UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission File No. 0-4410
TELECOMM INDUSTRIES CORP.
---------------------------------------------------
(Exact name of Issuer as specified in its charter)
DELAWARE 34-1765902
(State of Incorporation) (I.R.S. Employer
Identification No.)
1743 Quincy Ave.
Naperville, Illinois 60540
(Address of principal executive offices)
630-369-7111
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as the latest practical date:
common stock, $0.01 par value: (as of November 10, 1998): 12,650,746.
----------------------------- ----------
Transitional Small Business Disclosure Format:
Yes___ No _X_
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
INDEX
PART I-FINANCIAL INFORMATION Page No.
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets-
September 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations-
three and nine months ended September 30,
1998 and 1997 5
Consolidated Statements of Cash Flow-
nine months ended September 30, 1998 and
1997 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II-OTHER INFORMATION
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
2<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The Registrant's Consolidated Financial Statements
follow this page.
3<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 118,105 $ 97,779
Accounts receivable - trade 5,577,094 3,387,943
Inventories 2,226,051 1,412,196
Prepaid income taxes 63,145 59,557
Prepaid expenses 195,222 133,936
Employee advances 74,653 147,601
----------- ----------
Total current assets 8,254,270 5,239,012
----------- ----------
Property and equipment, net 1,449,078 1,481,566
Other assets:
Accounts receivable, long-term portion 3,636,589 2,992,137
Intangibles, net 3,900,015 3,462,958
----------- ----------
Total assets $17,239,952 $13,175,673
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,195,151 $ 1,371,210
Current portion of long-term debt 565,000 404,780
Accounts payable - trade 2,359,868 1,139,776
Accrued payroll and related expenses 234,262 268,191
Accrued bonus 291,377 575,500
Accrued commissions and contractor fees 122,483 180,813
Customer deposits 172,550 118,504
Deferred income taxes 106,321 342,321
Income taxes payable 114,033 109,399
Other accrued expenses 367,277 149,730
----------- -----------
Total current liabilities 6,528,322 4,660,224
----------- -----------
Long-term debt, less current portion 3,640,980 2,862,976
Deferred revenue 10,936 10,362
Deferred income taxes 1,426,112 906,913
----------- -----------
Total liabilities 11,606,350 8,440,475
----------- -----------
Stockholders' equity:
Common stock $.01 par value: authorized 20,000,000 shares: issued
12,650,746 and 12,300,746: outstanding 12,121,559 and 11,771,559,
September 30, 1998 and at December 31, 1997, respectively 126,508 123,008
Additional paid-in capital 3,994,132 3,577,632
Treasury stock: 529,187 shares at cost (317,512) (317,512)
Receivables from stockholders (61,187) (110,065)
Retained earnings 1,891,661 1,462,135
----------- -----------
Total stockholders' equity 5,633,602 4,735,198
----------- -----------
Total liabilities and stockholders' equity $17,239,952 $13,175,673
=========== ===========
See notes to unaudited consolidated financial statements
</TABLE>
4<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenues $ 6,110,196 $ 4,929,712 $ 18,278,371 $ 10,671,963
Commissions, contractor fees, and related expenses 2,644,703 1,590,679 8,346,628 3,534,637
Selling, general and administrative expenses 3,087,888 2,373,924 8,845,584 5,637,867
------------ ----------- ------------ ------------
Operating income 377,605 965,109 1,086,159 1,499,459
Other income (expense):
Gain on disposal of assets 2,280 (3,416) 3,922 (3,416)
Interest income - 5,610 - 8,302
Interest expense (166,642) (58,159) (369,810) (127,363)
------------ ----------- ------------ ------------
(164,362) (55,965) (365,888) (122,477)
------------ ----------- ------------ ------------
Income from operations before income tax expense 213,243 909,144 720,271 1,376,982
Income tax expense 89,085 379,339 290,745 552,178
------------ ----------- ------------ ------------
Net income $ 124,158 $ 529,805 $ 429,526 $ 824,804
============ =========== ============ ============
Net Income per common share:
Basic $ 0.01 $ 0.05 $ 0.04 $ 0.08
============ =========== ============ ============
Diluted $ 0.01 $ 0.05 $ 0.03 $ 0.07
============ =========== ============ ============
Average number of common shares outstanding:
Basic 12,091,833 10,842,483 12,091,833 10,842,483
============ =========== ============ ============
Diluted 13,581,833 11,642,483 13,581,833 11,642,483
============ =========== ============ ============
See notes to unaudited consolidated financial statements
</TABLE>
5<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 429,526 $ 824,804
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 456,957 265,302
Deferred revenue 574 (386)
Deferred income taxes 283,199 549,869
(Gain) Loss on sale of fixed assets (3,922) 3,416
Changes in assets and liabilities:
Accounts receivable - trade (2,102,886) 761,084
Accounts receivable - long term portion (494,452) (467,639)
Inventories (793,119) (86,022)
Prepaid income taxes (3,588) (11,297)
Prepaid expenses (57,386) (57,102)
Employee advances 75,948 (152,955)
Accounts payable - trade 1,190,092 (728,527)
Accrued payroll and related expenses (43,214) 103,245
Accrued bonus (299,123) (562,050)
Accrued commissions and contractor fees (58,330) (167,977)
Customer deposits 54,046 (294,018)
Income taxes payable 4,634 (19,738)
Other accrued expenses 206,422 (431,667)
---------- -----------
Total adjustments (1,584,148) (1,296,462)
---------- -----------
Net cash used in operating activities (1,154,622) (471,658)
Cash flows from investing activities:
Purchases of property and equipment (293,822) (286,760)
Proceeds from sale of assets 3,922 4,000
Proceeds from stockholders receivables 48,878 8,871
Purchase acquisitions, net of cash acquired (10,000) (301,453)
---------- -----------
Net cash used in investing activities (251,022) (575,342)
---------- -----------
Cash flows from financing activities:
Payments on long-term debt (315,498) (1,087,578)
Proceeds from issuance of long-term debt 1,150,000 1,124,091
Proceeds from common stock purchased by employees - 57,500
Purchase of Treasury Stock - (317,512)
Notes receivable - related parties - 400,000
Net borrowings under line of credit 591,468 1,177,605
---------- ----------
Net cash provided by financing activities 1,425,970 1,354,106
---------- ----------
Net increase in cash 20,326 307,106
Cash and cash equivalents at beginning of period 97,779 238,312
---------- ----------
Cash and cash equivalents at end of period $ 118,105 $ 545,418
========== ==========
6
<PAGE>
1998 1997
---- ----
Supplemental disclosures of cash flow information:
Cash paid for interest $ 336,447 $ 65,417
=========== ==========
Cash paid for income taxes $ 7,546 -
=========== ==========
Non-cash investing and financing activities:
Common stock issued for purchase acquisitions $ 420,000 $ 423,325
=========== ==========
Notes issued for purchase acquisitions $ 20,000 $ 200,000
=========== ==========
See notes to unaudited consolidated financial statements
</TABLE>
7<PAGE>
TELECOMM INDUSTRIES, CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. MANAGEMENT REPRESENTATION - The accompanying consolidated interim
financial statements of Telecomm Industries Corp. ("Telecomm" or
the "Company") have been prepared without audit and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The statements reflect
all adjustments that are, in the opinion of management, necessary
to present fairly the financial position of the Company as of
September 30, 1998, and the results of its operations for the
quarter then ended. These adjustments are of a normal and
recurring nature. Therefore, the accompanying consolidated
interim financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included
in the Form 10-KSB of the Company for the year ended December 31,
1997.
2. EARNINGS PER SHARE - Computations of basic and diluted earnings
per share of common stock have been made in accordance with the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). The Company was required to adopt the provisions of SFAS
No. 128 beginning with the year ended December 31, 1997. All
prior and interim period earnings per share amounts have been
restated accordingly. All securities that have an anti-dilutive
effect on earnings per share have been excluded from such
computations.
Reconciliation of Numerators and Denominators of the Basic
and Diluted EPS Computations
<TABLE>
<CAPTION>
For the three month period ended September 30, 1998
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 124,158
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 124,158 12,091,833 $ .01
Effect of dilutive securities options 1,490,000
----------- ----------- --------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 124,158 13,581,833 $ .01
=========== =========== ========
8<PAGE>
For the three month period ended September 30, 1997
---------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 529,805
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 529,805 10,842,483 $ .05
Effect of dilutive securities options 800,000
---------- ----------- --------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 529,805 11,642,483 $ .05
========== ========== ========
For the nine month period ended September 30, 1998
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 429,526
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 429,526 12,091,833 $ .04
Effect of dilutive securities options 1,490,000
----------- ------------- --------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 429,526 13,581,833 $ .03
=========== ============= ========
9<PAGE>
For the nine month period ended September 30, 1997
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 824,804
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 824,804 10,842,483 $ .08
Effect of dilutive securities options 800,000
---------- ------------- --------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 824,804 11,642,483 $ .07
========= ============= ========
</TABLE>
Options to purchase 300,000 shares of common stock at $3.00 to
$10.00 per share remain outstanding and have been since April 3,
1998. These options were not included in the computation of
diluted EPS because the options' exercise price was greater than
the average market price of the common shares during the period.
3. ACQUISITIONS - On February 20, 1998, the Company acquired
Division-Tel Communications, Inc. ("Division-Tel") under the
provisions of an Asset Purchase Agreement. Under the terms of
this agreement, the Company issued 350,000 shares of its common
stock valued at $420,000, paid $10,000 in cash, issued a $20,000
promissory note, due August 1998 (bearing interest at a fixed
rate of 9%), and assumed approximately $370,000 of Division-
Tel's liabilities in exchange for all of the outstanding common
stock of Division-Tel.
The net purchase price was allocated as follows:
Current assets $ 245,876
Property and equipment 80,599
Other assets 6,900
Goodwill 487,105
Liabilities assumed (370,480)
----------
Net purchase price 450,000
Less: common stock issued 420,000
Non-cash note payable 20,000
----------
Cash paid for acquisition $ 10,000
==========
4. SUBSEQUENT EVENTS - On November 5, 1998, the Company entered into
a financing relationship with Merrill Lynch Business Financial
Services Inc. ("MLBFS"). The structure of the financing consists
of three facilities. The first facility is an installment note
of $6,000,000 collateralized by substantially all assets of the
10<PAGE>
Company. Proceeds of $5,441,179 were received in November and
were used to retire the following debt from First Merit:
Balance as at:
November 5, 1998 September 30, 1998
---------------- ------------------
Term note 1 (L-T Debt) $1,671,801 $1,700,448
Term note 2 (L-T Debt) 1,104,237 1,119,797
Line of Credit 2,500,000 2,195,151
Accrued Interest 43,057 37,805
Prepayment penalty 122,084 -
---------- ----------
Total payoff $5,441,179 $5,053,201
========== ==========
The remaining available balance of the first facility, which has
not yet been funded (converted), will provide additional working
capital for expenses relating to future acquisitions as they are
incurred. This facility is currently interest bearing at an
annualized rate of 2.4% above the 30 day commercial paper rate
(5.5% as of September 30,1998) and will convert to a term note
payable in 60 monthly installments, at the same rate of interest,
commencing the first day of the second calendar month following
the conversion date (January 31, 1999).
The second facility is a working capital line of credit in the
amount of $4,000,000. Interest is due monthly at an annualized
rate of 2.4% above the 30 day commercial rate (5.5% as of
September 30,1998). The line of credit is renewable on September
30, 2000.
The third facility is a $3,800,000 revolving credit line to be
used exclusively for specific planned acquisitions. This
facility will expire on September 30, 1999, if not utilized.
On October 28, and November 6, 1998, Michael Toth and Rita
Koridek tendered their resignation from the Board of Directors,
respectively. The Board unanimously accepted each resignation.
The Board seats will remain vacant until the Company's final
decision to fill the seats has been determined.
Michael Toth will continue to serve as a General Manager of Sales
with responsibility for all sales throughout the State of Ohio.
Ms. Koridek previously announced on October 19, 1998 that she
would resign from her position as Vice President of Sales and
from the Company effective December 1, 1998. Ms. Koridek is
leaving the Company to pursue other interests both personally and
professionally.
11
<PAGE>
Smith Doughty, previously the Company's Customer Service
Director, will assume Ms. Koridek's prior responsibilities and
title as Vice President of Sales. This change allows the Company
an opportunity to capitalize on the benefits of almost 40 years
of experience in or around telecommunications sales and sales
management. Mr. Doughty spent 33 years in marketing and sales of
both equipment and network equipment and services at Ameritech,
one of the Company's primary Regional Bell Operating Company
partners.
On August 25, 1998, the Board voted both to accept the
resignation of its Chief Financial Officer, Eric Getzin, and to
appoint Mark Travi as his replacement.
Mark Travi was the former CFO of the recruitment division for TMP
Worldwide ("TMP"). Mr. Travi was involved with numerous
acquisitions over the past five years while with TMP. Prior to
TMP, Mr. Travi spent 7 years in public accounting.
5. RECLASSIFICATION - Certain reclassifications have been made to
the 1997 consolidated financial statements to conform to the 1998
method of presentation.
6. STOCK OPTIONS - In the Form 10-QSB for the quarter ended June 30,
1998, the Company reported that it had issued to Rita Koridek
stock options to purchase 160,000 shares of Company common stock
pursuant to the Company's Stock Option and Award Plan. After
further discussions between the parties, it was agreed that the
intent of the parties was more accurately reflected by the issuance
of these options pursuant to a Non-Statutory Qualified Stock
Option Agreement. The new agreement provides Ms. Koridek with
the option to purchase 160,000 shares of Company common stock,
par value $.01 per share, at $1.06 per share. The right to
purchase these shares vests immediately.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
--------
Telecomm is one of the nation's largest Regional Bell Operating
Company ("RBOC") distributors. As such, Telecomm sells voice, data,
cellular, video, and telephone information network solutions to
business customers throughout its five-state region. Telecomm has
sales personnel in Illinois, Indiana, Wisconsin, Ohio and Kentucky.
Ameritech and BellSouth are Telecomm's primary RBOC partners. The
voice services offered by these RBOCs include Centrex, Centrex-ISDN,
Multiserve, Intra-LATA usage plans, audio-conferencing and voice mail.
Data services include DS0, DS1, DS3, Synchronet, Frame Relay, Sonet,
ATM, ISDN and ISDN Prime.
12<PAGE>
In addition to RBOC services, Telecomm represents numerous
manufacturers of voice and data equipment. Telecomm markets, installs
and maintains telecommunications equipment manufactured by such
globally recognized companies as Nortel (Northern Telecom), NEC,
Lucent, Toshiba, and Comdial.
Companies who purchase data equipment from a manufacturer, add
value to the equipment through technical expertise and additional
software, and then resell these solutions to their customers, are
called Value Added Resellers (VARs). Telecomm was identified as one
of the 500 largest VARs in the country in VAR Business Magazine's 1998
annual industry report. The original manufacturers in Telecomm's
product line include Microsoft, Ascend, Intel, Adtran, Cisco, Amdahl
and Citrix. These manufacturers are recognized throughout the
industry for providing high quality products and innovative software.
Telecomm's value added services include network consultation, design,
installation, maintenance and repair services.
All of Telecomm's product lines are complementary. The
traditional separation of voice and data communications and
transmission is no longer valid. Much of the voice transmitted over
public and private networks is now dispatched as digital packets
utilizing the same protocols as data communications. In fact, several
of the products Telecomm markets will switch both voice and data.
Year 2000 Technology
--------------------
Based upon a review by management, the Company will work to
complete the Year 2000 compliance requirements during the fourth
quarter of 1998 through software upgrades. The expected remediation
costs of these upgrades and implementation fees needed to modify its
current computer information systems are estimated to be $25,000.
However, the Company will continue to evaluate whether additional
corrective action will be necessary. The Company is currently in
the process of assessing third party issues to determine what impact,
if any, they will have on the Company's operations with respect to the
year 2000. Management expects to complete the third party assessment
during the fourth quarter and currently anticipates that this will not
impact the operations of the Company.
THREE MONTHS ENDED SEPTEMBER 30, 1998 vs. THREE MONTHS ENDED
SEPTEMBER 30, OF 1997
The Company's net revenues increased 24% to $6.1 million for the
three months ended September 30, 1998 from $4.9 million in the
comparable 1997 period. The increase is attributable to a $1.3
million increase from equipment sales and related services and is
offset by a decrease of $.1 million in commissions from network
services sales. The total revenue breakdown demonstrates this gradual
shift to increased equipment sales. A comparison of the periods with
respect to allocation of total net revenues is as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1998 September 30, 1997
<S> <C> <C>
Sales of equipment and related services 56% 42%
Sales of network services 42% 56%
Long distance and other services 2% 2%
</TABLE>
Net revenues from equipment sales and related services increased
64% to $3.4 million during the three months ended September 30, 1998
from $2.1 million in the three months ended September 30, 1997. Of
the $3.4 million for the quarter, $2.0 million relates to voice
equipment sales and services and $1.4 million relates to data
equipment sales and services.
Net revenues from network services sales decreased 5% to $2.6
million in the three months ended September 30, 1998 from $2.7 million
in the comparable period for 1997. Of the $2.6 million for the
quarter, $2.0 million related to voice network services and $.6
million related to data network and services.
Commissions, contractor fees and related expenses increased $1.0
million to $2.6 million in the three months ended September 30, 1998,
a 66% increase from such expenses of $1.6 million in the comparable
period of 1997. The increase was primarily due to increased costs of
labor and equipment to support equipment sales generated in the three
months ended September 30, 1998. As a percentage of net revenues,
these expenses increased to 43% during the three months ended
September 30, 1998 from 32% during the comparable period of 1997.
This increase is primarily due to costs associated with the Company's
increased focus on equipment sales. The related expenses for
equipment sales require a higher percentage of the Company's revenues
than the Company's other sales and services.
Selling, general and administrative expenses ("SG&A") increased
$.7 million to $3.1 million in the three months ended September 30,
1998, a 30% increase from SG&A expenses of $2.4 million in the
comparable 1997 period. As a percentage of net revenues, these
expenses increased to 51% during the three months ended September
30, 1998, from 48% during the three months ended September 30, 1997.
This increase is primarily a result of the Company's continuing
efforts to consolidate and centralize operations.
In the three months ended September 30, 1998, interest expense
increased by $108,000, or 187%, to $167,000 from $58,000 in the
comparable 1997 period. The increase in interest expense was
primarily a result of increased borrowings under the Company's credit
facility in order to support the working capital needs of increased
equipment sales and long-term receivables.
Income from operations before income taxes decreased by $696,000
to $213,000 in the three months ended September 30, 1998, a decrease
of 77% from $909,000 in the comparable 1997 period, primarily for the
reasons stated above.
The provision for income taxes decreased by $290,000 to $89,000
in the three months ended September 30, 1998, compared to $379,000 in
the three months ended September 30, 1997, due to decreased earnings.
14<PAGE>
As a result of the foregoing, net income for the three months
ended September 30, 1998 was $124,000, a decrease of 77%, from the net
income for the three months ended September 30, 1997 of $530,000.
Management believes that the numbers set forth above accurately
reflect the success in the Company's long range strategy to diversify
its source of revenues. The Company has instituted a plan to further
diversify the Company's revenue stream while consolidating and
centralizing the Company's operations and redefining the information
technology and accounting departments. Management also believes that
while these changes may negatively impact the Company's short-term
profitability, the Company will be better positioned to integrate
acquisitions and to achieve continued growth in the future.
NINE MONTHS ENDED SEPTEMBER 30, 1998 vs. NINE MONTHS ENDED
SEPTEMBER 30, 1997
The Company's net revenues increased 71% to $18.3 million for the
nine months ended September 30, 1998 from $10.7 million in the
comparable 1997 period. The increase is primarily attributable to a
$5.5 million increase from equipment sales and related services and an
increase of $1.9 million in commissions from network services sales.
The total revenue breakdown demonstrates this gradual shift to
increased equipment sales. A comparison of the periods with respect to
allocation of total net revenues is as follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
<S> <C> <C>
Sales of equipment and related services 55% 42%
Sales of network services 43% 56%
Long distance and other services 2% 2%
</TABLE>
Net revenues from equipment sales and related services increased
123% to $10.0 million for the nine months ended September 30, 1998
from $4.5 million for the nine months ended September 30, 1997. Of
the $10.0 million, $5.8 million relates to voice equipment sales and
services and $4.2 million relates to data equipment sales and
services.
Net revenues from network services sales increased 31% to $7.8
million for the nine months ended September 30, 1998 from $6.0 million
in the comparable period for 1997. Of the $7.8 million, $5.9 million
relates to voice network services and $1.9 million relates to data
network and services.
Commissions, contractor fees and related expenses increased $4.8
million to $8.3 million for the nine months ended September 30, 1998,
a 136% increase from such expenses of $3.5 million in the comparable
15
<PAGE>
period of 1997. The increase was primarily due to increased costs of
labor and equipment to support equipment sales generated in the nine
months ended September 30, 1998. As a percentage of net revenues,
these expenses increased to 46% during the nine months ended September
30, 1998 from 33% during the comparable period of 1997. This increase
is primarily due to costs associated the Company's increased focus on
equipment sales and the related expenses for equipment sales require a
higher percentage of the Company's revenues than the Company's other
sales and services.
Selling, general and administrative expenses ("SG&A") increased
$3.2 million to $8.8 million for the nine months ended September 30,
1998, a 57% increase from SG&A expenses of $5.6 million in the
comparable 1997 period. As a percentage of net revenues, these
expenses decreased to 48% during the nine months ended September 30,
1998, from 53% during the nine months ended September 30, 1997. This
decrease is primarily the result of increased net revenues of the
Company without a corresponding increase in the costs necessary to
support the additional sales.
In the nine months ended September 30, 1998, interest expense
increased by $243,000, or 190%, to $370,000 from $127,000 in the
comparable 1997 period. The increase in interest expense was primarily
a result of increased borrowings under the Company's credit facility
in order to support the working capital needs of increased equipment
sales and long-term receivables.
Income from operations before income taxes decreased by $657,000
to $720,000 for the nine months ended September 30, 1998, a decrease
of 48% from $1,377,000 in the comparable 1997 period, primarily for
the reasons stated above.
The provision for income taxes decreased by $261,000 to $291,000
for the nine months ended September 30, 1998, compared to $552,000 for
the comparable 1997 period, due to decreased earnings.
As a result of the foregoing, net income for the nine months
ended September 30, 1998 was $430,000, a decrease of 48%, from the net
income for the nine months ended September 30, 1997 of $825,000.
Management believes that the numbers set forth above accurately
reflect the success in the Company's long range strategy to diversify
its source of revenues. The Company has instituted a plan to further
diversify the Company's revenue stream while consolidating and
centralizing the Company's operations and redefining the information
technology and accounting departments. Management also believes that
while these changes may negatively impact the Company's short-term
profitability, the Company will be better positioned to integrate
acquisitions and to achieve continued growth in the future.
16<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the
internal growth of network service sales and receivables (which are
classified as the long-term accounts receivable), voice and data
hardware sales, the infrastructure to support and monitor the
increased sales volume, and new acquisitions.
Net cash used in operating activities was $1.1 million for the
nine months ended September 30, 1998 compared to net cash used in
operating activities of $.6 million for the comparable period in 1997.
The change was primarily due to an increase of $2.1 million in trade
accounts receivable in the nine months ended September 30, 1998 compared
to a $.8 million decrease in the comparable 1997 period and a $.7 million
increase in inventory for the nine months ended September 30, 1998
compared to a $.1 million increase in the comparable 1997 period. These
changes are attributable to the Company's increased emphasis on equipment
sales which requires the company to maintain higher levels of inventory
and to extend credit to customers.
The above uses of operating cash were offset by increases in
accounts payable and other accrued expenses of $1.2 million and $.2
million, respectively in the nine months ended September 30, 1998 as
compared to decreases of $.7 million and $ .4 million, respectively
for the comparable 1997 period.
Net cash used in investing activities was $.3 million for the
nine months ended September 30, 1998 compared to $.6 million for the
comparable 1997 period. The use of cash for investing activities was
primarily attributable to the purchase of property and equipment.
This was comparable to 1997 except the company used cash of $.3
million for three acquisitions while only $10,000 was used for an
acquisition in 1998.
Net cash provided by financing activities was $1.4 million for
the nine months ended September 30, 1998 compared to $1.4 million in
the comparable 1997 period. The cash provided is primarily
attributable to the proceeds of $.6 million of short term borrowings
under the Company's line of credit in 1998, plus a net increase of
long term debt of $.8 million. In 1997, cash provided by financing
activities consisted primarily of $1.2 million of short-term
borrowings from the line of credit.
The change in the commission payment structure by Ameritech,
which was implemented in June 1996, and Ameritech's continuing
implementation of a new billing and customer record system, continues
to lengthen the collection period of receivables, adversely affecting
the Company's working capital and cash flow. Management believes cash
flow will continue to be similarly affected as long as the existing
Ameritech commission structure remains.
Because of the Company's recent increased emphasis on equipment
sales and related services, an increase in inventory and trade credit
17<PAGE>
is expected. Trade credit arises from the willingness of the
Company's creditors to grant payment terms for inventory purchases.
Although the Company has obtained favorable payment terms on its trade
credit from its vendors, there is no assurance that the Company will
be able to obtain such terms in the future.
The Company may also seek to obtain additional sources of
funding, including additional debt or equity financing as the Company
continues to grow. There is no assurance that the Company will obtain
such additional funds or, that if obtained, such financing will be on
terms favorable to the Company.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not
historical facts are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not
limited to:
* the dependence of the Company on one principal supplier, Ameritech,
for a significant portion of its revenues;
* the effects of the proposed acquisition of Ameritech by
Southwestern Bell Communications announced on May 11, 1998;
* changes in Ameritech's commission payment plan and its billing and
record system, adversely affecting the Company's working capital
and long-term accounts receivable;
* changes in Ameritech's Distributor Agreement;
* the ability of the Company to collect any and all amounts due and
payable from Ameritech, including but not limited to, outstanding
and future up front commissions and outstanding and future residual
payments;
* fluctuations in quarterly revenues and earnings of the Company
depending on when Ameritech bonus acceleration targets are met;
* the ability of the Company to obtain additional financing to
support its growth;
* changes arising from greater competition in local telephone service
attributable to passage of the Telecommunications Act of 1996;
* the introduction of competitors into the market including but not
limited to competitors with financial and other reserves
significantly greater than those of Telecomm;
* the ability of the Company to integrate the operations of recent
acquisitions into the Company;
* the availability of other acquisitions and the integration of the
operations of those acquisitions, if completed, into the Company,
and the availability of financing for such acquisitions;
* the ability of the Company to continue to grow its sales force
internally and to expand its product mix more toward the hardware
business, particularly in light of the increased competition in the
telecommunication markets in which Telecomm operates;
* the loss or inability to attract key personnel;
18
<PAGE>
* the ability of the Company to secure a reasonably high percentage
of its outstanding accounts receivable;
* and, general economic conditions, and other risk factors discussed
herein.
In addition, any of the risks detailed above may have an impact
on the Company's ability to obtain additional working capital funds
under its current credit facility. An investor or potential investor
in the Company must consider these risks.
19<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On November 5, 1998, the Company entered into a financing
relationship with Merrill Lynch Business Financial Services Inc.
("MLBFS"). The structure of the financing consists of three
facilities. The first facility is an installment note of $6,000,000.
Proceeds in the amount of $5,441,179 were received in November 1998
and were used to retire the existing debt with First Merit. The
remaining available balance of the first facility, which has not yet
been funded (converted), will provide additional working capital for
expenses relating to future acquisitions as they are incurred. The
second facility is a working capital line of credit in the amount of
$4,000,000. This increase in working capital will enable the company
to have more flexibility in meeting its current and long term
operational needs. The third facility is a $3,800,000 revolving
credit line to be used exclusively for specific planned acquisitions.
The three facilities include standard terms, conditions, covenants and
restrictions and are secured by a senior lien on the Company's assets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Form of Non-Statutory Stock Option Agreement with
Rita Koridek
10.2 Collateral Installment Note in favor of Merrill
Lynch Business Financial Services Inc.
27. Financial Data Schedule
B. REPORTS ON FORM 8-K
None
20<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELECOMM INDUSTRIES CORP.
By: /s/ James M. Lowery
--------------------------------
James M. Lowery, Chairman
And: /s/ Mark A. Travi
-------------------------------
Mark Travi, Chief Financial and
Accounting Officer
Date: November 12, 1998
21
EXHIBIT 10.1
------------
FORM OF NON-STATUTORY STOCK OPTION AGREEMENT
THIS NON-STATUTORY STOCK OPTION AGREEMENT ("Agreement") is
entered into as of this ___ day of _____, 1998, by and between
Telecomm Industries Corp., a Delaware corporation (the "Company"), and
Rita Koridek (the "Optionee").
WHEREAS, the Company has adopted the Telecomm Industries Corp.
1997 Stock Option and Award Plan (as amended from time to time, the
"Plan");
WHEREAS, capitalized terms used herein without definition have
the meanings assigned to them in the Plan;
WHEREAS,these options are not issued pursuant to the Plan, but
rather this Agreement;
WHEREAS, the Optionee is an Officer of the Company;
WHEREAS, the Optionee has assumed more duties in relation with
her promotion to the position as Vice President of Sales;
WHEREAS, the Company through its Board of Directors has approved
the grant to Optionee of Non-Statutory Stock Options to purchase
160,000 shares of Common Stock, par value $0.01 per share, of the
Company ("Common Stock"), which grant has, upon the Committee's
recommendation, been approved by the Board;
NOW, THEREFORE, the parties agree as follows:
1. GRANT OF OPTIONS. The Company hereby grants Non-Statutory
Options to purchase up to 160,000 shares of Common Stock
(collectively, the "Option Shares") to the Optionee, subject to all of
the terms and conditions contained in this Agreement and the Plan.
The Non-Statutory Options are not "incentive stock options" within the
meaning of Section 422 of the Code.
2. TIMING OF EXERCISE. The Non-Statutory Stock Options are
immediately exercisable in full.
3. EXERCISE PRICE. The exercise price for the Non-Statutory
Options shall be $1.06 per Option Share (the "Exercise Price"), and
shall be due and payable, in cash, by certified or official bank
check, by money order, in shares of Common Stock or, in the sole
discretion of the Committee, by personal check in full or partial
payment of any Option Shares. The Optionee shall remit the
withholding tax, if any, owed by the Optionee under Section 10 below
with respect to the exercise of the Non-Statutory Options to the
Company along with the Exercise Price.
4. PROCEDURE FOR EXERCISE. In order to exercise the Non-
Statutory Options, the Optionee shall deliver to the Chairman of the
Board or Secretary of the Company or such agent as such officers may
delegate in their stead, the following: (i) the aggregate Exercise
Price and any withholding tax required under Section 10 below; (ii) a
completed and executed Exercise of Stock Option in the form attached
hereto as Exhibit A; and (iii) if required, the written representation
and/or other information described in Section 6 below. The Company
shall cause certificates for Option Shares purchased hereunder to be
delivered to the Optionee as soon as reasonably practicable
thereafter.
5. EXPIRATION OF OPTIONS. The unexercised portion, if any, of
the Non-Statutory Options shall automatically and without notice
terminate and become null and void on the earlier of June 5, 2008 or
the date determined in accordance with Section 10 of the Plan.
6. REPRESENTATIONS AND WARRANTIES OF THE OPTIONEE. The
Optionee represents and warrants that:
(a) The Optionee is aware that no federal or state agency has
made any finding or determination as to the fairness for public or
private investment in, nor any recommendation or endorsement of, the
Options or the Option Shares.
(b) The Optionee is aware that the Option Shares are not
registered under the Securities Act of 1933, as amended (the "Act"),
or the securities or "blue sky" laws of any state or jurisdiction,
including any non U.S. jurisdiction (the "Blue Sky Laws"), as of the
date of this Agreement, and the Company is under no obligation to
cause the Option Shares to be registered under the Act or the Blue Sky
Laws; and that in the event that the Option Shares are not registered
under the Act or the Blue Sky Laws for any reason at a time when the
Optionee desires to exercise all or any part of the Non-Statutory
Options, then, in addition to the other terms and conditions of this
Agreement, such exercise shall be conditioned upon determination by
the Committee that the Option Shares may be issued to the Optionee
without registration under the Act or the Blue Sky Laws. The
Committee may require the Optionee to deliver to the Company an
agreement or undertaking setting forth any factual information that
the Committee deems necessary to determine whether the Option Shares
may be issued to the Optionee without registration under the Act or
the Blue Sky Laws, including, without limitation, a representation and
warranty that the Optionee is acquiring the Option Shares for
investment and not with a view to, or for sale in connection with, the
distribution of any the Option Shares.
7. NON-REGISTRATION AND LEGEND. Nothing contained in this
Agreement shall require the Company to register the Option Shares
under the Act or the Blue Sky Laws or to continue any such
registration which may be in effect on or after the date of this
Agreement. If any such Option Shares are not so registered when
issued hereunder, then the certificate(s) for the Option Shares shall
bear a legend, in a form satisfactory to the Committee, restricting
<PAGE>
the transfer of the Option Shares unless such transfer is registered
or exempt from registration under the Act or the Blue Sky Laws, and
the Option Shares shall not be transferred except in accordance with
such legend.
8. TRANSFERABILITY. The Optionee or any beneficiary thereof
shall have the power or right to sell, exchange, pledge, transfer,
assign or otherwise encumber or dispose of the Optionee's or such
beneficiary's Non-Statutory Stock Options only as follows: (i) to the
spouse or any children or grandchildren of such person that receives
Non-Statutory Stock Options under the Plan; (ii) as a charitable
contribution or gift to or for the use of any person or entity
described in Section 170(c) of the Code; (iii) to any Controlled Entity; or
(iv) by will or the laws of intestate succession.
9. RIGHTS PRIOR TO EXERCISE OF OPTION. The Optionee shall not
have any rights as a stockholder with respect to any Option Shares
subject to the Non-Statutory Options prior to the date on which the
Optionee is recorded as the holder of such Option Shares on the
records of the Company; provided that the foregoing shall not diminish
or affect any rights the Optionee has under the Plan.
10. TAXES. The Company may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding of
all federal, state, local and other taxes required by law to be
withheld with respect to the Non-Statutory Options including, but not
limited to: (i) reducing the number of Option Shares otherwise
deliverable, based upon their fair market value on the date of
exercise, to permit deduction of the amount of any such withholding
taxes from the amount otherwise payable under this Agreement; (ii)
deducting the amount of any such withholding taxes from any other
amount then or thereafter payable to the Optionee; or (iii) requiring
the Optionee, beneficiary or legal representative to pay to the
Company the amount required to be withheld or to execute such
documents as the Company deems necessary or desirable to enable it to
satisfy its withholding obligations as a condition of releasing the
Option Shares.
11. GENERAL PROVISIONS.
(a) The Company shall at all time during the term of the Non-
Statutory Options reserve and keep available such number of shares of
Common Stock as will be sufficient to satisfy the requirements of this
Agreement in respect of vested Option Shares, shall pay all fees and
expenses necessarily incurred by the Company in connection therewith,
and shall use its best efforts to comply with all laws and regulations
that, in the reasonable opinion of counsel for the Company, are
applicable thereto.
(b) Any notice to be given hereunder by either party to the
other shall be in writing and shall be given either by personal
delivery, telecopied with confirmed receipt, or sent by certified,
registered or express mail, postage pre-paid, or sent by a national
next-day delivery service, postage pre-paid, return receipt requested,
<PAGE>
addressed to the Company, at its headquarters, attention Chief
Executive Officer, or the Optionee, at such address as the Company has
on record, or such address as the Optionee provides to the Company in
writing, and shall be deemed given when so delivered personally, or
telecopied, or if mailed, two (2) days after the date of mailing, or
if by national next-day delivery service, on the date after delivery.
(c) The headings and other captions in this Agreement are for
convenience of reference only and shall not be used in interpreting,
construing or enforcing any of the provisions of this Agreement.
(d) THE PROVISIONS OF THIS AGREEMENT RELATE SOLELY TO GRANTING
OF THE NON-STATUTORY STOCK OPTIONS TO THE OPTIONEE PURSUANT TO THE
PLAN AS OF THE DATE HEREOF AND DO NOT ADDRESS OR RELATE TO ANY
CONDITIONS OF THE OPTIONEE'S EMPLOYMENT WITH THE COMPANY. NOTHING IN
THIS AGREEMENT OR THE PLAN SHALL CONFER UPON THE OPTIONEE ANY RIGHT OR
ENTITLEMENT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY
NOR INTERFERE IN ANY WAY WITH THE RIGHT OR POWER OF THE COMPANY TO
TERMINATE THE OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT
CAUSE.
(e) No change or modification of this Agreement shall be valid
unless the same is in writing and signed by the Company and the
Optionee.
(f) No waiver of any provision of this Agreement shall be valid
unless in writing and signed by the person against whom it is sought
to be enforced. The failure of any party at any time to insist upon
strict performance of any condition, promise, agreement or
understanding set forth herein shall not be construed as a waiver or
relinquishment of the right to insist upon strict performance of the
same or other condition, promise, agreement or understanding at a
future time.
(g) This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the respective heirs, legal
representatives, successors and permitted assigns of the parties
hereto. Nothing in this Agreement is intended, and it shall not be
construed, to give any person or entity other than the parties hereto
any right, remedy or claim under or in respect of this Agreement or
any provisions hereof.
(h) This Agreement and all rights hereunder shall be governed
by, and construed and interpreted in accordance with, the laws of the
State of Illinois applicable to contracts made and to be performed
entirely within that State. In the event of any conflict between this
Agreement and the Plan, the provisions of the Plan shall govern,
unless the contrary is specifically stated herein.
(i) This Agreement, the Non-Competition Agreement and the Plan
set forth all of the agreements, warranties and representations among
the parties hereto and thereto with respect to the Non-Statutory
Options and the Option Shares, and there are no other promises,
agreements, conditions, understandings, representations or warranties,
<PAGE>
oral or written, express or implied, among them with respect to the
Non-Statutory Options or the Option Shares other than as set forth
herein and therein. Any and all prior agreements with respect to the
Non-Statutory Options or the Option Shares are hereby revoked.
(j) This Agreement may be executed in any number of
counterparts, each of which, when executed, shall be deemed to be an
original and all of which together shall be deemed to be one and the
same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Optionee has executed
this Agreement, all as of the date first written above.
TELECOMM INDUSTRIES CORP.
____________________________________________
By: James M. Lowery
Its: Chairman and Chief Executive Officer
The undersigned Optionee hereby acknowledges receipt of an
executed original of this Stock Option Agreement and accepts the
option granted thereunder.
_______________________________________
Rita Koridek
<PAGE>
EXHIBIT A
FORM OF EXERCISE OF NON-STATUTORY STOCK OPTION
Telecomm Industries Corp.
1743 W. Quincy St., Suite 143
Naperville, Il. 60540
Attention: Chief Executive Officer
Gentlemen:
The undersigned Optionee hereby exercises all or a portion of the
Non-Statutory Options granted to him pursuant to the Non-Statutory
Stock Option Agreement dated as of __________, _____, between Telecomm
Industries, Corp. (the "Company") and the Optionee with respect to
__________ shares of Common Stock, par value $0.01 per share, of the
Company covered by said Non-Statutory Options, and tenders herewith at
the price of $__________ per share, of which $__________ represents
payment of the exercise price thereof and $__________ represents
payment of any withholding tax due.
The registered address on the share certificate to be issued to
the Optionee should be:_____________________________________________.
The Optionee's social security number is: _________________________.
Optionee:
___________________________________________
Signature
___________________________________________
Typed or Printed Name
___________________________________________
Date of Exercise
EXHIBIT 10.2
------------
COLLATERAL INSTALLMENT NOTE
FOR VALUE RECEIVED, TELECOMM INDUSTRIES CORP., a corporation organized
and existing under the laws of the State of Delaware ("Customer")
hereby promises to pay to the order of MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC., a corporation organized and existing under
the laws the State of Delaware ("MLBFS"), in lawful money of the
United States, the principal sum of $6,000,000.00, or if more or less,
the aggregate amount advanced by MLBFS to Customer pursuant to the
Loan Agreement (the "Loan Amount") together with interest on the
unpaid balance of the Loan Amount from the Closing Date until payment
at the Interest Rate, as follows:
1. DEFINITIONS.
(a) In addition to terms defined elsewhere in this Note, as used
herein, the following terms shall have the following meanings:
(i) "Closing Date" shall mean the date of the first advancement of
funds hereunder.
(ii) "Conversion Date" shall mean January 31, 1999.
(iii) Excess hits shall mean any amount of interest in excess of
the maximum amount of interest permitted to be charged by law.
(iv) "Interest Rate" shall mean a variable per annum rate equal to the
sum of (i) 2.40% per annum, and (ii) the interest rate from time to
time published in the "Money Rates" section of The Wall Street Journal
for 30-day high-grade unsecured notes sold through dealers by major
corporations (the "30-day Commercial Paper Rate"). The Interest Rate
will change as of the date of publication in The Wall Street Journal
of a 30-Day Commercial Paper Rate that is different from that
published on the preceding Business Day. In the event that The Wall
Street Journal shall, for any reason, fail or cease to publish the
30-Day Commercial Paper Rate, MLBFS will choose a reasonably
comparable index or source to use as the basis for the Interest Rate.
(v) "Loan Agreement" shall mean that certain WCMA AND TERM LOAN AND
SECURITY AGREEMENT NO. 9810551101 between Customer and MLBF, as the
same may have been or may hereafter be amended or supplemented.
(vi) "Note" shall mean this COLLATERAL INSTALLMENT NOTE.
(b) Capitalized terms used herein and not defined herein shall have
the meaning set forth in the Loan Agreement. Without limiting the
foregoing, the terms "Additional Agreements", "Bankruptcy Event", and
"Event of Default" shall have the respective meanings set forth in the
Loan Agreement.
2. PAYMENT AND OTHER TERMS. Customer shall pay the indebtedness
under this Note in consecutive monthly installments commencing on the
first day of the second calendar month following the Closing Date and
continuing on the first day of each calendar month thereafter until
this Note shall be paid in full. Each installment payable prior to the
first day of the second calendar month following the Conversion Date
shall be in an amount equal to accrued interest at the Interest Rate.
Commencing on the first day of the second calendar month immediately
following the Conversion Date, Customer shall pay 60 consecutive
monthly installments, with the first 59 such installments each in an
amount: equal to the sum of (i) accrued interest at the Interest Rate,
and (ii) 1/84th of the Loan Amount, and the 60th installment shall be
a balloon in an amount equal to the sum of all accrued interest:
hereunder, the then unpaid principal balance hereof and all other sums
then payable hereunder.
Each payment received hereunder shall be applied to any fees and
expenses of MLBFS; payable by Customer under the terms of the Loan
Agreement, next to any late charges payable hereunder, next to accrued
interest at the Interest Rate, with the balance applied on account of
the unpaid principal hereof. Any part of the principal hereof or
interest hereon or other sums payable hereunder or under the Loan
Agreement not paid within ten (10) days of applicable due date shall
be subject to a late charge equal to the lesser of (i) 5% of the
overdue amount, or (ii) the maximum amount permitted, by law. All
interest shall be computed on the basis of actual days elapsed over a
360-day year. All sums payable hereunder shall be payable at the
office of MLBFS at 33 West Monroe Street, Chicago, Illinois 60603, or
at such other place or places as the holder hereof may from time to
time appoint In writing.
Customer may prepay this Note at any time in whole or in part
provided, however, that any prepayment prior to the end of the the
first "year" after the Conversion Date shall be accompanied by a
premium equal to 3% of the amount prepaid; any prepayment during the
second year following the Conversion Date shall be accompanied by a
premium equal to 2% of the amount prepaid; and any prepayment
thereafter shall be accompanied by a premium equal to 1% of the amount
prepaid. A "year" for the purposes of this clause is a 365-366 day
period commencing on the Conversion Date or any anniversary of the
Conversion Date. Upon any acceleration of this Note, as hereinafter
provided, there shall become due from Customer the same prepayment
premium that would have been payable if Customer had then voluntarily
prepaid the then outstanding balance of this Note in full. Any partial
prepayment shall be applied to installments of the Loan Amount in
inverse order of maturity.
This Note is the Collateral Installment Note referred to in, and is
entitled to all of the benefits of the Loan Agreement and any
Additional Agreements. If Customer shall fail to pay when due any
installment or other sum do hereunder, and any such failure shall
continue for more than five (5) Business Days after written notice
thereof shall be given by the holder hereof to Customer, if any other
Event of Default shall occur and be continuing, then at the option of
the holder hereof (or, upon the occurrence of any Bankruptcy Event,
automatically, without any action on the part of the holder hereof),
and in addition to all other rights and remedies available to such
holder under the Loan Agreement, any Additional Agreements, and
otherwise, the entire Loan Amount at such time remaining unpaid,
together with accrued interest thereon, any prepayment premium due
upon acceleration and all other sums then owing by Customer under the
Loan Agreement may be declared to be and thereby become immediately
due and payable.
It is expressly understood, however, that nothing contained in the
Loan Agreement, any other agreement, instrument, or document executed
by Customer, or otherwise, shall affect or impair the right which is
unconditional and absolute, of the holder hereof to enforce payment of
all sums, due under this Note at or after maturity, whether by
acceleration or otherwise, or shall affect the obligation of Customer,
which is also unconditional and absolute, to pay the sums payable
under this Note in accordance with its terms. Except as otherwise
expressly set forth herein or in the Loan Agreement, Customer hereby
waives presentment demand for payment, protest and notice of protest,
notice of dishonor, notice of acceleration, notice of intent to
accelerate and all other notices and formalities in connection with
this Note.
Wherever possible each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if
any provision of this Note shall be prohibited by or invalid under
such law, such provision shall be ineffective to the extent of such
prohibition or invalidity without invalidating the remainder of such
provision or the remaining provisions of this Note. Notwithstanding
any provision to the contrary in this Note, the Loan Agreement or any
of the Additional Agreements, no provision of this Note, the Loan
Agreement or any of the Additional Agreements shall require the
payment or permit the collection of any excess interest. If any
excess interest is provided for, or is adjudicated as being provided
for in this Note, the Loan Agreement or any of the Additional
Agreements, then: (a) Customer shall not be obligated to pay any
Excess Interest; and (b) any excess that MLBFS may have received under
this Note, the Loan Agreement or any of the Additional Agreements
shall, at the option of MLBFS, be: (i) applied as a credit against the
then unpaid principal balance of this Note, or accrued interest hereon
not to exceed the maximum amount permitted by law, or both (ii)
refunded to the payor thereof, or (iii) any combination of the
foregoing.
This Note shall be construed in accordance with the laws of the State
of Illinois and may be enforced by the holder hereof in any
Jurisdiction in which the Loan Agreement may be enforced.
IN WITNESS WHEREOF, this Note has been executed by Customer as of the
day and year first above
written.
TELECOMM INDUSTRIES CORP.
<TABLE> <S> <C>
<ARTICLE> 5
<S>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 118,805
<SECURITIES> 0
<RECEIVABLES> 5,577,094
<ALLOWANCES> 0
<INVENTORY> 2,226,051
<CURRENT-ASSETS> 8,254,270
<PP&E> 2,223,529
<DEPRECIATION> 774,451
<TOTAL-ASSETS> 17,239,952
<CURRENT-LIABILITIES> 6,528,322
<BONDS> 0
0
0
<COMMON> 126,508
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 17,239,952
<SALES> 0
<TOTAL-REVENUES> 6,110,196
<CGS> 2,644,703
<TOTAL-COSTS> 5,732,591
<OTHER-EXPENSES> (2,280)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 166,642
<INCOME-PRETAX> 213,243
<INCOME-TAX> 89,085
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,158
<EPS-PRIMARY> .01
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