to buy the Intellectual Property or any part of it, and with power also to execute assurances, and do all other acts and things for completing the assignment, sale or disposition which the Secured party shall, in its sole discretion, deem appropriate or proper; and (xvi) in addition to the foregoing, in order to implement the assignment, sale or other disposal of any of the Intellectual Property pursuant to this Agreement, the Secured Party may, at any time, pursuant to the authority granted in the Power of Attorney described herein (such authority becoming effective on the occurrence or continuation as hereinabove provided of an Event of Default), execute and deliver on behalf of the applicable Debtor, one or more instruments of assignment of the Patents or Trademarks (or any application or registration thereof), in form suitable for filing, recording or registration in any country. Debtor agrees to pay when due all reasonable costs incurred in any such transfer of the Patents or 18 Trademarks, including any taxes, fees and reasonable attorneys' fees, and all such costs shall be added to the Secured Obligations. In the event of any license, assignment, sale or other disposition of the Intellectual Property, or any of it, after the occurrence or continuation as hereinabove provided of an Event of Default, Debtor shall supply its know-how and expertise relating to the manufacture and sale of the products bearing or in connection with the Trademarks or Patents, and its customer lists and other records relating to the Trademarks or Patents and to the distribution of said products, to the Secured Party or its designee. The Secured Party shall not be obligated to do any of the acts hereinabove authorized, but in the event that the Secured Party elects to do any such act, the Secured Party shall not be responsible to Debtor except for its gross negligence or willful misconduct. (a) The Secured Party may take legal proceedings for the appointment of a receiver or receivers (to which the Secured Party shall be entitled as a matter of right) to take possession of the Collateral pending the sale thereof pursuant either to the powers of sale granted by this Agreement or to a judgment, order or decree made in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement. If, after the exercise of any or all of such rights and remedies, any of the Secured Obligations shall remain unpaid, Debtor shall remain liable for any deficiency. After the indefeasible payment in full of the Secured Obligations, any proceeds of the Collateral received or held by the Secured Party shall be turned over to Debtor and the Collateral shall be reassigned to Debtor by the Secured Party without recourse to the Secured Party and without any representations, warranties or agreements of any kind. (b) Upon any sale of any of the Collateral, whether made under the power of sale hereby given or under judgment, order or decree in any judicial proceeding for the foreclosure or involving the enforcement of this Agreement: (i) the Secured Party may, to the extent permitted by law, bid for and purchase the property being sold, and upon compliance with the terms of sale may hold, retain and possess and dispose of such property in its own absolute right without further accountability, and may, in paying the purchase money therefor, deliver any Notes or claims for interest thereon and any other instruments evidencing the Secured Obligations or agree to the satisfaction of all or a portion of the Secured Obligations in lieu of cash in payment of the amount which shall be payable thereon, and the Notes and such instruments, in case the amounts so payable thereon shall be less than the amount due thereon, shall be returned to the Secured Party after being appropriately stamped to show partial payment; (ii) the Secured Party may make and deliver to the purchaser or purchasers a good and sufficient deed, bill of sale and instrument of assignment and transfer of the property sold; (iii) the Secured Party is hereby irrevocably appointed the true and lawful attorney-in-fact of Debtor in its name and stead, to make all necessary deeds, bills of sale and instruments of assignment and transfer of the property thus sold and 19 for such other purposes as are necessary or desirable to effectuate the provisions (including, without limitation, this Section 9) of this Agreement, and for that purpose it may execute and deliver all necessary deeds, bills of sale and instruments of assignment and transfer, and may substitute one or more Persons with like power, Debtor hereby ratifying and confirming all that its said attorney, or such substitute or substitutes, shall lawfully do by virtue hereof; but if so requested by the Secured Party or by any purchaser, Debtor shall ratify and confirm any such sale or transfer by executing and delivering to the Secured Party or to such purchaser all property, deeds, bills of sale, instruments or assignment and transfer and releases as may be designated in any such request; (iv) all right, title, interest, claim and demand whatsoever, either at law or in equity or otherwise, of Debtor of, in and to the property so sold shall be divested; such sale shall be a perpetual bar both at law and in equity against Debtor, its successors and assigns, and against any and all Persons claiming or who may claim the property sold or any part thereof from, through or under Debtor, its successors or assigns; (v) the receipt of the Secured Party or of the officer thereof making such sale shall be a sufficient discharge to the purchaser or purchasers at such sale for his or their purchase money, and such purchaser or purchasers, and his or their assigns or personal representatives, shall not, after paying such purchase money and receiving such receipt of the Secured Party or of such officer therefor, be obliged to see to the application of such purchase money or be in any way answerable for any loss, misapplication or non-application thereof; and (vi) to the extent that it may lawfully do so, and subject to any legal requirement that the Secured Party act in a commercially reasonable manner, Debtor agrees that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any appraisement, valuation, stay, extension or redemption laws, or any law permitting it to direct the order in which the Collateral or any part thereof shall be sold, now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance or enforcement of this Agreement, the Notes or any other agreement executed in connection with the Notes whereby Debtor has granted any Lien to the Secured Party, and Debtor hereby expressly waives all benefit or advantage of any such laws and covenants that it will not hinder, delay or impede the execution of any power granted or delegated to the Secured Party in this Agreement, but will suffer and permit the execution of every such power as though no such laws were in force. In the event of any sale of Collateral pursuant to this Section, the Secured Party shall, at least 10 days before such sale, give Debtor written, telecopied or telex notice of its intention to sell. Section 10. Application of Moneys. (a) Except as otherwise provided herein or in the Notes, all moneys which the Secured Party shall receive, in accordance with the provisions hereof, shall be applied (to the extent 20 thereof) in the following manner: First, to the payment of all costs and expenses reasonably incurred in connection with the administration and enforcement of, or the preservation of any rights under, this Agreement or any of the reasonable expenses and disbursements of the Secured Party (including, without limitation, the reasonable fees and disbursements of its counsel and agents); Second, to the payment of all Secured Obligations arising out of the Notes in accordance with the terms of the Notes and, if not therein provided, in such order as the Secured Party may determine; and Third, to the payment of all other Secured Obligations in such order as the Secured Party may determine. (b) If after applying any amounts which the Secured Party has received in respect of the Collateral any of the Secured Obligations remain unpaid, Debtor shall continue to be liable for any deficiency, together with interest. (c) If after applying any amounts which the Secured Party has received in respect of the Collateral, there is a surplus, any such surplus shall be paid to Debtor, its successors or assigns. Section 11. Fees and Expenses, etc. Any and all fees, costs and expenses of whatever kind or nature, including but not limited to the reasonable attorneys' fees and legal expenses incurred by the Secured Party in connection with enforcement of its rights under this Agreement, the filing or recording of any documents (including all taxes in connection therewith) in public offices, the payment or discharge of any taxes, counsel fees, maintenance fees, fees and other costs relating to the encumbrances or otherwise protecting, maintaining, preserving the Collateral, or in defending or prosecuting any actions or proceedings arising out of or related to the Collateral, shall be borne and paid by Debtor on written demand by the Secured Party setting forth in reasonable detail the nature of such expenses and until so paid shall be added to the principal amount of the Secured Obligations and shall bear interest at the rate accruing thereon. In addition, Debtor will pay, and indemnify and hold the Secured Party harmless from and against, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the Collateral, including (without limitation) claims of patent or trademark infringement and any claim of unfair competition or anti-trust violation, other than liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements arising as a result of Secured Party's gross negligence or willful misconduct. Section 12. Power of Attorney. Concurrently with the execution and delivery hereof, Debtor is executing and delivering to the Secured Party, in the form of Exhibit 2 hereto, three originals of a Power of Attorney for the implementation of the assignment, sale or other disposal of the Collateral, including the Trademarks and Patents pursuant to this Agreement and Debtor hereby releases the Secured Party from any claims, causes of action and demands at any time arising out of or with respect to any actions taken or omitted to be taken by the Secured Party under the powers of attorney granted herein, other than actions taken or omitted to be taken through the gross negligence or willful misconduct of the Secured Party. 21 Section 13. Miscellaneous. (a) All notices, communications and distributions hereunder shall be in writing (including telecopied communication) and mailed by certified mail, telecopied, personally delivered or delivered by Federal Express or other reputable overnight courier service, if to Debtor addressed to it at its address set forth opposite its signature below, if to the Secured Party, addressed to it at its address set forth opposite its signature below, or as to either party at such other address as shall be designated by such party in a written notice to such other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective (i) if mailed by certified mail, three days after the date of deposit thereof with the U.S. Postal Service, properly addressed with postage prepaid, (ii) if telecopied, upon receipt by the addressee, (iii) if personally delivered, upon such delivery and (iv) if delivered by overnight courier service, on the business day following delivery thereof to such courier service in time for next-business-day delivery. (b) No delay on the part of the Secured Party in exercising any of its rights, remedies, powers and privileges hereunder or partial or single exercise thereof, shall constitute a waiver thereof. None of the terms and conditions of this Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by Debtor and the Secured Party. No notice to or demand on Debtor in any case shall entitle Debtor to any other or further notice or demand in similar or other circumstances or constitute a waiver of any of the rights of the Secured Party to any other or further action in any circumstances without notice or demand. (c) The obligations of Debtor hereunder shall remain in full force and effect without regard to, and shall not be impaired by, (i) any exercise or non-exercise, or any waiver of, any right, remedy, power or privilege under or in respect of the Notes, this Agreement or any other agreement executed in connection with the Notes whereby Debtor has granted any Lien to the Secured Party or any other agreement executed in connection with any of the foregoing, the Secured Obligations or any security for any of the Secured Obligations; or (ii) any amendment to or modification of any of the foregoing; whether or not Debtor shall have notice or knowledge of any of the foregoing. The rights and remedies of the Secured Party herein provided are cumulative and not exclusive of any rights or remedies which the Secured Party would otherwise have under all applicable law. (d) This Agreement shall be binding upon Debtor and its successors and assigns and shall inure to the benefit of the Secured Party and its successors and assigns, except that Debtor may not transfer or assign any of its obligations, rights or interest hereunder without the prior written consent of the Secured Party and any such purported assignment by Debtor shall be void. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement. (e) The descriptive headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. (f) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or non- 22 enforceability without invalidating the remaining provisions hereof, and any such prohibition or non-enforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (g) All rights, remedies and powers provided by this Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and the provisions hereof are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they will not render this Agreement invalid, unenforceable in whole or in part or not entitled to be recorded, registered or filed under the provisions of any applicable law. (h) This Agreement and the rights and obligations of the parties hereunder shall be construed in accordance with and be governed by the laws of the State of New York except to the extent that matters of title, or creation, perfection and priority of the Security Interests created hereby, or procedural issues of foreclosure are required to be governed by the laws of the state in which the Collateral, or part thereof, is located. (i) It is expressly agreed, anything herein, in the Notes or in any other agreement or instrument executed in connection with the Notes to the contrary notwithstanding, that Debtor shall remain liable to perform all of the obligations, if any, assumed by it with respect to the Collateral and the Secured Party shall not have any obligations or liabilities with respect to any Collateral by reason of or arising out of this Agreement, nor shall the Secured Party be required or obligated in any manner to perform or fulfill any of the obligations of Debtor under or pursuant to any or in respect of any Collateral. (j) This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. COMDIAL COPORATION, as Debtor By: /s/ Paul K. Suijk ------------------------------------------- Name: Paul K. Suijk Title: Chief Financial Officer COMVEST VENTURE PARTNERS, L. P., as Agent, as Secured Party By: ComVest Management LLC, its general partner 23 By: /s/ Travis Lee Provow --------------------------------------------- Name: Travis Lee Provow Title: Manager President / Managing Director 24 EX-4.4 6 dex44.txt ADVISORY WARRANT TO PURCHASE COMMON STOCK EXHIBTI 4.4 Advisory Warrant to purchase Common Stock issued by Comdial Corporation to Commonwealth Associates, L.P. THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE TRANSFERRED UNTIL (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") SHALL HAVE BECOME EFFECTIVE WITH RESPECT THERETO OR (ii) RECEIPT BY THE COMPANY OF AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION UNDER THE SECURITIES ACT IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED TRANSFER NOR IS SUCH TRANSFER IN VIOLATION OF ANY APPLICABLE STATE SECURITIES LAWS. THIS LEGEND SHALL BE ENDORSED UPON ANY WARRANT ISSUED IN EXCHANGE FOR THIS WARRANT OR ANY SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT. WARRANT TO PURCHASE COMMON STOCK OF COMDIAL CORPORATION AW-1 This is to Certify That, FOR VALUE RECEIVED, Commonwealth Associates, L.P. or assigns ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Comdial Corporation, a Delaware corporation (the "Company"), Two Million Two Hundred Fifty-Seven Thousand Two Hundred Sixty-Eight (2,257,268) fully paid, validly issued and nonassessable shares of the common stock of the Company ("Common Stock") at a price of $.01 per share at any time or from time to time during the period commencing on the date the Company obtains shareholder approval of an amendment to its certificate of incorporation to increase the number of authorized shares of Common Stock to not less than 100,000,000 (the "Approval") through June 21, 2007 (the "Exercise Period"). The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a share Common Stock in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price". This Warrant is being issued pursuant to a financial advisory services agreement dated June 7, 2002 between the Company and Commonwealth Associates, L.P. ("Commonwealth") relating to a bridge financing (the "Bridge Financing") and debt restructuring on behalf of the Company. Upon the final closing of the Bridge Financing, this Warrant, together with warrants of like tenor to be issued to Commonwealth and/ or its designees (collectively, the "Warrants"), shall constitute, in the aggregate, warrants to purchase five percent (5%) of the Company's outstanding Common Stock on a fully-diluted basis immediately following the final closing or termination of the Bridge Financing. (a) EXERCISE OF WARRANT. (1) This Warrant may be exercised in whole or in part at any time or from time to time during the Exercise Period; provided, however, that (i) if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, prior to termination of the Exercise Period, the Holder shall have the right to exercise this Warrant commencing at such time through the termination of the Exercise Period into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant might have been exercisable immediately prior thereto. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of this Warrant following the receipt of good and available funds, the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee and bearing a restrictive legend substantially similar to the one set forth on the front page of this Warrant. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. As of the end of business on the date of receipt by the Company of this Warrant at its office in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares shall not then be physically delivered to the Holder. (2) At any time during the Exercise Period, the Holder may, at its option, exercise this Warrant on a cashless basis by exchanging this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section (a)(2), by surrendering this Warrant at the principal office of the Company or at the office of its stock transfer agent, accompanied by a properly prepared notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder as soon as practicable following the Exchange Date and, if deemed appropriate by the Company, bearing a restrictive legend substantially similar to the one set forth on the front page of this Warrant. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a share of Common Stock. Current market value shall have the meaning set forth Section (c) below, except that for purposes hereof, it shall mean the highest price for the five days immediately preceding the date of the Notice of Exchange. (b) RESERVATION OF SHARES. The Company shall at all times after receipt of the Approval reserve for issuance and/or delivery upon exercise of the Warrants such number of 2 shares of Common Stock as shall be required for issuance and delivery upon exercise of the Warrants. Prior to receipt of the Approval, the Company shall reserve the maximum number of shares available for issuance and/or delivery upon exercise of the Warrants. (c) FRACTIONAL SHARES. No fractional shares or scrips representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (1) If the Common Stock is listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the Nasdaq Stock Market, the current market value shall be the last reported sale price of the Common Stock on such exchange or market on such trading day or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or market; or (2) If the Common Stock is not so listed or admitted to unlisted trading privileges, but are traded in the over-the-counter market, the current market value shall be the mean of the average of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. for such trading day; or (3) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to such business day, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of shares of Common Stock purchasable hereunder. Upon surrender of this Warrant to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed by the Holder and funds sufficient to pay any transfer tax delivered by the Holder, the Company shall, without charge, subject to the Holder's compliance with the restrictive legend set forth on the front page of this Warrant, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be cancelled. This Warrant may be divided or combined with other warrants that carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the denominations in which new warrants are to be issued to the Holder and signed by the Holder hereof. The term "Warrants" as used herein includes any warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. 3 (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein. (f) ADJUSTMENT PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case the Company shall hereafter (i) declare a dividend or make a distribution on its outstanding Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (2) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsection (1), the number of Warrant Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted to the number of Warrant Shares resulting from multiplying the number of Warrant Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect immediately prior to such adjustment and dividing the product so obtained by the Exercise Price, as adjusted. (3) In the event that at any time, as a result of an adjustment similar to any adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsection (1) above. (4) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant. (g) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, 4 then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (h) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction and to the extent reasonably deemed necessary, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock that might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (h) shall similarly apply to successive reclassifications, capital reorganizations and changes of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof. (i) REGISTRATION UNDER THE SECURITIES ACT OF 1933. The holders of this Warrant and the Warrant Shares or their transferees (other than a transferee who acquires shares pursuant to Rule 144 or an effective registration statement) shall be entitled to the piggy-back registration rights set forth in the Bridge Subscription Agreement (the "Subscription Agreement") dated as of June 20, 2002, between the Company and ComVest Venture Partners, L.P., an affiliate of Commonwealth. The provisions of Sections 5.2 through 5.5 of Article V of the Subscription Agreement, which is available for inspection upon request, are incorporated herein by reference as if fully set forth herein. (j) MODIFICATION OF AGREEMENT. The provisions of this Warrant may from time to time be amended, modified or waived, if such amendment, modification or waiver is applicable to all of the Warrants and is in writing and consented to by the Company and the holders of at least a majority of the outstanding Warrants and Warrant Shares and such 5 amendment, modification or waiver shall be binding upon the holder of this Warrant (and any assignee thereof) regardless of whether the holder consented to such amendment, modification or waiver; provided that nothing shall prevent the Company and a Holder from consenting to modifications to this Warrant which affect or are applicable to such Holder only. COMDIAL CORPORATION By: /s/ Paul K. Suijk ------------------------------- Paul K. Suijk, Chief Financial Officer Dated: June 21, 2002 6 PURCHASE FORM Dated _________________ (1) The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _____ shares of Common Stock of Comdial Corporation (or such number of shares of Common Stock or other securities or property to which the undersigned is entitled in lieu thereof or in addition thereto under the provisions of the Warrant). (2) The undersigned elects to exercise the within Warrant on a cashless basis pursuant to the provisions of Section (a)(2) of the Warrant by checking below: ______ check if cashless exercise; or (3) The undersigned encloses herewith a bank draft, certified check or money order payable to the Company in payment of the exercise price determined under, and on the terms specified in, the Warrant. (4) The undersigned hereby irrevocably directs that the said shares be issued and delivered as follows:
Name(s) in Full Address(es) Number of Shares S.S. or IRS # - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
_______________________________ Signature of Subscriber _______________________________ Print Name 7 ASSIGNMENT FORM FOR VALUE RECEIVED, __________________________ hereby sells, assigns and transfers unto Name __________________________________________ (Please typewrite or print in block letters) Address _______________________________________ the right to purchase Common Stock represented by this Warrant to the extent of _____ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ___________ Attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Date ____________________ Signature ______________________ 8 EX-10.1 7 dex101.txt FORM OF LOCK-UP AGREEMENT EXHIBIT 10.1 Form of Lock-Up Agreement by and between officers and directors of Comdial Corporation Officer, Director and Securityholder Lock-Up Agreement June ___, 2002 Comdial Corporation 106 Cattleman Road Sarasota, Florida 34232 Ladies and Gentlemen: The undersigned (the "Securityholder") understands that Comdial Corporation (the "Corporation") has entered into certain Bridge Subscription Agreements of even date hereof (the "Subscription Agreements") with certain investors providing for the sale (the "Bridge Offering") by the Company of units consisting of 7% senior subordinated secured convertible promissory notes (the "Notes"). 13.33% of the principal amount of the Notes are convertible into shares of the Company's common stock, par value $0.01 per share ("Common Stock"). 1. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Securityholder agrees that the Securityholder will not, without the prior written consent of the Company, directly or indirectly offer, sell, pledge, contract to sell (including any short sale), grant any option to purchase, enter into any contract to sell or otherwise dispose of or transfer any shares of Common Stock or other equity securities of the Company (including without limitation, any shares of Common Stock which may be deemed to be beneficially owned by the Securityholder in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC"), and any shares of Common Stock which may be issued upon exercise of any stock options or warrants or upon conversion or exchange of any convertible or exchangeable securities) or any rights, warrants, options or other securities that are convertible into, or exercisable or exchangeable for, Common Stock (collectively, "Rights", which term includes, without limitation, any shares of preferred stock which are convertible into Common Stock) or enter into any Hedging Transaction (as defined below) (each of the foregoing referred to as a "Disposition") for a period beginning on the date of the Initial Closing (as defined in the Subscription Agreements) and continuing through the earlier of (i) the date on which a registration statement covering the resale of the shares of Common Stock issuable upon conversion of a portion of the principal balance of the Notes (the "Note Conversion Stock"), is declared effective by the SEC, (ii) the date on which the Note Conversion Stock may be sold in the public market without an effective registration statement under the Securities Act of 1933, as amended; and (iii) the second anniversary of the Initial Closing (the "Lock-Up Period"). The foregoing restriction is expressly intended to preclude the Securityholder from engaging in any Hedging Transaction or other transaction which is designed to or is reasonably expected to lead to or result in a Disposition during the Lock-Up Period even if the securities would be disposed of by someone other than the Securityholder. "Hedging Transaction" means any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Common Stock or any Rights. The foregoing restrictions set forth in this paragraph shall apply to all shares of Common Stock and all Rights now owned or hereafter acquired by the Securityholder, except that such restrictions shall not apply to shares of Common Stock and Rights acquired in open market transactions after the completion of the Bridge Offering. 2. Notwithstanding the foregoing, the Securityholder may transfer any or all of the Securityholder's Common Stock or Rights (i) if the Securityholder is a natural person, by gift, will or intestacy so long as the transfer is not for value; (ii) if the Securityholder is a natural person, to any trust for the direct or indirect benefit of the Securityholder or the immediate family of the Securityholder so long as the transfer is not for value; (iii) if the Securityholder is a partnership, to a partner of such partnership or a retired partner of such partnership who retires after the date hereof so long as the transfer is not for value; and (iv) if the Securityholder is a corporation, limited liability company or limited partnership to any of its wholly-owned subsidiaries; provided, however, that in any such case it shall be a condition to the transfer that, prior to or concurrently with such transfer, the transferee executes and delivers to the Company an agreement, in form and substance satisfactory to the Company, stating that the transferee is receiving and agrees to hold the Common Stock or Rights, as the case may be, subject to the provisions of this letter agreement, and there shall be no further transfer of such Common Stock or Rights, as the case may be, except in accordance with this letter agreement. For purposes of this Lock-Up Agreement, "immediate family" shall mean any relationship by blood, marriage, or adoption, not more remote than first cousin. Furthermore, in the event ComVest Venture Partners, L.P. ("ComVest") privately sells or transfers any of the securities it acquires in the Bridge Offering other than to its limited partners and other affiliated persons (except that a sale or transfer by such transferee shall be treated as if by ComVest), Securityholder may privately sell or transfer an equal percentage of its Common Stock or Rights. 3. Without limiting the restrictions herein, any Disposition by the Securityholder shall remain at all times subject to applicable securities laws, including without limitation the resale restrictions imposed by Rule 144 promulgated under the Securities Act of 1933, as amended. 4. The Securityholder hereby agrees that, to the extent that the terms of this letter agreement conflict with or are in any way inconsistent with any registration rights agreement or similar agreement to which the Securityholder is a party or under which the Securityholder is entitled to any right or benefit, this letter agreement supersedes such registration rights agreement or similar agreements. 5. The Securityholder understands that the Company will proceed with the Bridge Offering in reliance on this letter agreement. 2 6. This letter agreement shall be governed by the laws of the State of New York, without regard to any applicable choice of law provisions. 7. This letter agreement shall terminate and have no force or effect if the Initial Closing (as defined in the Subscription Agreements) does not occur by 11:59 p.m. (New York time) on July 1, 2002. 8. The Securityholder hereby represents and warrants that the Securityholder has full power and authority to enter into this letter agreement and that this letter agreement has been duly authorized (if applicable), executed and delivered by the Securityholder and is a valid and binding agreement of the Securityholder. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the Securityholder and any obligations of the Securityholder shall be binding upon the heirs, personal representatives, successors and assigns of the Securityholder. Very truly yours _________________________________________ (Signature) _________________________________________ (Print Name) _________________________________________ (Print Name of Securityholder, if Securityholder is an entity) Consent of Spouse I, the spouse of the above-named Securityholder, acknowledge and agree that I am bound by the terms of this letter agreement as to any and all interests I may have in securities or options issued by the Company acquired, held or beneficially owned by my spouse. ___________________________ ___________________________ Print Name 3 EX-10.2 8 dex102.txt FORM OF IRREVOCABLE LIMITED PROXY EXHIBIT 10.2 Form of Irrevocable Limited Proxy granted by officers and directors of ComVest Venture Partners, L.P. IRREVOCABLE LIMITED PROXY For good and valuable consideration, receipt of which is hereby acknowledged, the undersigned,[ ], hereby appoints ComVest Venture Partners, L.P. ("ComVest"), the proxy of the undersigned for the period commencing on the date hereof and continuing until September 30, 2002 (the "Proxy Term") with full power to vote at any special meeting of the shareholders for a shareholder proposal to approve an amendment to Comdial Corporation's (the "Company") Certificate of Incorporation to review the authorized shares of Common Stock (the "Proposal") of the Company in such manner as it, in its sole discretion, deems proper with respect to the shares of Common Stock of the Company owned by the undersigned on any record date for such meeting (the "Proxy Shares"). Any other matters to be acted upon at such special meeting of shareholders during the Proxy Term where the Proposal is presented to the shareholders shall be voted by ComVest as directed by the undersigned. This proxy is irrevocable and coupled with an interest. At any time and from time to time during the Proxy Term, the undersigned shall execute and deliver to ComVest or its designees such additional proxies or instruments as may be deemed by ComVest necessary or desirable to effectuate the purposes of this Proxy or further to evidence the right and powers granted hereby. If the undersigned sells or otherwise transfers any of Proxy Shares during the Proxy Term, such shares will remain subject to this Proxy during the remainder of the Proxy Term. IN WITNESS WHEREOF, the undersigned has executed this irrevocable proxy as of the June 20, 2002. __________________________________ [ ] ComVest hereby in good faith affirms that it will independently vote the [ ] Shares on this Proposal without influence from the grantor of the above proxy and will vote the[ ] Shares in accordance with what it believes to be the best interests of the Company and independently of the interests of the grantor of such proxy. COMVEST VENTURE PARTNERS, L.P. By: ComVest Management LLC, its general partner By:_________________________________________ Name: Title: Manager EX-10.3 9 dex103.txt AMENDMENT TO EMPLOYMENT AGREEMENT EXHIBIT 10.3 Amendment to Employment Agreement by and between Nicholas Branica and Comdial Corporation dated June 21, 2002. AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT to the Executive Employment Agreement dated September 27, 2001 (the "Employment Agreement") is made as of June 20, 2002 by and between Nickolas A. Branica, an individual residing at 8230 Sanderling Road, Sarasota, Florida 34242 (the "Executive"), and Comdial Corporation, a Delaware corporation having offices at 106 Cattlement Road, Sarasota, Florida 34232 (the "Company"). Capitalized terms used in this Amendment shall have the same meanings set forth in the Employment Agreement. WITNESSETH: WHEREAS, the Company has entered into a term sheet dated June 10, 2002 with Comvest Venture Partners, L.P. ("Comvest") whereby Comvest has agreed to provide a secured bridge loan to the Company in the aggregate principal amount of not less than Two Million Dollars ($2,000,000.00) (the "Bridge Loan"). WHEREAS, it is a condition to the Bridge Loan that the Company and the Executive amend the Employment Agreement to incorporate modifications to certain of the terms thereof. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties hereby agree as follows: 1. Compensation. A. The first sentence of Section 4.1 of the Employment Agreement is hereby deleted in its entirety and replaced with the following: "(a) During the Term, the Company shall pay the Executive a "Base Salary" of $225,000 payable in installments in accordance with the Company's regular payroll practices and subject to all withholdings required by law." B. Section 4.2 of the Employment Agreement is hereby amended by adding the following after the last sentence thereof: "Executive shall be eligible to participate in a Performance Bonus Plan to be established by the Compensation Committee of the BOD following the initial closing of the Bridge Loan (the "Closing"). Subject to the terms of such plan, the bonus payable thereunder shall equal 100% of the Base Salary." C. The following new subsection 4.3.3 shall be added to Section 4.3 of the Employment Agreement: "4.3.3. Additional Grants. Two business days following the Closing, the Executive shall be granted (i) an option under the Plan to purchase 2% of the shares of the Company's common stock on a fully diluted basis (approximately 1,000,000 shares) at an exercise price equal to the closing price on the date of grant, which option shall vest in three equal annual installments commencing one year from the date of grant, and (ii) an option under the Plan to purchase up to 500,000 shares of the Company's stock at an exercise price equal to the closing price on the date of grant, which option shall vest in full on the date of grant." D. The following new Section 4.9 shall be added as the end of Section 4 Compensation and Benefits: "4.9 Warrants. Executive shall in lieu of a bonus previously awarded by the Compensation Committee of the BOD, receive warrants to purchase up to 825,000 shares of Common Stock of the Company at an exercise price equal to $0.01." 2. Effectiveness; Termination. This Amendment shall be deemed effective as of the date hereof, except for Section 1A, which shall be effective August 1, 2002. In the event the private placement contemplated by the term sheet dated June 10, 2002 between the Company and Commonwealth Associates, L.P. is not completed on or prior to September 27, 2002, this Amendment shall be null and void and of no further force and effect and the options granted to Executive pursuant to Section 1C hereof shall be automatically cancelled. 3. Miscellaneous. A. Agreement Amended. Subject to the provisions of this Section 3, this Amendment shall be deemed to be an amendment to the Employment Agreement. All references to the Employment Agreement in any other document, instrument agreement or writing hereafter shall be deemed to refer to the Employment Agreement as amended hereby. B. Successors and Assigns. This Amendment shall be binding upon and inure to the benefit of the Executive and the Company and their respective successors and assigns. C. Governing Law. This Amendment and the rights and obligation of the parties hereunder shall be construed in accordance with and governed by the law of the State of Florida, without regard to conflict of laws principles. IN WITNESS WHEREOF, the parties hereby have executed this Agreement by proper persons thereunto duly authorized. COMDIAL CORPORATION By: /s/ Paul K. Suijk -------------------------------------- Paul K. Suijk, Chief Financial Officer EXECUTIVE 2 By: /s/ Nickolas A. Branica -------------------------------------- Nickolas A. Branica 3 EX-99.1 10 dex991.txt PRESS RELEASE DATED JUNE 24, 2002. EXHIBIT 99.1 Press Release dated June 24, 2002, announcing the Company's Bridge Financing transaction. Comdial Secures New Financing SARASOTA, Fla., June 24 /PRNewswire-FirstCall/ -- Comdial Corporation announced it has closed on a $2.25 million bridge loan from ComVest Venture Partners LP and Nick Branica, the CEO of the Company, under an agreement which provides for up to $4 million of bridge financing. Proceeds will be used by the company for working capital and to accelerate its development and delivery of its innovative Small and Medium Business (SMB) telephony solutions. "Comdial's unique combination of product offerings, its dedicated management team and its solid distribution channels, make it a worthwhile investment. With the recent announcement of its Converged Telephony Platform and the market share gain posted by its DX-80 line, Comdial has gained significant industry momentum. As a result, ComVest Venture Partners is excited to join Comdial in its expanding effort to provide feature-rich, affordable telecommunication solutions to the SMB space," said Lee Provow of ComVest Venture Partners LP. The bridge loan is in the form of 7% subordinated secured convertible promissory notes ("Notes"). 13.33% of the principal amount of the Notes is convertible into common stock at $.01 per share or approximately 26.7 million shares (53.3 million shares if the entire $4 million bridge financing is completed). The Company currently has 9.45 million shares outstanding. The Notes mature in 120 days, but contain extension provisions. Upon receipt of shareholder approval to increase the Company's available authorized shares, the maturity date will be extended to 12 months. There is also a 90-day extension provision in the event the contemplated subsequent financing discussed below is unsuccessful. The Company's Board of Directors obtained a fairness opinion in connection with this transaction. In connection with the bridge loan, ComVest Venture Partners entered into an agreement with Bank of America to purchase the bank's approximately $14 million debt position and 1 million shares of Series B Alternate Rate Convertible Preferred Stock (having an aggregate liquidation preference of $10 million) for approximately $8 million. It is expected that the buy-out, which is subject to closing conditions, will be completed in the next 90 days. In connection with its debt restructuring, Comdial will seek additional financing which it expects will be in the form of a new senior bank loan and other debt or equity funding to be raised within the next 90 days. It is anticipated that the bridge loan will be replaced by or convert into this subsequent financing. Comdial has engaged an investment banking firm to assist it in connection with the bridge financing, the debt restructuring and the subsequent financing. There can be no assurance that the Company will be successful in obtaining additional financing or the terms on which funding will be available. The completion of such financing will be subject to a number of conditions, including the Company's ability to continue to restructure its balance sheet, including its existing accounts payable. The Company does not have sufficient authorized shares for full conversion of the Notes. The Company is therefore expected to seek shareholder approval of an amendment to its certificate of incorporation to increase the authorized to a total of at least 100 million shares. The new authorized shares will also be allocated to parts of the proposed subsequent financing and a new stock option plan. The issuance of the Notes required shareholder approval under Nasdaq's Marketplace Rules. The failure to obtain shareholder approval prior to the issuance of the Notes may result in the Company's shares being delisted. The Company expects to request a hearing on this matter. However, there can be no assurance the Company will be successful in its effort to retain its listing. Comdial also announced that in connection with and upon consummation of the initial closing of the bridge loan Mr. David P. Berg and Mr. Robert P. Collins stepped down from the Board of Directors and were replaced by the appointments of Mr. Travis Lee Provow and Mr. Joseph Wynne, designees of ComVest Venture Partners. The Company intends to add additional independent Directors to its board as the current make-up of the Audit Committee does not comply with Nasdaq rules. "This level of commitment from the investment community, especially given the current funding environment, affirms Comdial's business strategy," stated Nick Branica, Comdial's CEO. ComVest Venture Partners' investment is an important part of Comdial's 2-year restructuring plan. This effort consisted of consolidating business units, outsourcing manufacturing operations and streamlining product offerings. The result has been a more focused and efficiently run company. Throughout its restructuring, Comdial continued to provide the SMB market with viable solutions such as its DX-80 and FX II Business Communications Systems, its Interchange Unified Communications Solution and its Converged Telephony Platform. The DX-80 is an entry-level telephone system with many of the features previously only afforded to more expensive large enterprise offerings. The FX II simultaneously manages digital voice features and IP Telephony. Comdial's Interchange Unified Messaging solution offers extensive call processing/call center capabilities and unified messaging. The Converged Telephony Platform combines the benefits of the FX II and Interchange products into an integrated offering that includes many features intended to reduce telecommunication network costs and enhance enterprise revenue opportunities. Moving forward, Comdial plans to develop a next-generation IP Telephony Platform that supports industry standards such as SIP and is compatible with its current offerings. About Comdial Comdial Corporation, headquartered in Sarasota, Florida, develops and markets sophisticated communications solutions for small to mid-sized offices, government, and other organizations. Comdial offers a broad range of solutions to enhance the productivity of businesses, including voice switching systems, voice over IP (VoIP), voice processing and computer telephony integration solutions. For more information about Comdial and its communications solutions, please visit our web site at www.comdial.com. Forward-Looking Statements This press release contains statements that may constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including Comdial Corporation's ability to obtain additional funding for its business, its ability to maintain its listing with Nasdaq, the risks associated with the outsourcing of its manufacturing requirements, including international risk factors, its ability to meets its obligations to its suppliers and its lenders, its ability to achieve its operational goals and to generate positive cash flow, any unfavorable outcomes of pending disputes or litigation and the various other factors set forth from time to time in Comdial's filings with the SEC, including but not limited to Comdial's most recent Form 10-K. Comdial Corporation undertakes no obligation to publicly update or revise the forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events. -----END PRIVACY-ENHANCED MESSAGE-----