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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
Commission file number 0-4410
TELECOMM INDUSTRIES CORP.
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(Name of Small Business Issuer as Specified in Its Charter)
Delaware 34-1765902
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(State of Incorporation) (I.R.S. Employer Identification No.)
1743 Quincy Ave. Naperville, Illinois 60540
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(Address of Principal Executive Offices) (Zip Code)
(630) 369-7111
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.01 par value
Check whether the issuer: (1) 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
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. ____
State issuer's revenues for its most recent fiscal year. $17,051,339
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.).
Common Stock, $0.01 par value: $11,384,268 (as of March 31, 1998)
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State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, $0.01 par value: 12,650,746 (as of March 31, 1998)
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Transitional Small Business Disclosure Format (check one): Yes No X.
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TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Description of Business............................................. 3
Item 2. Description of Property............................................. 8
Item 3. Legal Proceedings................................................... 8
Item 4. Submission of Matters to Security Holders........................... 8
Item 5. Market for Common Equity and Related Stockholder Matters............ 9
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11
Item 7. Financial Statements................................................ F1
Item 8. Changes in and Disagreements with Accountants.......................N/A
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................... 16
Item 10. Executive Compensation.............................................. 16
Item 11. Security Ownership of Certain Beneficial Owners and Management...... 16
Item 12. Certain Relationships and Related Transactions...................... 16
Item 13. Exhibits and Reports on Form 8-K.................................... 16
</TABLE>
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PART I
DESCRIPTION OF BUSINESS
THE COMPANY
Telecomm Industries Corp. ("Telecomm" or the "Company"), a Delaware
corporation, is one of the nation's largest Regional Bell Operating Company
("RBOC") distributors. The Company sells voice, data, cellular, video and
telephone information network solutions to business customers throughout its
five-state region. Ameritech and BellSouth are Telecomm's primary RBOC
partners. Telecomm also represents numerous manufacturers of voice and data
equipment, by marketing, installing and maintaining their telecommunications
equipment. Equipment manufacturers represented by Telecomm include various
globally-recognized companies, such as Northern Telecom, NEC, and Comdial.
In addition, Telecomm adds software and other technical enhancements or
services to data equipment purchased from third party manufacturers for
resale. Telecomm was recently identified as one of the 500 largest Value
Added Resellers ("VARs") in the country in VAR Business Magazine's 1997
annual industry report. Telecomm's value added services include network
consultation, design, installation, maintenance and repair for products of
various manufacturers, including Microsoft, Ascend, Intel, Adtran, Cisco,
Amdahl and Citrix. These manufacturers are recognized throughout the
industry for providing high quality technology and innovative software.
Telecomm operates sales offices in Naperville, Peoria, Quad Cities and
Savoy, Illinois; Indianapolis, Evansville, Schererville, South Bend, Muncie,
Bloomington, Clarksville and Lafayette, Indiana; Cleveland, Columbus, Dayton
and Independence Ohio; Green Bay, Appleton and Milwaukee, Wisconsin; and
Louisville and Owensboro, Kentucky. Telecomm's customers can be found in all
industries, particularly mid-size business enterprises, state and municipal
governments, financial institutions, manufacturing companies and public
school systems. Telecomm's customers' systems range in size from 2 to 7,600
telephone lines and in sophistication from basic telephone operations to
extensive communications networks that include voice messaging, automatic
call distribution and multi-location networks. The Company also services
customers with advanced data networks.
Telecomm, which is located at 1743 Quincy Ave., Naperville, Illinois
60540 (telephone number 630-369-7111), was originally incorporated in 1967 as
Scotco Data Leasing Incorporated, and from 1984 to October 18, 1993 was
inactive and had no operations. To streamline the Company's operations, the
Company's wholly-owned subsidiaries, Authorized Network Distributors, Inc.
("AND") and Centel Corporation ("Teleco") were merged with and into the
Company on November 11, 1997. AND and Teleco were acquired in August 1995
and April 1994, respectively, and in January 1996 the Company, through AND,
acquired Seraphim Information Systems, Inc. Teleco operated as an Ameritech
authorized distributor of telecommunications services in Ohio, AND operated
as an Ameritech authorized distributor of telecommunications
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services in Illinois, Indiana and Ohio and Seraphim operated as an Ameritech
authorized distributor of data services, integrated hardware and software
networking solutions in northern Illinois, particularly the Chicago market.
Today, Telecomm has one wholly-owned subsidiary, Teleco Acquisition Corp.
("TAC") which was formed to acquire Unitel, Inc. ("Unitel") in August 1997.
ACQUISITION STRATEGY
To effect its growth strategy, Telecomm has been an aggressive acquiror.
The Company made three acquisition in 1997. Telecomm acquired Long-Tell
Communications, Inc. ("Long-Tell"), a distributor of long distance telephone
services by merger on January 2, 1997.
On January 4, 1997, Telecomm acquired Northeastern Communications
Services, Inc., ("NCS"). NCS operated as an Ameritech authorized distributor
of voice and usages services, and as an NEC distributor for PBX and Key
telephone systems. NCS was headquartered in Green Bay, Wisconsin and had
offices throughout the state. Telecomm continues to operate the business of
NCS substantially in the manner previously conducted prior to its acquisition.
Unitel, with seven offices throughout Indiana and Kentucky, had
operated as a computer and telecommunications integrator and a distributor of
Ameritech and BellSouth services. The purchase was effective August 12,
1997. TAC has continued to use the acquired assets in the same manner as
they were used by Unitel prior to the purchase.
In order to facilitate the integration of new acquisitions into the
Company, as well as manage the company's internal growth, Telecomm has
reorganized its operations into three regional operations. The East Region
is made up of all offices in the State of Ohio. The West Region includes all
offices in Kentucky, southern and central Indiana and Illinois with the
exception of Chicago. The North Region includes northern Indiana, Chicago
and all of Wisconsin. The regions are under the direction of Regional Vice
Presidents who report directly to the Chief Executive Officer and Chairman.
On January 1, 1998, Telecomm management formed an acquisition team to
evaluate prospective acquisition opportunities. In 1998, the Company's
acquisition strategy will be focused on geographic expansion and economies of
scale in administration and sales support, and less on diversification and
development of infrastructure, which were the primary benefits of the Unitel
acquisition. The first 1998 acquisition was completed when Telecom acquired
substantially all of the assets of Division-Tel Communications Group, Inc.
("Division-Tel") on February 20, 1998. Division-Tel is one of Ameritech's
fastest growing distributors in Southern Indiana. Telecomm continues to use
the Division-Tel assets in substantially the same manner as they were used
prior to the acquisition.
The Company's acquisition strategy calls for the identification of
acquisition targets that meet certain criteria. The Company will pursue and
negotiate with targets that operate as interconnect services providers,
network services providers or that partner with RBOCs in the five Ameritech
States: Indiana, Illinois, Ohio, Michigan and Wisconsin, and the nine Bell
South States:
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Kentucky, North and South Carolina, Georgia, Tennessee, Alabama, Florida,
Louisiana and Mississippi. Telecomm will seek acquisition candidates that
would be immediately accretive to earnings per share, have a strong
management team in place that is compatible with the Company's management and
have a satisfied customer base. At this time, Telecomm has no outstanding
commitments or agreements regarding any future acquisitions.
SALES AND MARKETING
Telecomm and TAC presently employ 68 sales people. Sales Managers, who
report to the Regional Vice Presidents, manage and develop Telecomm's sales
force. Based upon his or her market area and experience level, each sales
person is assigned a monthly objective for equipment and services sales,
which triggers eligibility for incentive bonuses. Additionally, the Company
partners with third party firms and consultants to supplement their product
lines with voice and data applications provided by Telecomm through
Ameritech. The success of Telecomm's sales force has enabled its product
marketing department to negotiate volume discounts and other advantageous
terms that significantly enhance the Company's products and services.
TELECOMMUNICATIONS INDUSTRY REGULATION
The telecommunications industry is undergoing significant changes. The
Telecommunications Act of 1996 (the "Act") was signed into law on February 8,
1996. Congress and the Justice Department, through legislation and consent
decrees, had previously overseen the deregulation of the long distance and
equipment segments of the industry. This Act is intended to bring
competition to local telephone service, and thereby, provide the final step
in the deregulation of the telecommunications industry in this country.
The Company believes that the Act will bring significant change at the
federal and state levels by enabling the RBOCs and other Local Exchange
Carriers ("LECs") that provide local telephone service and Inter-Exchange
Carriers ("IXCs") that carry long distance traffic to begin competing in the
same market. In addition, services historically offered at a single tariff
rate will be available at wholesale and retail rates. Accordingly, the
Company believes some customers will choose their service provider based
entirely on price, while others will select their vendor based upon the type
and sophistication of services they provide.
Local exchange and long distance service companies, cable TV companies,
cellular service companies, computer concerns and the entertainment and
information services industries are merging, forming alliances and
positioning to provide a variety of products and services. New competitive
Local Exchange Carriers have been formed to purchase services from the RBOCs
at wholesale rates and resell these services to their customers. Regulatory,
legislative and judicial decisions and technological advances, as well as
heightened customer interest in advanced telecommunications services, have
expanded the types of available communications products and services as well
as the number of companies offering such services.
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REGULATORY ENVIRONMENT.
Telecomm's equipment and service providers are subject to regulation by
the Federal Communications Commission and various state public utilities
commissions. Management believes that the complex regulatory environment in
which its equipment suppliers operate has little effect on Telecomm's ability
to distribute equipment and services, and that many sources of supply exist
for the types of equipment and services sold.
COMPETITION
The distribution of telecommunications services and equipment is highly
fragmented and competitive. Many of the Company's competitors are larger
than the Company and have financial and other resources substantially greater
than the Company. Telecomm faces substantial direct competition for the same
small and medium sized business customers that it targets in all of its
markets. Telecomm competes, as a full-service provider of its customers'
voice and data communications needs, providing high quality, competitive
prices and a wide array of equipment and services. Management believes that
substantial opportunities will continue to arise to increase value for
stockholders by expanding Telecomm's business, both in the menu of services
provided, in order to provide more interconnect services to compliment its
existing network business, and to gain market share in its geographic
markets. Telecomm continues to seek and evaluate acquisitions of other
telecommunications distributors and wide area networking companies, as well
as continuing to expand its sales through internal growth. The Company
anticipates that as local telephone service becomes more competitive under
the provisions of the Act, the RBOCs, and consequently the Company, will face
more competition in the provision of these services.
EMPLOYEES
As of December 31, 1997, Telecomm and its subsidiary employed 218
persons, an increase from 112 persons on December 31, 1996. Of these
employees, 214 are employed on a full time basis and 4 are employed on a part
time basis. The increase was due primarily to the acquisitions of NCS and
Unitel and the expansion of the Company's sales force, markets served and
services provided.
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EXECUTIVE OFFICERS.
The current officers of Telecomm are listed below. Each has been duly
appointed to serve in the capacity set forth opposite their respective names.
<TABLE>
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Positions With
Name Age Date Service Commenced Registrant
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James M. Lowery 49 February 1997 Chairman of the Board and Chief Executive Officer
Eric Getzin 38 October 1997 Chief Financial Officer
Rita Koridek 42 February 1997 Director and Regional Vice-President
Paul Stoyanoff 40 February 1997 Director and Regional Vice-President
Paul J. Satterthwaite 43 August 1997 Director, Regional Vice-President and Secretary
</TABLE>
JAMES M. LOWERY. Mr. Lowery became Chairman of the Board and Chief
Executive Officer of Telecomm in February 1997 and was President of Seraphim
from August 1992 until it was merged into Telecomm. Previously, he was
employed by Ameritech as Director of Channel Management for the authorized
distributors in Ameritech's marketing area.
ERIC GETZIN. Mr. Getzin, a certified public accountant, has served as
the Chief Financial Officer of Telecomm since August 1997. From January 1997
to August 1997, Mr. Getzin served as the Chief Financial Officer of Unitel.
Prior to January 1997, he provided part-time financial officer services to a
variety of companies through Alternative Financial Services, a consulting
company that he founded in April 1991.
RITA KORIDEK. Ms. Koridek has served as a Director of Telecomm since
February 1997 and as a Regional Vice President since January 1996. From
January 1995 to January 1996, she was a partner in Seraphim and from January
1995 to January 1997 she owned and managed St. James Sales and Consulting
Group, an Ameritech pay phone distributorship in Illinois. From December
1993 to January 1995, Ms. Koridek served as a Vice President of Ameritech.
PAUL STOYANOFF. Mr. Stoyanoff has served as a Director and Vice
President of Telecomm since February 1997. Prior to such time, he had served
as the Managing Vice President of AND
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since October 1994. From October 1990 to October 1994, Mr. Stoyanoff served
as a Regional Sales Manager for Tone Commander Systems of Redmond, Washington.
PAUL SATTERTHWAITE. Mr. Satterthwaite has served as a Director and
Regional Vice President of Telecomm since August 1997. For more than five
years prior to that time, he served as President and Chief Executive Officer
of Unitel.
On July 2, 1997, while Paul Satterthwaite and Eric Getzin were officers
of Unitel, prior to its acquisition by Telecomm, an involuntary petition was
filed under Chapter 7 of the Bankruptcy Code against Unitel. The petition
was dismissed on July 29, 1997 after a settlement was reached with Unitel's
creditors.
DESCRIPTION OF PROPERTY.
Telecomm's principal offices are located in approximately 1,650 square
feet of a one-story brick building located in Naperville, Illinois;
approximately 35,000 square feet of a two-story brick building in Indianapolis,
Indiana; and approximately 6,000 square feet of a one-story brick building
located in Mentor, Ohio. The Mentor facility is leased from an affiliate
through November 31, 1998 at a monthly rate of $2,400. The Indianapolis
facility is leased from affiliates through September 2015. The Company makes
monthly payments for the Indianapolis facility of $12,542 for rent plus
approximately $10,000 for certain expenses and has a right to terminate the
lease on 12 months advance written notice.
Telecomm also has sales offices in several Illinois, Kentucky, Indiana
and Ohio cities. Such offices are leased on a short-term basis not exceeding
two years.
LEGAL PROCEEDINGS.
Telecomm is not a party to, nor are any of Telecomm's assets subject to,
any pending legal proceedings other than non-material litigation incidental
to its business.
SUBMISSION OF MATTERS TO SECURITIES HOLDERS.
None.
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PART II
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Since November 1, 1993, Telecomm's Common Stock has traded on the NASDAQ
over-the counter market and has been quoted on the NASDAQ Electronic Bulletin
Board under the symbol "TCMM." The following quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
<TABLE>
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REPRESENTATIVE PRICES
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CALENDAR QUARTER HIGH/ASK LOW/BID
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First quarter 1996 2-3/4 1-3/4
Second quarter 1996 3-5/8 1-5/8
Third quarter 1996 2-1/2 1-7/16
Fourth quarter 1996 2-1/16 1
First quarter 1997 1-3/4 1
Second quarter 1997 1-9/16 1-1/8
Third quarter 1997 1-11/32 27/32
Fourth quarter 1997 1-13/16 5/8
</TABLE>
Holders
The approximate number of holders of Telecomm's Common Stock as of
December 31, 1997 was 415.
UNREGISTERED STOCK ISSUANCES
In January 1997, Telecomm issued 400,000 shares of Common Stock
("Shares") to Peter Olk in connection with the acquisition of NCS; 112,500
Shares to Dennis Gehrisch in connection with the acquisition of Long-Tell;
20,202 Shares to Vito Centofani in connection with the acquisition of NCS and
25,253 Shares to Jane Shirk, also in connection with the acquisition of NCS.
In May 1997, Telecomm granted 400,000 options to purchase shares of
common stock to David Gruber in consideration for consulting services (the
"Options"). The Options are exercisable for prices ranging from $3.00 to
$10.00 per share, as amended April 3, 1998.
In August 1997, Telecomm issued 1,000,000 Shares to each of Jon
Satterthwaite and Paul Satterthwaite in connection with the acquisition of
Unitel. Also in connection with the acquisition,
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Telecomm issued a $1.0 million 5% convertible promissory note (the "Note") to
P&J Corporation, an affiliate of Messrs Satterthwaite. The Note has a term
of five years and is convertible, at the holder's election, at its maturity.
Each of the above described issuances were exempt under Section 4(2) of
the Act.
DIVIDENDS
Telecomm has not declared any cash dividends to date. The Company
intends to retain earnings, if any, to finance the growth and development of
its business and does not anticipate paying any cash dividends in the
foreseeable future. Any future dividends will depend on earnings, capital
requirements and the financial condition of the Company, and on such other
factors as the Company's Board of Directors may consider relevant.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Telecomm is one of the nation's largest RBOC distributors. The Company
sells voice, data, cellular, video and telephone information network
solutions to business customers throughout its five-state region. Ameritech
and Bell South are Telecomm's primary RBOC partners. In addition, Telecomm
represents numerous manufacturers of voice and data equipment by marketing,
installing and maintaining their telecommunications equipment. Telecomm also
operates as a value added reseller of data equipment.
Because of a change in Ameritech's commission payment structure, the
Company adopted a new compensation plan for its sales force in 1996. Before
June 1996, Ameritech paid 100% of the commissions earned at the time the
service was installed. After June 1996, Ameritech began paying Telecomm 60%
of the commissions earned at the time the service was installed and the
remaining 40% over the life of the contract. The Company adopted an
aggressive commission policy which enabled it to adjust to the new method of
payment from Ameritech, while continuing to actively attract and maintain
skilled, experienced salespeople.
In addition, in the third quarter of 1996, Ameritech implemented a new
billing and customer record system in an effort to consolidate and
standardize its five non-standard billing systems. The combined effect on
the Company of the change in timing of commission payments and the new system
implementation lengthened the collection period for Ameritech receivables,
adversely affecting the Company's working capital and cash flow.
Under Ameritech's accelerator bonus system, significant bonuses are
awarded to the Company for each commission dollar earned over a certain
threshold. Once the threshold is reached, revenue derived from Ameritech
sales increases at a greater rate than prior to the Company's obtaining the
target. Also, once the target is reached, the Company earns promotional and
co-op advertising dollars to be spent in the subsequent year.
While Ameritech is Telecomm's most significant supplier, Telecomm's
recent acquisitions have enabled it to diversify its product mix. Unitel,
acquired in August 1997, derives revenues predominantly from equipment and
service sales, while prior to the Unitel acquisition, Telecomm derived
revenues primarily from RBOC commissions. Management believes that this
diversification will enable Telecomm to continue its rapid growth and
maintain its relationship with Ameritech while significantly reducing its
reliance on Ameritech.
YEAR 2000 TECHNOLOGY
Based upon a preliminary study by management, Telecomm does not expect
to incur material costs to modify its current computer information systems to
enable proper processing of transactions relating to the year 2000 and beyond.
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However, Telecomm continues to evaluate whether additional corrective action
will be necessary. Telecomm made no material expenditures in 1997
relating to year 2000 technology.
1997 VS. 1996
The Company's net revenues increased 61% to $17.1 million for the year
ended 1997 from $10.6 million in the comparable 1996 period. Sales of
network services for the year ended 1997 were $9.6 million (or 56% of net
revenues), equipment sales and related services were $7.3 million (or 43% of
net revenues), and long distance and other services were $0.2 million (or 1%
of net revenues) compared to network services sales of $7.5 million (or 71%
of net revenues) and $3.1 million in equipment sales and related services (or
29% of net revenues) for the year ended 1996. The increase in network
services was primarily attributable to an increase of $0.9 million in sales
of voice transmission services by Unitel, which was acquired in August 1997,
and receipt of Ameritech accelerator bonuses of $0.6 million during the year
ended 1997. The increase in equipment sales and related services was
primarily attributable to an increase of $3.3 million of voice equipment and
related services sold, including $1.8 million sold by Unitel and $1.1 million
in data equipment and related services sold.
Commissions, contractor fees and related expenses increased $2.2 million
to $5.8 million for the year ended 1997, a 62% increase from such expenses of
$3.6 million for the year ended 1996. $1.3 million of this increase is
attributable to costs associated with Unitel sales and $0.7 million is
attributable to increased costs of equipment and labor to support additional
hardware sales generated in 1997. As a percentage of net revenues,
commissions, contractor fees and related expenses remained constant at 34%
from 1996 to 1997. Even though Unitel was included in Telecomm's results for
only five months in 1997, there was no change in the percentage because
Unitel's commissions, contractor fees and related expenses of 49% of net
revenues were offset by a decrease in similar expenses for Telecomm's other
operations to 31% of net revenues. Compared to Telecomm's other businesses,
these expenses are a higher percentage of Unitel's net revenues primarily
because of Unitel's emphasis on equipment sales.
Selling, general and administrative expenses ("SG&A") increased $3.1
million to $9.1 million for the year ended 1997, a 51% increase from SG&A
expenses of $6.0 million in the comparable 1996 period. As a percentage of
net revenues, these expenses decreased to 54% for the year ended 1997, from
57% for the comparable period in 1996. The increased SG&A costs attributable
to Unitel sales in 1997 were $1.5 million, and the remaining $1.6 million
were due to increases in administrative and sales expenses due primarily to
growth and acquisitions of NCS and Long-Tell during 1997.
Interest income decreased by $14,700 to $11,400 for the year ended 1997,
primarily due to the use of short-term investments to meet operating
expenses. Interest expense increased by $171,100 to $224,800 for the year
ended 1997 from $53,600, in the comparable period in 1996,
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primarily due to increased borrowing by the Company under its line of credit
facility and issuance of new notes in connection with the 1997 acquisitions
of NCS, Long-Tell and Unitel.
Income from operations before income taxes increased by $1.0 million to
$1.9 million for the year ended 1997, an increase of 100% from $0.9 million
in the comparable 1996 period, primarily for the reasons stated above.
The provision for income taxes increased by $0.4 million to $0.8 million
for the year ended 1997 compared to $0.4 million for the year ended 1996, due
to higher earnings in 1997. The provision includes a $0.1 million tax
benefit attributable to Unitel's 1997 operating loss of $0.3 million.
As a result of the foregoing, net income for the year ended 1997 was
$1.1 million, an increase of 103% compared to net income for the year ended
1996 of $0.6 million.
LIQUIDITY AND CAPITAL RESOURCES
Telecomm's principal capital requirements are the internal growth of
network services sales, primarily network service receivables classified as
long term, 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 $0.8 million and $0.5 million
in 1997 and 1996, respectively. In 1997, the $1.6 million increase in
network long term receivables due to Ameritech's commission payment
structure, and the decrease of accounts payable-trade, accrued commissions
and contractor fees, and accrued expenses aggregating $1.3 million (excluding
the acquisitions' impact on these accounts) were offset by net income of $1.1
million, the increase in deferred income taxes of $0.7 million and
depreciation and amortization of $0.4 million. In 1996, the increase of $2.2
million in accounts receivable, including a $1.0 million increase in network
long term receivables, and the increase of $0.4 million in inventory, were
offset by net income of $0.5 million, an increase in deferred income taxes of
$0.3 million, an increase of $0.3 million in accounts payable and an increase
of $0.7 million in accrued bonuses.
Net cash used in investing activities was $0.7 million in 1997 compared
to $0.1 million in 1996. This increase is primarily attributable to $0.5
million used for the purchase of fixed assets in 1997 compared to $0.2
million used for the same purpose in 1996, and $0.3 million net used for the
acquisitions of Unitel, NCS and Long-Tell in 1997.
Net cash provided by financing activities was $1.4 million in 1997
compared to $0.3 million in 1996. This increase is primarily attributable to
$1.3 million in proceeds from long-term debt received in 1997 compared to
$0.4 million in proceeds from long-term debt received in 1996, net proceeds
from the Company's line of credit in the amount of $1.3 million in 1997
compared to $0 in 1996 and the receipt of $0.4 million payment on notes
receivable from related parties. This increase is partially offset by an
increase of $1.2 million in payments made on
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long-term debt, which were $1.3 million in 1997 compared to $0.1 million in
1996 and the purchase of treasury stock of $0.3 million in 1997.
The Company's 1997 capital expenditures were approximately $0.5 million,
excluding acquisitions, primarily representing computer equipment purchased
to network Telecomm's offices throughout its five-state region.
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, lengthened the collection period of
receivables, adversely affecting the Company's working capital and cash flow.
Telecomm believes cash flow will continue to be similarly affected as long as
the existing Ameritech commission structure remains.
On September 24, 1997, Telecomm entered into a Credit and Security
Agreement (the "Credit Agreement") with Peoples Bank, N.A. ("Peoples"). The
Credit Agreement provides for a line of credit (the "Line of Credit") and a
term loan (the "Term Loan"), each in the amount of $2.0 million. A copy of
the Credit Agreement is attached to this Form 10-KSB as Exhibit 10.2.
The Line of Credit is payable on demand and bears interest at Peoples'
prime rate of interest plus one quarter percent (1/4%) per annum (8.5% at
December 31, 1997). The Term Loan matures on September 24, 2002 and bears
interest at the rate of nine and twenty-three hundredths percent (9.23%) per
annum. Both loans are secured by a lien on substantially all of Telecomm's
assets. Payment of interest under the Line of Credit and principal and
interest under the Term Loan is made monthly. On December 31, 1997, $0.6
million was available under the Line of Credit.
Telecomm is pursuing additional funds under its credit facility, which,
together with cash reserves and funds generated from operations, management
believes will be sufficient to provide the liquidity necessary to fund its
anticipated capital and operational requirements and acquisitions over the
next twelve months. Telecomm may also seek additional debt or equity
financing if it determines that such financing is necessary. There is no
assurance that the Company will obtain additional funds under its credit
facility or any other additional debt or equity financing 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;
-14-
<PAGE>
- changes in Ameritech's commission payment plan and/or its billing and
record system, adversely affecting the Company's working capital and
long-term accounts receivable;
- 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 competitors
with financial and other reserves significantly greater than those of
Telecomm;
- the ability of the Company to integrate the operations of Unitel and
Division-Tel 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 Telecomm 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; 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.
FINANCIAL STATEMENTS
Telecomm's Reports of Independent Accountants and Financial Statements
follow this page.
-15-
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................................... 1
Consolidated Balance Sheets as of December 31, 1997 and 1996................................ 2
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996........ 3
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997
and 1996............................................................................. 4
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996........ 5
Notes to Consolidated Financial Statements.................................................. 6-18
</TABLE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Telecomm Industries Corp. and Subsidiary
We have audited the accompanying consolidated balance sheets of Telecomm
Industries Corp. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Telecomm
Industries Corp. and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cleveland, Ohio
April 10, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 97,779 $ 238,312
Accounts receivable - trade 3,387,943 2,548,961
Inventories 1,412,196 616,147
Prepaid income taxes 59,557 48,260
Prepaid expenses 133,936 38,660
Employee advances 147,601 139,887
Notes receivable - related parties - 400,000
------------ -----------
Total current assets 5,239,012 4,030,227
Property and equipment, net 1,481,566 482,712
Accounts receivable, long-term portion 2,992,137 1,013,520
Intangibles and other assets, net 3,462,958 81,244
------------ -----------
Total assets $13,175,673 $5,607,703
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 1,371,210 $ 113,384
Current portion of long-term debt 404,780 175,823
Accounts payable - trade 1,139,776 408,848
Accrued payroll and related expenses 268,191 122,719
Accrued bonus 575,500 816,900
Accrued commissions and contractor fees 180,813 455,582
Customer deposits 118,504 -
Deferred income taxes 342,321 106,321
Income taxes payable 109,399 81,136
Other accrued expenses 149,730 56,185
------------ -----------
Total current liabilities 4,660,224 2,336,898
Long-term debt, less current portion 2,862,976 389,436
Deferred revenue 10,362 -
Deferred income taxes 906,913 402,913
------------ -----------
Total liabilities 8,440,475 3,129,247
Commitments and contingencies - -
Stockholders' equity:
Common stock $.01 par value; authorized 20,000,000 shares; issued
12,300,746 and 9,642,791; outstanding 11,771,559 and
9,642,791, at December 31, 1997 and 1996, respectively 123,008 96,428
Additional paid-in capital 3,577,632 2,085,887
Treasury stock, 529,187 shares at cost (317,512) -
Receivables from stockholders (110,065) (44,531)
Retained earnings 1,462,135 340,672
------------ -----------
Total stockholders' equity 4,735,198 2,478,456
------------ -----------
Total liabilities and stockholders' equity $13,175,673 $5,607,703
------------ -----------
------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIALS
STATEMENTS.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 2
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net revenues $17,051,339 $10,560,785
Commissions, contractor fees, and related expenses 5,783,176 3,560,176
Selling, general and administrative expenses 9,137,518 6,048,802
------------ ------------
Operating income 2,130,645 951,807
Other income (expense):
Gain (loss) on disposal of assets (3,166) (870)
Interest income 11,417 26,130
Interest expense (224,750) (53,641)
------------- ------------
(216,499) (28,381)
------------ ------------
Income from operations before income tax expense 1,914,146 923,426
Income tax expense 792,683 371,200
------------ ------------
Net income $ 1,121,463 $ 552,226
------------ ------------
------------ ------------
Net income per common share:
Basic $ .10 $ .06
------------ ------------
------------ ------------
Diluted $ .10 $ .06
------------ ------------
------------ ------------
Average number of common shares outstanding:
Basic 10,854,949 9,425,291
------------ ------------
------------ ------------
Diluted 11,654,949 9,725,291
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 3
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL RECEIVABLES
COMMON STOCK PAID-IN TREASURY STOCK FROM RETAINED
SHARES AMOUNT CAPITAL SHARES AMOUNT STOCKHOLDERS EARNINGS
--------- -------- ---------- --------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 9,607,791 $ 96,078 $2,145,706 $(163,202) $(211,554)
Stock purchased by employees 35,000 350 (350)
Forgiveness of stockholders debt (59,469) 59,469
Settlement of advances to stockholders 59,202
Net income 552,226
--------- -------- ---------- --------- ------- ------------ ---------
Balance at December 31, 1996 9,642,791 96,428 2,085,887 (44,531) 340,672
Purchase of treasury shares (529,187)$(317,512)
Stock issued for Long-Tell, Inc. 112,500 1,125 91,800
Stock issued for NCS Communications 400,000 4,000 326,400
Stock issued for Unitel, Inc. 2,000,000 20,000 980,000
Stockholder advances acquired from
Unitel, Inc. (174,227)
Settlement of advances to stockholders 108,693
Stock purchased by employees 145,455 1,455 93,545
Net income 1,121,463
--------- -------- ---------- --------- ------- ------------ ---------
Balance at December 31, 1997 12,300,746 $123,008 $3,577,632 (529,187)$(317,512) $ (110,065) $1,462,135
--------- -------- ---------- --------- ------- ------------ ---------
--------- -------- ---------- --------- ------- ------------ ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,121,463 $ 552,226
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 388,170 120,664
Deferred revenue (966) -
Deferred income taxes 740,000 350,334
Reserve for bad debt 56,833 -
Loss on sale of property and equipment 3,416 870
Changes in assets and liabilities:
Accounts receivable - trade 210,499 (1,199,964)
Accounts receivable - long-term portion (1,604,617) (1,013,520)
Inventories (59,487) (416,537)
Prepaid income taxes (11,297) (48,260)
Prepaid expenses (39,903) 106,907
Employee advances (1,510) (110,467)
Accounts payable - trade (585,172) 265,460
Accrued payroll and related expenses 89,133 104,732
Accrued bonus (241,400) 674,900
Accrued commissions and contractor fees (296,279) 136,713
Customer deposits (175,514) -
Income taxes payable 28,263 (80,994)
Other accrued expenses (428,002) 39,995
------------------- -------------------
Total adjustments (1,927,833) (1,069,167)
------------------- -------------------
Net cash (used in) provided by operating activities (806,370) (516,941)
------------------- -------------------
Cash flows from investing activities:
Purchases of property and equipment (542,461) (149,833)
Proceeds from sale of property and equipment 4,000 -
Purchase acquisitions, net of cash acquired of $123,547 (301,453) -
Proceeds from stockholders receivables 108,693 59,202
------------------- -------------------
Net cash used in investing activities (731,221) (90,631)
------------------- --------------------
Cash flows from financing activities:
Payments on long-term debt (1,312,087) (153,512)
Proceeds from issuance of long-term debt 1,273,831 400,000
Proceeds from common stock purchased by employees 95,000 -
Net borrowings under line of credit 1,257,826 (12,617)
Notes receivable - related parties 400,000 36,646
Purchases of treasury stock (317,512) -
-------------------- -------------------
Net cash provided by financing activities 1,397,058 270,517
------------------- -------------------
Net decrease in cash (140,533) (337,055)
Cash at beginning of period 238,312 575,367
------------------- -------------------
Cash at end of period $ 97,779 $ 238,312
------------------- -------------------
------------------- -------------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 203,917 $ 53,641
------------------- -------------------
------------------- -------------------
Cash paid for income taxes $ 31,048 $ 149,300
------------------- -------------------
------------------- -------------------
Non-cash investing and financing activities:
Common stock issued for purchase acquisitions $ 1,423,325 $ -
------------------- -------------------
------------------- -------------------
Notes issued for purchase acquisitions $ 1,200,000 $ -
------------------- -------------------
------------------- -------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: Telecomm Industries Corp. ("Telecomm" or
the "Company") is incorporated under the laws of the State of Delaware and
has its principal offices in Naperville, Illinois. In 1996, the Company's
wholly-owned subsidiaries included Centel Corporation, an Ohio corporation
doing business under the tradename Teleco ("Teleco"), and Authorized Network
Distributors ("AND"), an Indiana corporation. In July 1997, Teleco
Acquisition Corporation ("Teleco Acquisition"), a wholly-owned subsidiary and
an Ohio corporation doing business under the tradename Unitel/Telecomm
Industries, was formed to acquire the assets of Unitel, Inc. On November 11,
1997, Teleco and AND were merged into Telecomm.
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Teleco Acquisition. All
significant intercompany accounts and transactions have been eliminated.
BUSINESS AND INDUSTRY: The Company is an authorized distributor for
Ameritech, Bell South and GTE and is a full-service provider of
telecommunication services and equipment.
The telecommunications industry is undergoing significant changes.
Local exchange and long distance service companies, cable TV companies,
cellular service companies, computer concerns and the entertainment and
information services industries are converging, forming alliances and
positioning to provide a variety of services. Regulatory, legislative and
judicial decisions and technological advances, as well as heightened customer
interest in advanced telecommunication services, have expanded the types of
available communication services and products, as well as the number of
companies offering such services.
The distribution of telecommunications equipment and services is highly
fragmented and competitive. Many of the major suppliers to the industry such
as Ameritech, AT&T and Northern Telecom, have sales forces that compete with
their authorized distributors. These sales forces, as well as those of
various distributors, compete for the same small and medium sized business
customers that Telecomm targets. Telecomm competes as a full-service provider
of its customers' telecommunications needs, as well as quality, price and
selection of equipment and services.
USE OF ESTIMATES: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results may differ form those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Management has determined that the
carrying values of financial instruments, primarily accounts receivable,
notes receivable (Note 3), accounts payable and debt (Note 6), approximate
fair value.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CONCENTRATIONS OF CREDIT RISK: Financial instruments, which potentially
expose the Company to concentration of credit risk, consist primarily of
accounts receivable. Ameritech and its subsidiaries accounted for 57% and 71%
of the Company's revenues for 1997 and 1996, respectively. The Company may
establish an allowance for possible losses based upon factors surrounding the
credit and historical information. At December 31, 1997 and 1996, the Company
recorded an allowance for doubtful accounts of approximately $145,000 and
$370,000, respectively.
The Company places cash with high quality financial institutions. At
times, deposits may be in excess of FDIC insurance limits.
PROPERTY AND EQUIPMENT: Property and equipment is recorded at cost,
less accumulated depreciation. Depreciation is computed principally by using
the straight-line method over the estimated useful lives. The provision for
amortization of leasehold improvements is based on the term of the lease or
the estimated useful lives, whichever is shorter.
REVENUE RECOGNITION: Revenues are recognized when earned and are
recorded net of estimated cancellations and charge backs.
INVENTORY: Inventory consists of purchased equipment for
installation contracts and is recorded at the lower of cost (first-in,
first-out) or market value.
INTANGIBLE AND OTHER ASSETS: The excess of the purchase cost over the
fair value of net assets in an acquisition (goodwill) is included in
intangible and other assets in the accompanying consolidated balance sheets.
Goodwill is amortized on a straight-line basis over fifteen to thirty years.
Customer lists are being amortized on a straight-line basis over their
estimated useful lives of fifteen years.
Software costs are capitalized in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Cost of Computer
Software to Be Sold, Leased, or Otherwise Marketed" and are included in
intangible and other assets in the accompanying consolidated balance sheets.
Purchased computer software is capitalized and amortized for both financial
and tax reporting purposes, using the straight-line method, over the expected
useful life of the software, generally five years. Similarly, internally
developed computer software for sale or lease is capitalized and amortized
for financial reporting purposes using the straight-line method.
The Company's policy is to evaluate intangible assets based on a review
of such factors as the occurrence of a significant adverse event or change in
the environment in which the business operates or if the expected future net
cash flows (not discounted and without interest) would become less than the
carrying amount of the asset. An impairment loss would be recorded in the
period such determination is made based on the fair value of the related
businesses.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). SFAS No. 109 requires the use of the liability
method of computing deferred income taxes, whereby deferred income taxes are
recorded to reflect the income tax consequences on future years of temporary
differences between the income tax and financial reporting bases of assets
and liabilities as of the balance sheet date. Under the liability method,
deferred income taxes are adjusted for tax rate changes as they occur. This
method also provides for the current recognition of the expected income tax
benefits from net operating losses if it is expected such income tax benefits
are more likely than not to be realized.
RECEIVABLES FROM STOCKHOLDERS: Advances and other receivables due from
stockholders have been recorded as a reduction of stockholder's equity where
there is not a demonstrated ability or intent to repay the outstanding
amounts in cash.
RECLASSIFICATIONS: Certain items in the 1996 consolidated financial
statements of the Company have been reclassified to conform to the current
year's presentation.
2. ACQUISITIONS:
On August 12, 1997, the Company purchased all of the assets of Unitel,
Inc. ("Unitel"), an Indiana corporation, pursuant to an Asset Purchase
Agreement dated July 7, 1997, among the Company, Unitel, Paul Satterthwaite,
Jon Satterthwaite, the controlling stockholders of Unitel, and Teleco
Acquisition. The purchase price for the assets consisted of (i) 2,000,000
shares of the Company's common stock valued at $1,000,000, (ii) a convertible
promissory note in the principal amount of $1,000,000, and (iii) the
assumption of Unitel's liabilities, including a bank loan with a balance of
$1,309,000, and obligations to trade creditors of Unitel in an amount not to
exceed $1,200,000.
The Unitel asset acquisition has been accounted for using the purchase
method of accounting and accordingly, the purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the fair
values at the date of acquisition. The excess of the purchase price over the
fair values of the net assets acquired was $2,112,617 and has been recorded
as goodwill, which is being amortized on a straight-line basis over thirty
years. The amortization expense for fiscal 1997 was $28,604.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITIONS, CONTINUED:
The net purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 1,827,297
Property and equipment 777,471
Stockholder receivable 174,227
Other assets 381,204
Goodwill 2,112,617
Liabilities assumed (3,272,816)
--------------------
Net purchase price 2,000,000
Less: common stock issued 1,000,000
convertible note issued 1,000,000
--------------------
Cash paid for acquisition $ -
--------------------
--------------------
</TABLE>
Had the acquisition of Unitel occurred at January 1, 1997, the
unaudited pro forma consolidated Statement of Operations for the year ended
December 31, 1997 would have been as follows:
<TABLE>
<CAPTION>
PRO FORMA
TELECOMM UNITEL INC. STATEMENT OF
INDUSTRIES CORP. (1/1/97 TO PRO FORMA OPERATIONS
(AS REPORTED) 8/12/97) ADJUSTMENTS (UNAUDITED)
------------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Net revenues $ 17,051,339 $ 4,952,033 $ 22,003,372
Operating expenses 14,920,694 4,709,560 $ 28,600(1) 19,658,854
Other income (expense) (216,499) (216,499)
------------------ ----------------- ------------------- -------------------
Income (loss) from operations
before income taxes 1,914,146 242,473 (28,600) 2,128,019
Income taxes 792,683 96,989(2) 889,672
------------------ ----------------- ------------------- -------------------
Net income (loss) $ 1,121,463 $ 242,473 $ (125,589) $ 1,238,347
------------------ ----------------- ------------------- -------------------
------------------ ----------------- ------------------- -------------------
Earnings per common share:
Basic $ .10 $ .11
------------------ -------------------
------------------ -------------------
Diluted $ .10 $ .11
------------------ -------------------
------------------ -------------------
Average number of common
shares outstanding:
Basic 10,854,949 10,854,949
------------------ -------------------
------------------ -------------------
Diluted 11,654,949 11,654,949
------------------ -------------------
------------------ -------------------
</TABLE>
(1): Adjustment to recognize amortization of Unitel non-compete agreement
and customer lists.
(2): Adjustment to record income tax provision as if Unitel had been treated
as a "C" corporation.
On January 2, 1997, the Company acquired Northeastern Communication
Systems, Inc. ("NCS") under the provisions of a Stock Purchase Agreement.
Under the terms of this agreement, the Company issued 400,000 shares of its
common stock valued at $330,400, paid $400,000 in cash and assumed $503,957 of
NCS's liabilities for all of the outstanding common stock of NCS.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITIONS, CONTINUED:
The NCS acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair values at
the date of acquisition. The excess of the purchase price over the fair
values of the net assets acquired was $759,219 and has been recorded as
goodwill, which is being amortized on a straight-line basis over fifteen years.
The amortization expense for fiscal 1997 was $50,615.
The net purchase price was allocated as follows:
<TABLE>
<S> <C>
Working capital $ 194,497
Property and equipment 280,641
Goodwill 759,219
Liabilities assumed (503,957)
--------------------
Net purchase price 730,400
Less: common stock issued 330,400
--------------------
Cash paid for acquisition $ 400,000
--------------------
--------------------
</TABLE>
Had the acquisitions of Unitel and NCS occurred at January 1, 1996,
the unaudited pro forma consolidated Statement of Operations for the year
ended December 31, 1996 would have been as follows:
<TABLE>
<CAPTION>
PRO FORMA
TELECOMM STATEMENT OF
INDUSTRIES CORP. PRO FORMA OPERATIONS
(AS REPORTED) UNITEL INC. NCS ADJUSTMENTS (UNAUDITED)
------------------ ----------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Net revenue $ 10,560,785 $ 10,499,655 $ 1,967,058 $ 23,027,498
Operating expenses 9,608,978 11,759,638 2,227,252 $ 240,900(1) 23,836,768
Other income (expense) (28,381) 46,557 9,722 27,898
------------------ ----------------- ------------------ ----------------- ------------------
Income (loss) before income
taxes (benefit) 923,426 (1,213,426) (250,472) (240,900) (781,372)
Income taxes (benefit) 371,200 (610,335)(2) (239,135)
------------------ ----------------- ------------------ ----------------- ------------------
Net income (loss) $ 552,226 $ (1,213,426) $ (250,472) $ 369,435 $ (542,237)
------------------ ----------------- ------------------ ----------------- ------------------
------------------ ----------------- ------------------ ----------------- ------------------
Earnings (loss) per common
share:
Basic $ .06 $ (.05)
------------------ ------------------
------------------ ------------------
Diluted $ .06 $ (.04)
------------------ ------------------
------------------ ------------------
Average number of common
shares Outstanding:
Basic 9,425,291 11,825,291
------------------ ------------------
------------------ ------------------
Diluted 9,725,291 12,125,291
------------------ ------------------
------------------ ------------------
</TABLE>
(1): Adjustment to recognize amortization of Unitel non-compete agreement
and customer lists, and to recognize amortization of NCS goodwill.
(2): Adjustment to record income tax benefit as if Unitel and NCS had been
treated as "C" corporations.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITIONS, CONTINUED:
On January 2, 1997, the Company entered into a Stock Purchase Agreement
to purchase all of the outstanding stock of Long-Tell, Inc. of Mentor, Ohio.
Under the terms of this agreement, the Company issued 112,500 shares of its
common stock valued at $92,925, paid $25,000 cash and issued a $200,000 note
(bearing interest at a fixed rate of 9% and maturing January 2, 2002). The
entire purchase price was allocated to goodwill.
On January 26, 1996, the Company issued 400,000 shares of its common
stock for all of the outstanding common stock of Seraphim Information
Systems, Inc. This acquisition was accounted for by the pooling-of-interests
method and accordingly, the consolidated financial statements for the years
ended December 31, 1997 and 1996 reflect the combined results of the
businesses.
3. NOTES RECEIVABLE:
In conjunction with the sale of a former subsidiary in 1994, the
Company was issued a note receivable of $580,000, payable in 35 monthly
installments of $20,000 (including accrued interest at 13%) through December
1997. As of December 31, 1996, the balance of this note receivable was
$400,000, and was paid during the first quarter of 1997. Additionally, in
connection with the sale, a second note receivable of $59,469 was recorded
and was subsequently forgiven during 1996.
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1997 and 1996, consists of the
following:
<TABLE>
<CAPTION>
USEFUL LIVES 1997 1996
---------------------- ------------------- -------------------
<S> <C> <C> <C>
Office furniture and fixtures 5-7 $ 542,076 $ 197,954
Transportation equipment 3-5 286,017 219,304
Leasehold improvements Life of Lease 42,899 2,150
Computer equipment 5 868,748 300,944
Cable plant 10 206,373 -
------------------- -------------------
1,946,113 720,352
Less accumulated depreciation 464,547 237,640
------------------- -------------------
$ 1,481,566 $ 482,712
------------------- -------------------
------------------- -------------------
</TABLE>
Depreciation expense for the years ended December 31, 1997 and 1996,
amounted to $271,323 and $112,531, respectively.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
<S> <C> <C>
Goodwill $ 3,189,761 $ -
Customer lists 99,482 99,482
Software development costs 308,800 -
------------------ -----------------
3,598,043 99,482
Less accumulated amortization 135,085 18,238
------------------ -----------------
$ 3,462,958 $ 81,244
------------------ -----------------
------------------ -----------------
</TABLE>
Amortization expense for the years ended December 31, 1997 and 1996,
amounted to $116,847 and $6,632, respectively.
6. DEBT:
Long-term debt at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
Note payable to a financial institution for $400,000, collateralized
by a blanket filing on corporate assets with specific filings to
cover present and future contract service for business
acquisitions. Interest accrued at 0.5% over the financial
institution's prime rate (8.25% at December 31, 1996). The note
requires interest only payments for three months of $8,262 with
principal and interest payable in 47 monthly installments of
$9,907 commencing February 28, 1997 and maturing on February 27, 2001. $ - $ 400,000
Note payable to a financial institution for $2,000,000, collateralized by a
blanket filing on corporate assets. Principal and interest (fixed at
9.23% per annum) is payable in 59 monthly installments of $41,740
commencing October 1, 1997 and maturing September 24, 2002. 1,920,757 -
Note payable to a related party in connection with the acquisition of
Long-Tell, Inc. Principal is due on January 2, 2002. Interest is
payable quarterly at 9% per annum. 200,000 -
Convertible note payable to a related party in connection with the
acquisition of Unitel, Inc. Principal is due on August 11, 2002.
Interest is payable quarterly at 5% per annum and a balance of
$20,833 was due as of December 31, 1997. The note may only be
converted at the maturity date with a conversion rate of $2.00 per share. 1,000,000 -
Vehicle and equipment loans payable in monthly installments ranging
from $252 to $1,991 (including interest ranging from 8.2% to
13.9%) through July 2001, collateralized by vehicles and
equipment with a net book value of $138,617 and $179,364 at
December 31, 1997 and 1996, respectively. 146,999 165,259
------------------- -------------------
Total long-term debt 3,267,756 565,259
Less current portion 404,780 175,823
------------------- -------------------
$ 2,862,976 $ 389,436
------------------- -------------------
------------------- -------------------
</TABLE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. DEBT, CONTINUED:
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------
<S> <C>
1998 $ 404,780
1999 401,054
2000 371,505
2001 357,411
2002 and thereafter 1,733,006
------------------
$ 3,267,756
------------------
------------------
</TABLE>
The fair market value of the Company's long-term debt is estimated
based on the current rates offered to the Company for debt of the same
remaining maturities. At December 31, 1997 and 1996, the fair value of the
long-term debt approximates the amount recorded in the consolidated financial
statements.
The Company also has a line of credit with Peoples Bank for an amount
up to $2,000,000, of which $1,371,210 was outstanding at December 31, 1997.
The line bears interest at the financial institution's prime rate plus .25%
(prime rate was 8.5% at December 31, 1997) and is payable on demand. Interest
is payable monthly and is secured by all assets of the Company. The most
restrictive covenant requires the Company to maintain certain debt service
coverage. Additionally, the Company had a similar line of credit with
Peoples Bank in 1996, of which $113,384 was outstanding at December 31,
1996.
7. INCOME TAXES:
The provision for income taxes consists of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------------- ------------------
<S> <C> <C>
Federal $ - $ 5,853
State and local 52,683 15,013
Deferred - federal 656,373 297,784
Deferred - state and local 83,627 52,550
----------------- ------------------
$ 792,683 $ 371,200
----------------- ------------------
----------------- ------------------
</TABLE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
The following is a reconciliation of income taxes computed at the
federal statutory rate with income taxes recorded by the Company at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Statutory federal income tax rate 34.0% 34.0%
State and local taxes (net of federal tax effect) 7.8 4.8
Non-deductible items - 2.2
Other (.4) (.8)
------ ------
Effective income tax rate 41.4% 40.2%
------ ------
------ ------
</TABLE>
The tax effect of temporary differences which comprise the deferred
tax assets and liabilities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Deferred tax assets:
Accrued bonuses $ 154,762 $148,000
Other - 3,966
---------- --------
154,762 151,966
Deferred tax liabilities:
Deferred accounts receivable 1,365,354 539,800
Installment sale - 121,400
Other 38,642 -
---------- --------
1,403,996 661,200
---------- --------
Net deferred tax liabilities $1,249,234 $509,234
---------- --------
---------- --------
</TABLE>
6. STOCKHOLDERS' EQUITY DATA:
On May 23, 1996, the Company's Board of Directors authorized an
additional 10,000,000 shares of common stock, increasing the number of shares
authorized to 20,000,000.
During 1997, certain former employees purchased 145,455 shares of common
stock at an average price of $.65 per share pursuant to existing performance
measurement agreements.
On July 31, 1997, the Company repurchased 529,187 shares of its common
stock. These shares are held in treasury, at cost and are presented as a
reduction to stockholders' equity on the consolidated balance sheets.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY DATA, CONTINUED:
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 YEAR ENDED DECEMBER 31, 1997
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income $1,121,463
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 1,121,463 10,854,949 $.10
Effect of dilutive securities 800,000
----------- ------------- ---------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $1,121,463 11,654,949 $.10
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net income $ 552,226
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 552,226 9,425,291 $.06
Effect of dilutive securities 300,000
----------- ------------- ---------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 552,226 9,725,291 $.06
----------- ------------- ---------
----------- ------------- ---------
</TABLE>
Options to purchase 400,000 shares of common stock at $3.00 to $14.00
per share were outstanding during fiscal 1997, but 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 for the year.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK-BASED COMPENSATION PLANS:
The Company accounts for stock based compensation issued to employees
and directors in accordance with Accounting Principles Board Opinion 25 ("APB
25") and has elected the "disclosure-only" provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"). Certain grants to non-employees of the
Company have been accounted for under the provisions of SFAS No. 123.
The 1995 Stock Option Plan (the "1995 Plan") provides for the grant of
non-qualified options at an exercise price of $.50 per share. Options
outstanding under the 1995 Plan vest in equal installments over a two-year
period on the first two anniversary dates after the of grant. The option
price is equal to the market price for the Company's common stock at the time
of grant.
On May 1, 1997, the Company's Board of Directors issued stock options
for 400,000 shares to a consultant that will assist in publc and investor
relations of the Company. These options have exercise prices ranging from
$3.00 to $14.00 per share and vest upon grant (Note 14).
The following is a summary of the activity in the Company's stock option
plans during fiscal 1997 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGED
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at December 31, 1995 300,000 $ .50
Granted -
Exercised -
Expired -
------- --------
Outstanding at December 31, 1996 300,000 .50
Granted 400,000 8.92
Exercised -
Expired -
------- --------
Outstanding at December 31, 1997 700,000 $5.31
------- --------
------- --------
</TABLE>
At December 31, 1997, there were options outstanding under the Company's
stock option plans to purchase 700,000 shares of common stock, of which all
are currently exercisable at $.50 to $14.00 per share.
For SFAS No. 123 purposes, the fair value of each option under the
Company's stock option plans is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in both 1997 and 1996: (1) Average dividend yield of 0%, (2) expected
volatility of 120%, and (3) expected life of 5 years. A risk-free interest
rate of 5.71% and 5.89% was used for grants in 1997 and 1996, respectively.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. STOCK-BASED COMPENSATION PLANS, CONTINUED
Had the Company elected the fair value methodology for determining
compensation expense, the Company's net income and net income per common
share would not have changed from amounts reported in the accompanying
consolidated financial statements.
10. LEASES:
The Company and its subsidiaries lease office space, equipment and
vehicles under various operating leases. Leases that expire are generally
expected to be renewed or replaced by other leases.
At December 31, 1997, future minimum rental payments applicable to
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 467,063
1999 358,529
2000 286,704
2001 274,304
2002 and thereafter 3,787,056
----------
Total minimum lease payments $5,173,656
----------
----------
</TABLE>
Rent expense for all operating leases was $590,258 and $206,211 in 1997
and 1996, respectively.
11. RELATED PARTY TRANSACTIONS:
The Company currently leases office and warehouse space through an
entity partially owned by a director/stockholder. The lease agreement calls
for monthly payments of $2,400 through November 1998. Rent expense related to
this lease amounted to $28,800 for both 1997 and 1996.
A director/stockholder of the Company was also an officer, director and
shareholder of Long-Tell Communications, Inc. which was acquired by the
Company on January 2, 1997.
At December 31, 1996, certain funds aggregating $400,000 were due from
related parties. The balance was paid during the first quarter 1997.
Additionally, a note receivable for $59,469 was recorded at the time of sale.
This balance was forgiven during 1996.
The Company acquired from the Unitel asset acquisition a lease for
office and warehouse space through an entity owned by a director/shareholder.
The lease agreement calls for the Company to make monthly payments of $12,542
through September 2015, as well as payment of certain expenses of
approximately $10,000 per month. As a part of the acquisition the Company
obtained an amendment to the lease which allows the Company to terminate the
existing lease by providing a twelve month written notice. The Company has
not exercised this option as of the date of this report. Rent expense related
to this lease amounted to $122,710 for the year ended 1997.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. RELATED PARTY TRANSACTIONS, CONTINUED:
The Company also assumed other vehicle leases as part of the Unitel
asset acquisition, through an entity owned by a director/shareholder. The
vehicle lease agreements call for monthly payments ranging from $343 to $805,
and expire in June 1999. Rent expense related to these leases amounted to
$23,251 for the year ended 1997.
12. EMPLOYEE BENEFIT PLAN:
The Company sponsors a 401(k) plan that covers substantially all
eligible employees. Contributions to the plan are discretionarily determined
by the Company's management. For the years ended December 31, 1997 and 1996,
contributions totaled $40,914 and $7,240, respectively.
13. COMMITMENTS AND CONTINGENCIES:
The Company is subject to legal proceedings and claims in the ordinary
course of business that have not been finally adjudicated. In management's
opinion, all such outstanding matters would not have a material adverse
affect on the Company's consolidated financial position, results of
operations or cash flows.
14. SUBSEQUENT EVENTS:
On February 20, 1998, the Company acquired Division-Tel Communications
Group, 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 $25,000 in cash, issued a
$20,000 note (bearing interest at a fixed rate of 9% and maturing January 2,
2002) and assumed $300,000 of Division-Tel's liabilities for all of the
outstanding common stock of Division-Tel.
On April 3, 1998, the Company amended the May 1, 1997 stock option
agreement with a public relations consultant assisting the Company. The
amendment: (1) reduces the number of shares granted under option by 25%, (2)
modifies the range of exercise prices from $3.00 - $14.00 per share to $3.00
- -$10.00 per share, and (3) specifies certain guidelines for the termination
of the agreement. Management has not yet determined the effect such amendment
will have on the consolidated results of operations.
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY 18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
For information with respect to the executive officers of the Registrant,
see "The Company -- Executive Officers" in Part I of this Form 10-KSB. Telecomm
will file with the Securities and Exchange Commission a definitive Proxy
Statement relating to its 1998 Annual Meeting of Stockholders no later than 120
days after the close of its fiscal year ended December 31, 1997 (the "Proxy
Statement"). The information with respect to the Directors of Telecomm
required by this Item is hereby incorporated by reference to the Proxy
Statement.
ITEM 10. EXECUTIVE COMPENSATION.
The section entitled "Executive Compensation and Other Information" in
the Proxy Statement is hereby incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The section entitled "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement is hereby incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The section entitled "Certain Relationships and Related Transactions" in
the Proxy Statement is hereby incorporated by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
A. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
2.1 Merger Agreement dated September 5, 1995 regarding Authorized Network
Distributors, Inc.(1)
</TABLE>
- ----------
(1) Filed as an exhibit to Telecomm's Current Report on Form 8-K dated
September 7, 1995, and incorporated herein by reference.
-16-
<PAGE>
<TABLE>
<S> <C>
2.2 Merger Agreement dated January 23, 1996 regarding Seraphim Information
Systems, Inc.(2)
3.4 By-Laws of Registrant.(3)
3.5 Amended and Restated Certificate of Incorporation of the Registrant,
dated October 1, 1996.(4)
10.1 Non-Exclusive Authorized Distributor Agreement between Telecomm and
Ameritech.(4)
10.2* Credit and Security Agreement between Telecomm and Peoples Bank,
N.A., dated September 24, 1997.
10.3 Merger Agreement by and among Peter Olk and Thomas Raasch,
Northeastern Communications Systems, Inc. and Telecomm, dated January
1, 1997.(5)
10.4 Asset Purchase Agreement by and among Unitel, Inc., Paul
Satterthwaite, Jon Satterthwaite, Teleco Acquisition Corporation and
Telecomm, dated July 7, 1997.(6)
21* Subsidiaries of Registrant.
27* Financial Data Schedule.
B. REPORTS ON FORM 8-K.
None.
</TABLE>
* Filed herewith
- ----------
(2) Filed as an exhibit to Telecomm's Current Report on Form 8-K dated
January 25, 1996, and incorporated herein by reference.
(3) Filed as an exhibit to Telecomm's Annual Report on Form 10-KSB for the
year ended December 31, 1994.
(4) Filed as an exhibit to Telecomm's Annual Report on Form 10-KSB for the
year ended December 31, 1996.
(5) Filed as an exhibit to Telecomm's Current Report on Form 8-K dated
January 3, 1997, and incorporated herein by reference.
(6) Filed as an exhibit to Telecomm's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1997.
-17-
<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/ Eric Getzin
--------------------------------
Eric Getzin, Chief Financial and
Accounting Officer
Date: April 15, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Michael J. Toth Director April 15, 1998
- ----------------------------
Michael J. Toth
/s/ Rita Koridek Director and April 15, 1998
- ---------------------------- Vice President
Rita Koridek
/s/ James M. Lowery Director and April 15, 1998
- ---------------------------- Chairman
James M. Lowery
/s/ Paul Stoyanoff Director and Vice President April 15, 1998
- ----------------------------
Paul Stoyanoff
/s/ Steven W. Smith Director April 15, 1998
- ----------------------------
Steven W. Smith
/s/ Raymond W. Sheets, Jr. Director April 15, 1998
- ----------------------------
Raymond W. Sheets, Jr.
/s/ Paul Satterthwaite Secretary and Vice President April 15, 1998
- ----------------------------
Paul Satterthwaite
</TABLE>
-18-
<PAGE>
CREDIT AND SECURITY AGREEMENT
This Credit and Security Agreement (as it may from time to time be amended,
restated or otherwise modified, the "Agreement") is made effective as of the
24TH day of SEPTEMBER, 1997, by and among TELECOMM INDUSTRIES CORP., a Delaware
corporation, 9310 Progress Parkway, Mentor, Ohio 44060 ("Telecomm"), and TELECO
ACQUISITION CORPORATION, an Ohio corporation, d/b/a Telecomm Industries, 9310
Progress Parkway, Mentor, Ohio 44060 ("Teleco"), (Telecomm and Teleco are
collectively, "Borrowers" and individually, "Borrower"), and PEOPLES BANK, N.A.,
7800 Reynolds Road, Mentor, Ohio 44060 ("Bank").
WITNESSETH:
WHEREAS, Borrowers and Bank desire to contract for the establishment of
credits in the aggregate principal amounts hereinafter set forth, to be made
available to Borrowers upon the terms and subject to the conditions hereinafter
set forth;
NOW, THEREFORE, it is mutually agreed as follows:
ARTICLE I. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
"Account" shall mean (a) any right to payment now or hereafter owing to
either Borrower (including but not limited to any such right to payment by
reason of any lease, sale, manufacture, repair, processing or fabrication of
personal property formerly, now or hereafter owned or otherwise held by such
Borrower, by reason of any services formerly, now or hereafter rendered by or on
behalf of such Borrower or by reason of any former, existing or future contract
for any such lease, sale, manufacture, repair, processing, fabrication and/or
services), whether such right to payment be classified by law as an instrument,
chattel paper, contract right, account, document, general intangible or
otherwise, (b) the security, if any, for such right to payment, (c) any such
Borrower's right, title and interest (including, without limitation, all of such
Borrower's rights as an unpaid vendor, and any applicable right of stoppage in
transit) in or to the personal property, if any, which is the subject of such
rights to payment, (d) all books and records pertaining to such rights to
payment, and (e) all proceeds of any of the foregoing, irrespective of the form
or kind thereof.
"Account Debtor" shall mean any Person obligated to pay all or any part of
any Account in any manner and includes (without limitation) any Guarantor
thereof.
"Ameritech" shall mean Ameritech Corporation, a Delaware corporation, with
offices at 225 West Randolph, Chicago, Illinois 60606, and its successors and
assigns.
<PAGE>
"Ameritech Residual Receivables" shall mean the account receivables of
either Borrower guaranteed by Ameritech pursuant to the terms and conditions of
the Authorized Distributor Agreement for such Borrowers.
"Ameritech Residual Receivables Discount Value" shall mean an amount equal
to ninety percent (90%) of the Ameritech Residual Receivables.
"Authorized Distributor Agreement" shall mean both (a) the Non-Exclusive
Authorized Distributor Agreement between Ameritech and Telecomm Industries Corp.
dated May 29, 1996, as it may be from time to time renewed, amended, modified,
supplemented or replaced, and (b) the Non-Exclusive Authorized Distributor
Agreement between Ameritech and Teleco Acquisition Corporation (as assignee of
Unitel) dated , as it may be from time to time renewed, amended, modified,
supplemented or replaced.
"Bell South" shall mean Bell South Telecommunications, Inc., a Georgia
corporation, with offices at 675 West Peachtree Street, Atlanta, Georgia 30375.
"Bell South Contract" shall mean the Authorized Sales Representative
Agreement between Bell South and United Voice and Data Communications accepted
and approved as of January 1, 1996, as it may be from time to time reviewed,
amended, modified, supplemented or replaced.
"Business Day" shall mean a day on which the main office of Bank in Mentor,
Ohio is open for the transaction of business.
"Bell South Receivable" shall mean the accounts receivable of either
Borrower pursuant to the terms and conditions of the Bell South Contract.
"Borrowers' Certificate" shall mean a certificate, substantially in the
form of attached Exhibit C.
"Borrowing Base" shall mean an amount not in excess of the sum of the
following: (a) eighty percent (80%) of the aggregate amount due and owing on
Eligible Accounts Receivable, plus (b) eighty percent (80%) of the aggregate
amount due and owing on all Local Exchange Carrier Receivables, plus (c) an
amount equal to sixty percent (60%) of the Ameritech Residual Receivables
Discount Value, (d) forty percent (40%) of the aggregate inventory value,
(e) fifty percent (50%) on Eligible Net Book Value of Fixed Assets, (f) sixty
percent (60%) of the Culver Buyout Amount, minus (g) the outstanding principal
balance of the Term Loan; provided, however, that anything herein to the
contrary notwithstanding, Bank shall at all times have the right, in its
reasonable discretion and upon thirty (30) days' prior written notice to
Borrowers, to modify or reduce such percentages from time to time.
"Capital Distributions" shall mean a payment made, liability incurred or
other consideration given for the purchase, acquisition, redemption or
retirement of any capital stock of any Company
- 2 -
<PAGE>
or as a dividend, return of capital or other distribution (other than any stock
dividend or stock split payable only in capital stock of the Company in
question) in respect of any Company's capital stock.
"Capital Expenditures" shall mean the amount of capital expenditures as
determined on a Consolidated basis and in accordance with GAAP.
"Cash Collateral Account" shall mean a commercial Deposit Account
designated "cash collateral account" and maintained by Borrowers with Bank,
without liability by Bank to pay interest thereon, from which account Bank shall
have the exclusive right to withdraw funds until all of the Debt is paid in
full.
"Cash Security" shall mean all cash, instruments, Deposit Accounts, and
other cash equivalents, whether matured or unmatured, whether collected or in
the process of collection, upon which Borrowers presently have or may hereafter
have any claim, wherever located, including but not limited to any of the
foregoing that are presently or may hereafter be existing or maintained with,
issued by, drawn upon, or in the possession of Bank.
"Closing Date" shall mean the effective date of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Collateral" shall mean (a) all of Borrowers' existing and future Accounts,
accounts receivable, instruments, chattel paper, documents and General
Intangibles; (b) all of Borrowers' Inventory and Equipment, whether now owned or
hereafter acquired by either of Borrowers; (c) all funds now or hereafter on
deposit in the Cash Collateral Account, if any; (d) all of Borrowers' existing
and future Cash Security; (e) the Real Property; and (f) all of the Proceeds,
products, profits, and rents of any of (a) through (e) above.
"Collateral Assignment Agreement" shall mean each of the Collateral
Assignment and Security Agreements executed and delivered to Bank by each
Borrower, and acknowledged and consented to by Ameritech and Bell South in
connection with this Agreement, as the same may be from time to time amended,
supplemented or otherwise modified, in such form and substance as is reasonably
required by Bank.
"Commitment" shall mean the obligation hereunder of Bank, hereunder to make
Line of Credit Loan, in its discretion, pursuant to the Line of Credit
Commitment and Term Loan pursuant to the Term Loan Commitment, up to an
aggregate principal amount outstanding at any one time of Four Million Dollars
($4,000,000), or such lesser amount as shall be determined pursuant to Section
2.5 hereof.
"Company" shall mean either Borrower or a Subsidiary.
"Companies" shall mean both Borrowers and all Subsidiaries.
- 3 -
<PAGE>
"Consolidated" shall mean the resultant consolidation of the financial
statements of Borrowers and their Subsidiaries in accordance with GAAP,
including principles of consolidation consistent with those applied in
preparation of the consolidated financial statements referred to in Section 6.14
hereof.
"Consolidated Adjusted Tangible Net Worth" shall mean (a) the sum of
Borrowers' (i) capital stock, (ii) paid in capital, (iii) retained earnings,
(iv) Subordinated debt, less (b) (i) intangible assets, including without
limitation, patents, goodwill and treasury stock, and less (ii) all notes to
shareholders of Borrowers (excluding the Subordinated notes to the Subordinated
Creditors and excluding commission advances to employees of Borrowers), and less
(iii) capitalized cost of customer lists, as determined on a Consolidated basis
in accordance with GAAP.
"Consolidated Cash-In-Flow" shall mean, for the time period in question and
on a Consolidated basis and in accordance with GAAP, the sum of (a) Consolidated
Net Income and (b) Consolidated Depreciation and Amortization Charges, (c)
interest expense, (d) any decrease (increase) in the aggregate amount of
Ameritech Residual Receivables, and (e) increase (decrease) in deferred taxes.
"Consolidated Cash-Out-Flow" shall mean, the for the time period in
question and on a consolidated basis and in accordance with GAAP, the aggregate
of (a) the current portion of long-term Funded Indebtedness (including
capitalized lease obligations) for the period in question as of the end of that
period, and (b) interest expense (including interest expense on the Line of
Credit Loan assuming full usage thereof).
"Consolidated Depreciation and Amortization Charges" shall mean the
aggregate of all such charges for fixed assets, leasehold improvements and
general intangibles (specifically including goodwill) of Borrowers for the year
in question on a Consolidated basis as determined in accordance with GAAP.
"Consolidated Net Income" shall mean the net income (losses) of Borrowers
and their Subsidiaries, after taxes and after extraordinary items (but without
giving effect to any gain resulting from the re-appraisal or write-up of any
asset or the sale of any asset other than inventory), as determined on a
Consolidated basis in accordance with GAAP.
"Controlled Group" shall mean a Company and each "person" (as therein
defined) required to be aggregated with a Company under Code Sections 414(b),
(c), (m) or (o).
"Culver" shall mean Culver Educational Foundation, with an office at 1300
Academy Drive, Culver, Indiana 46511-1291, and its successors and assigns.
"Culver Buy-Out Amount" shall mean the amount by which Culver may purchase
Unitel's interest in the Culver Management Agreement, as such amount is adjusted
from time to time.
- 4 -
<PAGE>
"Culver Management Agreement" shall mean the Long Distance Telephone
Services Management Agreement between Culver and Unitel dated March, 1995, as
assigned to Teleco, as it may be from time to time renewed, amended, modified,
supplemented and replaced.
"Currents Assets" and "Current Liabilities" shall mean the amounts of
Borrowers' as determined on a Consolidated basis and in accordance with GAAP,
with the understanding, however, that without limiting the generality of the
foregoing, the amounts of the principal installments maturing within twelve
months of the date in question on any promissory note (including any Note), and
all accrued taxes shall be included in Current Liabilities and applicable
reserves and other properly deductible items shall be deducted from Current
Assets.
"Debt" shall mean, collectively, (a) all Indebtedness incurred by
Borrowers, or either of them, to the Bank pursuant to this Agreement and
includes the principal of and interest on all Notes; (b) each extension, renewal
or refinancing thereof in whole or in part; (c) any other fees, and any
prepayment premium payable hereunder; (d) every other liability, now or
hereafter owing to Bank by Borrowers, and includes, without limitation, every
liability, whether owing, by only one Borrower or by both Borrowers or by
Borrowers with one or more others in a several, joint or joint and several
capacity, whether owing absolutely or contingently, whether created by note,
overdraft, guaranty of payment or other contract or by quasi-contract, tort,
statute or other operation of law, whether incurred directly to Bank or acquired
by Bank by purchase, pledge or otherwise and whether participated to or from
them in whole or in part; and (e) all Related Expenses.
"Default Rate" shall mean a rate per annum which shall be three percent
(3%) in excess of the Prime Rate from time to time in effect.
"Deposit Account" shall mean (a) any deposit account, and (b) any demand,
time, savings, passbook, or a similar account maintained with a bank, savings
and loan association, credit union, or similar organization.
"Eligible Account Receivable" shall mean an account receivable of either
Borrower to the extent arising out of completed sales by such Borrower in
accordance with the terms and conditions of all purchase orders, contracts and
other documents relating thereto. which, at all times until it is collected in
full, continuously meets the following requirements: (a) is not subject to any
claim for credit, allowance, or adjustment by the Account Debtor or any set off
or counter claim; (b) arose in the ordinary course of such Borrower's business
from the performance (fully completed) of services or bona fide sale of goods
which have been shipped to the Account Debtor, and not more than ninety (90)
days have elapsed since the performance (fully completed) of services or the
sale of goods for or to the Account Debtor; provided, however, that accounts
receivable due from a Local Exchange Carrier which are outstanding for more than
ninety (90) days from performance but less than one hundred twenty (120) days
from performance shall not be deemed ineligible if they otherwise meet the other
requirements of this definition; (c) is not due from any Account Debtor with
respect to which such Borrower has received any notice or has any knowledge of
insolvency, bankruptcy or financial impairment; (d) is not subject to an
assignment, pledge, claim, mortgage, lien, or security interest of any type
except that granted to or in favor of the Bank; (e) does not relate to any goods
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rejected or returned, or acceptance of which has been revoked or refused; (f) is
not the subject of any instrument or chattel paper offered in payment thereof;
(g) has not been determined by Bank to be unsatisfactory in any respect; (h) is
not a Government Account Receivable, unless Bank's security interest in such
Government Account Receivable is perfected according to the Federal Assignment
of Claims Act; (i) is not an account receivable due from any affiliate,
shareholder or employee of a Borrower; (j) is not a Foreign Account Receivable;
(k) is not evidenced by a promissory note or any other negotiable instrument;
(l) is not an account receivable owed to a Borrower by an Account Debtor which
has failed to pay more than 25% of its currently outstanding accounts receivable
within ninety (90) days, or within one hundred twenty (120) days with respect to
a Local Exchange Carrier, or service or sale of goods; (m) is not an Ameritech
Residual Receivable; (n) is not a Local Exchange Carrier Receivable; and (o) is
not a Bell South Receivable, unless either (i) such Bell South Receivable is
less than Five Hundred Thousand Dollars ($500,000), or (ii) Bank is provided a
Collateral Assignment Agreement with respect to the Bell South Contract.
"Eligible Net Book Value of Fixed Assets" shall mean the amounts of
Borrowers' Equipment as determined on a Consolidated basis and in accordance
with GAAP (less accumulated depreciation) and further reduced by (i) the "Culver
Cable Plant" and (ii) capitalized computer software development expenses.
"Environmental Laws" shall mean all provisions of law, statutes,
ordinances, rules, regulations, permits, licenses, judgments, writs,
injunctions, decrees, orders, awards and standards promulgated by the government
of the United States of America or by any state or municipality thereof or by
any court, agency, instrumentality, regulatory authority or commission of any of
the foregoing concerning health, safety and protection of, or regulation of the
discharge of substances into, the environment.
"Equipment" shall mean (a) all equipment as defined in Chapter 1309 of the
Ohio Revised Code, including without limitation, machinery, motor vehicles,
trade fixtures, office and other furniture and furnishings, tools, dies, jigs,
and molds; (b) all goods that are used or bought for use primarily in Borrowers'
business; (c) all goods that are not consumer goods, farm products (as defined
in Chapter 1309 of the Ohio Revised Code), or Inventory; and (d) all substitutes
or replacements for, and all parts, accessories, additions, attachments, or
accessions to (a) through (c) above.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated pursuant thereto.
"ERISA Event" shall mean: (a) the existence of any condition or event with
respect to an ERISA Plan which presents a risk of the imposition of an excise
tax or any other liability on a Company or of the imposition of a lien on the
assets of a Company; (b) a Controlled Group member has engaged in a non-exempt
"prohibited transaction" (as defined under ERISA Section 406 or Code Section
4975) or a breach of a fiduciary duty under ERISA which could result in
liability to a Company; (c) a Controlled Group member has applied for a waiver
from the minimum funding requirements of Code Section 412 or ERISA Section 302
or a Controlled Group member is required
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to provide security under Code Section 401(a)(29) or ERISA Section 307; (d) a
"reportable event" (as defined under ERISA Section 4043) has occurred with
respect of any Pension Plan as to which notice is required to be provided to the
PBGC; (e) a Controlled Group member has withdrawn from a Multi-employer Plan in
a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in
ERISA Sections 4203 and 4205, respectively); (f) a Multi-employer Plan is in or
is likely to be in reorganization under ERISA Section 4241; (g) an ERISA Plan
(and any related trust) which is intended to be qualified under Code Sections
401 and 501 fails to be so qualified or any "cash or deferred arrangement" under
any such ERISA Plan fails to meet the requirements of Code Section 401(k);
(h) the PBGC takes any steps to terminate a Pension Plan or appoint a trustee to
administer a Pension Plan, or a Controlled Group member takes steps to terminate
a Pension Plan; (i) a Controlled Group member or an ERISA Plan fails to satisfy
any requirements of law applicable to an ERISA Plan; (j) a claim, action, suit,
audit or investigation is pending or threatened with respect to an ERISA Plan,
other than a routine claim for benefits; or (k) a Controlled Group member incurs
or is expected to incur any liability for post-retirement benefits under any
Welfare Plan, other than as required by ERISA Section 601, ET SEQ. or Code
Section 4980B.
"Event of Default" shall mean an event, condition or thing which
constitutes an event of default as defined in Article VII hereof.
"Financial Officer" shall mean any of the following officers: chief
executive officer, president, chief financial officer or treasurer.
"Foreign Account Receivable" shall mean any Account which arises out of
contracts with or orders from an Account Debtor which is not a resident of the
United States.
"Funded Indebtedness" shall mean all Indebtedness that is funded,
including, but not limited to, current, long-term and Subordinated Indebtedness,
if any.
"GAAP" shall mean generally accepted accounting principles as then in
effect, which shall include the official interpretations thereof by the
Financial Accounting Standards Board, applied on a basis consistent with the
past accounting practices and procedures of Borrowers.
"General Intangibles" shall mean all general intangibles now or hereafter
acquired by either Borrower, including but not limited to general intangibles as
defined in Chapter 1309 of the Ohio Revised Code, chooses in action, causes of
action, all customer lists, corporate or other business records, inventions,
designs, patents, patent applications, service marks, registrations, trade
names, trademarks, copyrights, goodwill, computer software, rights to
indemnification and tax refunds, and all proceeds of any of the foregoing,
irrespective of the form or kind thereof.
"Guarantor" shall mean one who pledges its credit or property in any manner
for the payment or other performance of the indebtedness, contract or other
obligation of another and includes (without limitation) any guarantor (whether
of payment or of collection), surety, co-maker, endorser or one who agrees
conditionally or otherwise to make any purchase, loan or investment in order
thereby to enable another to prevent or correct a default of any kind.
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"Guarantor of Payment" shall mean any person which shall deliver a Guaranty
of Payment to Bank subsequent to the Closing Date.
"Guaranty of Payment" shall mean each of the guaranties of payment of debt
executed and delivered by any Guarantor of Payment, as the same may be from time
to time amended, supplemented or otherwise modified.
"Indebtedness" shall mean, for any Company (a) all obligations to repay
borrowed money, direct or indirect, incurred, assumed, or guaranteed, (b) all
obligations for the deferred purchase price of capital assets excluding trade
payables, (c) all obligations under conditional sales or other title retention
agreements, (d) all reimbursement obligations (contingent or otherwise) under
any letter of credit, bankers acceptance, currency swap agreement, interest rate
swap, cap, collar or floor agreement or other interest rate management device,
(e) all lease obligations which have been or should be capitalized on the books
of such Company in accordance with GAAP, and (f) any other transaction
(including forward sale or purchase agreements) having the commercial effect of
a borrowing of money entered into by such Company to finance its operations or
capital requirements.
"Inventory" shall mean (a) all inventory as defined in Chapter 1309 of the
Ohio Revised Code; (b) all goods that are raw materials; (c) all goods that are
work in process; (d) all goods that are materials used or consumed in the
ordinary course of either Borrower's business; (e) all goods that are, in the
ordinary course of either Borrower's business, held for sale or lease or
furnished or to be furnished under contracts of service; and (f) all substitutes
and replacements for, and parts, accessories, additions, attachments, or
accessions to (a) through (e) above.
"Lien" shall mean any mortgage, security interest, lien, charge,
encumbrance on, pledge or deposit of, or conditional sale or other title
retention agreement with respect to any property or asset.
"Line of Credit Commitment" shall mean the agreement hereunder of Bank, in
its discretion) to make Line of Credit Loan, up to an aggregate principal amount
outstanding at any time equal to the lesser of (a) Two Million Dollars
($2,000,000), or (b) the Borrowing Base (or such lesser amount as shall be
determined pursuant to Section 2.5 hereof).
"Line of Credit Note" shall mean the Line of Credit Note executed and
delivered pursuant to Section 2.1 A hereof.
"Line of Credit Loan" shall mean a Loan granted to Borrowers by Bank in
accordance with Section 2.1 hereof.
"Loan" or "Loans" shall mean the credit granted to Borrowers in accordance
with Sections 2.1A or B hereof.
"Loan Documents" shall mean this Agreement, each of the Notes, each of the
Guaranties of Payment of Debt (if any), the Collateral Assignment Agreements,
the Subordination Agreements and any other documents delivered pursuant thereto.
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"Local Exchange Carrier" shall mean an Account Debtor who is considered a
local exchange carrier in the ordinary course of Borrower's business.
"Local Exchange Carrier Receivable" shall mean any account receivable of
either Borrower, which meets the requirements of (a) through (m) of the
definition of "Eligible Accounts Receivable," and is due from any Local Exchange
Carrier.
"Multiemployer Plan" shall mean a Pension Plan that is subject to the
requirements of Subtitle E of Title IV of ERISA.
"Note" or "Notes" shall mean the Line of Credit Note and the Term Note, or
any other note delivered pursuant to this Agreement.
"Obligor" shall mean one whose credit or any of whose property is pledged
to the payment of the Debt and includes, without limitation, any Guarantor and
any signatory to a Related Writing.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or its
successor.
"Pension Plan" shall mean an ERISA Plan that is a "pension plan" within the
meaning of ERISA Section 3(2).
"Person" shall mean any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, corporation, limited liability
company, institution, trust, estate, government or other agency or political
subdivision thereof or any other entity.
"Prime Rate" shall mean the interest rate established from time to time by
Bank as Bank's base lending rate, whether or not such rate is publicly
announced; the Prime Rate may not be the lowest interest rate charged by Bank
for commercial or other extensions of credit. Each change in the Prime Rate
shall be effective immediately from and after such change.
"Proceeds" shall mean (a) any proceeds, and (b) whatever is received upon
the sale, exchange, collection, or other disposition of Collateral or proceeds,
whether cash or non-cash. Cash proceeds includes, without limitation, moneys,
checks, and Deposit Accounts. Proceeds includes, without limitation, any
Account arising when the right to payment is earned under a contract right any
insurance payable by reason of loss or damage to the Collateral, and any return
or unearned premium upon any cancellation of insurance. Except as expressly
authorized in this Agreement, Bank's right to Proceeds specifically set forth
herein or indicated in any financing statement shall never constitute an express
or implied authorization on the part of the Bank to Borrowers' sale, exchange,
collection, or other disposition of any or all of the Collateral.
"Related Expenses" shall mean any and all costs, liabilities, and expenses
(including, without limitation, losses, damages, penalties, claims, actions,
reasonable attorney's fees, legal expenses, judgments, suits, and disbursements)
incurred by, imposed upon, or asserted against, Bank in any attempt by Bank: (a)
to obtain, preserve, perfect, or enforce any security interest evidenced by this
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Agreement or any Related Writing; (b) to obtain payment, performance, and
observance of any and all of the Debt; (c) to maintain, insure, audit, collect,
preserve, repossess, and dispose of any of the collateral securing the Debt or
any thereof, including, without limitation, costs and expenses for appraisals,
assessments, and audits of Borrowers or any such collateral; or (d) incidental
or related to (a) through (c) above, including, without limitation, interest
thereupon from the date incurred, imposed, or asserted until paid at the Default
Rate.
"Related Writing" shall mean the Loan Documents and any other assignment,
mortgage, security agreement, guaranty agreement, subordination agreement,
financial statement, audit report or other writing furnished by Borrowers, any
Subsidiary or any Obligor, or any of their respective officers. to Bank pursuant
to or otherwise in connection with this Agreement.
"Reportable Event" shall mean a reportable event as that term is defined in
Title IV of ERISA, except actions of general applicability by the Secretary of
Labor under Section 110 of such Act.
"Subordinated", as applied to Indebtedness, shall mean that the
Indebtedness has been subordinated (by written terms or written agreement being,
in either case, in form and substance satisfactory to Bank) in favor of the
prior payment in full of the Debt.
"Subordinated Creditors" shall mean P & J Corporation or any other party
which shall deliver a Subordination Agreement to Bank subsequent to the Closing
Date.
"Subordination Agreement" shall mean a Subordination Agreement executed and
delivered by a Subordinated Creditor in connection with this Agreement, as the
same may be from time to time amended, supplemented or otherwise modified.
"Subsidiary" shall mean an existing or future corporation, the majority of
the outstanding capital stock or voting power, or both, of which is (or upon the
exercise of all outstanding warrants, options and other rights would be),
directly or indirectly, owned at the time in question by either Borrower or by
another such corporation or by any combination of Borrowers and such
corporations.
"Term Loan" shall mean the Loan granted to Borrowers by Bank in accordance
with Section 2.1B hereof.
"Term Loan Commitment" shall mean the obligation hereunder of Bank to make
a Term Loan in the principal amount of Two Million Dollars ($2,000,000).
"Term Note" shall mean the Term Note executed and delivered pursuant to
Section 2.1B hereof.
"Total Liabilities" shall mean the total of all items of indebtedness or
liability of Borrowers on a Consolidated basis which, in accordance with GAAP,
would be included in determining total liabilities on the liability side of the
balance sheet as of the date of determination.
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"Unmatured Event of Default" shall mean an event, condition or thing which
constitutes, or which with the lapse of any applicable grace period or the
giving of notice or both would constitute, an Event of Default, and which has
not been appropriately waived by Bank in writing or fully corrected prior to
becoming an actual Event of Default.
"Voting Stock" shall mean stock of a corporation of a class or classes
having general voting power under ordinary circumstances to elect a majority of
the board of directors, managers or trustees of such corporation (irrespective
of whether or not at the time stock of any other class or classes shall have or
might have voting power by the reason of the happening of any contingency).
"Welfare Plan" shall mean an ERISA Plan that is a "welfare plan" within the
meaning of ERISA Section 3 (1).
"Wholly-Owned Subsidiary" shall mean each Subsidiary all of whose
outstanding stock, other than directors' qualifying shares, shall at the time be
owned by either Borrower and/or by one or more Wholly-Owned Subsidiaries.
Any accounting term not specifically defined in this Article I shall have
the meaning ascribed thereto by GAAP.
The foregoing definitions shall be applicable to the singular and plurals
of the foregoing defined terms.
ARTICLE II. AMOUNT AND TERMS OF CREDIT
SECTION 2.1. AMOUNT AND NATURE OF CREDIT. Subject to the terms and
provisions of this Agreement, Bank shall make Loans to Borrowers, in such
aggregate amount as Borrowers shall request pursuant to the Line of Credit
Commitment and the Term Loan Commitment; provided, however, that in no event
shall the aggregate principal amount of all Loans outstanding under this
Agreement at any one time be in excess of the Commitment.
The Loans may be made as Line of Credit Loan and as a Term Loan as follows:
A. Line of Credit. Subject to the terms and conditions of this
Agreement, Bank may, in its discretion, make a Loan or Loans to Borrowers in
such amount or amounts as Borrowers may from time to time request, but not
exceeding in aggregate principal amount at any one time outstanding hereunder
the Line of Credit Commitment. Borrowers may, subject to the terms and
conditions set forth herein, borrow hereunder up to the Line of Credit
Commitment amount. The Line of Credit Loan shall be payable on demand and shall
bear interest at a rate per annum which shall be the Prime Rate plus one-quarter
of one percent (1/4%) from time to time in effect and drawn down in aggregate
amounts of not less than Fifty Thousand Dollars ($50,000) or any multiple
thereof.
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Borrowers shall pay interest on the unpaid principal amount of the Line of
Credit Loan outstanding from time to time from the date thereof until paid,
commencing November 1, 1997, and continuing on the first day of each succeeding
month of each year, and upon payment of the outstanding principal balance of the
Line of Credit Loan upon demand.
The obligation of Borrowers to repay the Line of Credit Loan made by Bank
and to pay interest thereon shall be evidenced by a Line of Credit Note of
Borrowers substantially in the form of EXHIBIT A hereto, with appropriate
insertions, dated the date of this Agreement and payable to the order of Bank on
demand in the principal amount of the Line of Credit Commitment, or, if less,
the aggregate unpaid principal amount of Line of Credit Loan made hereunder.
Subject to the provisions of this Agreement, Borrowers shall be entitled under
this Section 2.1 A to borrow funds, repay the same in whole or in part and
reborrow hereunder at any time and from time to time at the discretion of the
Bank prior to demand.
ANYTHING HEREIN TO THE CONTRARY NOTWITHSTANDING, THE LINE OF CREDIT COMMITMENT
IS A DISCRETIONARY FACILITY AND NOTHING CONTAINED IN THIS AGREEMENT SHALL
REQUIRE BANK, AT ANY TIME, TO MAKE LINE OF CREDIT LOAN OR OTHER EXTENSIONS OF
CREDIT TO BORROWER, AND THE GRANTING AMOUNT OF ANY LINE OF CREDIT LOAN OR OTHER
EXTENSIONS OF CREDIT HEREUNDER, OTHER THAN PURSUANT TO SECTION 2.1B, SHALL AT
ALL TIMES BE IN BANK'S SOLE DISCRETION.
B. Term Loan. Subject to the conditions of this Agreement, Bank shall
make a five (5) year Term Loan to Borrowers in such amount, if any, as Borrowers
may request on the Closing Date, but not exceeding the Term Loan Commitment. To
evidence the Term Loan, Borrowers shall execute and deliver to Bank the Term
Note dated the date the Term Loan is to be made, and substantially in the form
of Exhibit B hereto, with appropriate insertions. Borrowers shall pay interest
on the unpaid principal amount of the Term Note outstanding from time to time
from the date thereof until paid, at the fixed rate of nine and twenty-three
hundredths percent (9.23%) per annum. The Term Note shall be payable in
fifty-nine (59) consecutive monthly installments of Forty-One Thousand Seven
Hundred Forty and 32/100 Dollars ($41,740.32) each, commencing November 1, 1997
and continuing on the first day of each and every succeeding month thereafter,
with the balance thereof payable in full on November 1, 2002.
SECTION 2.2. CONDITIONS TO LOANS. The obligation of Bank to make Loans
hereunder is conditioned, in the case of each borrowing or issuance hereunder,
upon:
(a) all conditions precedent as listed in Article III hereof shall have
been satisfied;
(b) receipt by Bank of notice from Borrowers by 11:00 A.M. on the proposed
date of borrowing, such notice to provide the aggregate amount the Loan;
(c) the fact that no Unmatured Event of Default or Event of Default shall
then exist or immediately after the Loan would exist; and
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(d) the fact that the representations and warranties contained in Article
VI hereof shall be true and correct with the same force and effect as if made on
and as of the date of such Loan, except to the extent that any thereof expressly
relate to an earlier date.
Each request for a Loan by Borrowers hereunder shall be deemed to be a
representation and warranty by Borrowers as of the date of such request as to
the facts specified in (c) and (d) above.
SECTION 2.3. PAYMENT ON NOTES, ETC. All payments of principal, interest
and other fees shall be made to Bank in immediately available funds. Bank shall
record (a) any principal, interest or other payment, and (b) the principal
amount of the Loans and all prepayments thereof and the applicable dates with
respect thereto, by such method as Bank may generally employ; provided, however,
that failure to make any such entry shall in no way detract from Borrowers'
obligations under each such Note. The aggregate unpaid amount of Loans set
forth on the records of Bank shall be rebuttably presumptive evidence of the
principal and interest owing and unpaid on each Note. Whenever any payment to
be made hereunder, including without limitation any payment to be made on any
Note, shall be stated to be due on a day which is not a Business Day, such
payment shall be made on the next succeeding Business Day and such extension of
time shall in each case be included in the computation of the interest payable
on such Note.
SECTION 2.4. PREPAYMENT. Subject to the terms of this Section, Borrowers
shall have the right at any time or from time to time to prepay all or any part
of the principal amount of the Notes then outstanding as designated by
Borrowers, plus interest accrued on the amount so prepaid to the date of such
prepayment and plus the applicable prepayment premium as hereinafter provided.
Borrowers shall give Bank notice of prepayment of any Loans by not later than
11:00 A.M. Cleveland time on the Business Day such prepayment is to be made.
Prepayments of the Line of Credit Note shall be without any premium or penalty.
If the Term Note is prepaid in excess of twenty percent (20%) of the scheduled
amortization per year prior to maturity, as determined by Bank in its reasonable
discretion which determination shall be conclusive and binding on Borrowers,
each prepayment of the Term Note shall be subject to a prepayment premium (due
and payable with such prepayment) based on the following schedule: (a)
prepayment during the first (1st) year of the Term Note, a prepayment premium
equal to five percent (5%) of the principal amount outstanding at the time of
any such prepayment, (b) prepayment during the first (2nd) year of the Term
Note, a prepayment premium equal to four percent (4%) of the principal amount
outstanding at the time of any such prepayment, (c) prepayment during the third
(3rd) year of the Term Note, a prepayment premium equal to three percent (3%) of
the principal amount outstanding at the time of any such prepayment, (d)
prepayment during the fourth (4th) year of the Term Note, a prepayment premium
equal to two percent (2%) of the principal amount outstanding at the time of any
such prepayment, (e) prepayment during the fifth (5th) year of the Term Note, a
prepayment premium equal to one percent (1%) of the principal amount outstanding
at the time of any such prepayment. Each partial prepayment of the Term Note
shall be applied to the principal installments thereof in the inverse order of
their respective maturities and such prepayment premium shall be calculated
based on the principal amount outstanding immediately prior to such prepayment.
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SECTION 2.5. TERMINATION OR REDUCTION OF COMMITMENTS. Borrowers may at
any time or from time to time terminate in whole or ratably in part the
Commitment to an amount not less than the aggregate principal amount of the
Loans then outstanding, by giving Bank not fewer than five (5) Business Days'
notice, provided that any such partial termination shall be in an amount of One
Hundred Thousand Dollars ($100,000) or any integral multiple thereof. If
Borrowers terminate in whole the Commitment, on the effective date of such
termination (Borrowers having prepaid in full the unpaid principal balance, if
any, of the Notes outstanding, together with all interest (if any) and accrued
and unpaid) all of the Notes outstanding shall be marked "Canceled" and
delivered to Borrowers. Any partial reduction in the Commitment shall be
effective from the date of such reduction until demand with respect to Line of
Credit Loan, and until maturity with respect to Term Loan.
SECTION 2.6. COMPUTATION OF INTEREST AND FEES; DEFAULT RATE. Interest on
Loans, Related Expenses and other fees and charges hereunder shall be computed
on the basis of a year having three hundred sixty (360) days and calculated for
the actual number of days elapsed. Anything herein to the contrary
notwithstanding, if an Event of Default shall occur hereunder, the principal of
each Note and the unpaid interest thereon shall bear interest, until paid, at
the Default Rate. In no event shall the rate of interest hereunder exceed the
rate allowable by law.
ARTICLE III. CONDITIONS PRECEDENT
The obligation of Bank to make its first Loan hereunder is subject to
Borrowers satisfying each of the following conditions:
SECTION 3.1. NOTES. Borrowers shall have executed and delivered to Bank
the Line of Credit Note and the Term Note.
SECTION 3.2. [Intentionally Omitted]
SECTION 3.3. OFFICER'S CERTIFICATE, RESOLUTIONS, ORGANIZATIONAL
DOCUMENTS. Each Borrower shall deliver to Bank an officer's certificate
certifying the names of the officers of each Borrower authorized to sign the
Loan Documents, together with the true signatures of such officers and certified
copies of (a) the resolutions of the board of directors of each Borrower
evidencing approval of the execution and delivery of the Loan Documents and the
execution of other Related Writings to which each Borrower, as the case may be,
is a party, and (b) the Articles (or Certificate) of Incorporation and all
amendments thereto of each Borrower.
SECTION 3.4. LEGAL OPINION. An opinion of counsel for Borrowers in form
and substance satisfactory to Bank shall be delivered to Bank.
SECTION 3.5. GOOD STANDING CERTIFICATES. A good standing certificate or
certificates for each Borrower issued on or about the Closing Date by the
Secretary of State in the
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state(s) where each Borrower is incorporated or qualified as a foreign
corporation shall be delivered to Bank.
SECTION 3.6. CLOSING FEE/LEGAL FEES. A closing fee of Fifteen Thousand
Dollars ($15,000) shall be paid on the Closing Date to Bank, and all legal fees
and expenses of Bank in connection with the preparation and negotiation of the
Loan Documents shall also be paid.
SECTION 3.7. FINANCING STATEMENTS AND LIEN SEARCHES. With respect to the
property owned or leased by Borrowers, Borrowers shall cause to be delivered to
Bank: (a) U.C.C. financing statements satisfactory to Bank; (b) the results of
U.C.C. lien searches, satisfactory to Bank; (c) the results of federal and state
tax lien and judicial lien searches, satisfactory to Agent and the Banks; and
(d) U.C.C. termination statements reflecting termination of all financing
statements previously filed and any other party having a security interest in
any part of the Collateral or any other property securing the Debt.
SECTION 3.8. INSURANCE CERTIFICATE. Evidence of insurance on ACORD 27
form, and otherwise satisfactory to Bank, of adequate personal property and
liability insurance of Borrowers, with Bank listed as loss payee and additional
insured.
SECTION 3.9. NO MATERIAL ADVERSE CHANGE. No material adverse change, in
the opinion of Bank, shall have occurred in the financial condition, operations
or prospects of Borrowers.
SECTION 3.10. SUBORDINATION AGREEMENTS. Borrowers shall deliver a
Subordination Agreement, fully executed by each Subordinated Creditor, wherein
the Indebtedness to each Subordinated Creditor is Subordinated to the Debt.
SECTION 3.11. COLLATERAL ASSIGNMENT AGREEMENT. Borrowers shall deliver a
Collateral Assignment Agreement, executed by each Borrower, in form and
substance satisfactory to Bank.
SECTION 3.12. LANDLORD'S AND MORTGAGEE'S WAIVERS. Borrowers shall deliver
a landlord's waiver and a mortgagee's waiver, if applicable, each in form and
substance satisfactory to Bank, for Borrower's location at 9310 Progress
Parkway, Mentor, Ohio and 8450 Westfield Blvd., Indianapolis, Indiana and, upon
reasonable request by Bank, for each other location not owned by either Borrower
where any of the Collateral is located.
SECTION 3.13. MISCELLANEOUS. Such other items and conditions as may be
reasonably required by Bank.
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ARTICLE IV. COVENANTS
Borrowers agree that so long as the Commitment remains in effect and
thereafter until the principal of and interest on all Notes and all other
payments and fees due hereunder shall have been paid in full, Borrowers shall
perform and observe, and shall cause each Subsidiary to perform and observe,
each of the following provisions:
SECTION 4.1. INSURANCE. Each Company shall at all times maintain
insurance upon its Inventory, Equipment and other personal and real property in
such form, written by such companies, in such amounts, for such period, and
against such risks as may be acceptable to Bank, with provisions satisfactory to
Bank for payment of all losses thereunder to Bank and Borrowers as their
interests may appear (loss payable endorsement in favor of Bank), and, if
required by Bank, Borrowers shall deposit the policies with Bank. Any such
policies of insurance shall provide for no fewer than thirty (30) days prior
written notice of cancellation to Bank. Any sums received by Bank in payment of
insurance losses, returns, or unearned premiums under the policies may, at the
option of Bank, be applied upon any Debt whether or not the same is then due and
payable, or may be delivered to Borrowers for the purpose of replacing,
repairing, or restoring the insured property. Bank is hereby authorized to act
as attorney-in-fact for Borrowers in obtaining, adjusting, settling and
canceling such insurance and endorsing any drafts. In the event of failure to
provide such insurance as herein provided, Bank may, at its option, provide such
insurance and Borrowers shall pay to Bank, upon demand, the cost thereof Should
Borrowers fail to pay such sum to Bank upon demand, interest shall accrue
thereon, from the date of demand until paid in full, at the highest rate set
forth in this Agreement. Within ten (10) days of Bank's written request,
Borrowers shall furnish to Bank such information about Borrowers' insurance as
Bank may from time to time reasonably request, which information shall be
prepared in form and detail satisfactory to Bank and certified by a Financial
Officer of each Borrower.
SECTION 4.2. MONEY OBLIGATIONS. Each Company shall pay in full (a) prior
in each case to the date when penalties would attach, all taxes, assessments and
governmental charges and levies (except only those so long as and to the extent
that the same shall be contested in good faith by appropriate and timely
proceedings and for which adequate reserves have been established in accordance
with GAAP) for which it may be or become liable or to which any or all of its
properties may be or become subject; (b) all of its wage obligations to its
employees in compliance with the Fair Labor Standards Act (29 U.S.C. 206-207) or
any comparable provisions; and (c) all of its other obligations calling for the
payment of money (except only those so long as and to the extent that the same
shall be contested in good faith and for which adequate reserves have been
established in accordance with GAAP) before such payment becomes overdue.
SECTION 4.3. FINANCIAL STATEMENTS. Borrowers shall furnish to Bank:
(a) as frequently as Bank may request, but no less frequently than
monthly, a Borrowers' Certificate prepared certified as being true and
correct by a Financial Officer;
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(b) within twenty (20) days after the end of each month, an Accounts aging
report and, if requested by Bank, an Inventory report, in form and substance
satisfactory to Bank and signed by a Financial Officer;
(c) within forty-five (45) days after the end of each month, balance
sheets of Borrowers and their Subsidiaries as of the end of such period and
statements of income (loss), stockholders equity and cash flow for the quarter
and fiscal year to date periods, all prepared on a Consolidated and
consolidating basis, in accordance with GAAP, and in form and detail
satisfactory to Bank and certified by a Financial Officer of each Borrower;
together with a certificate of such officer setting forth the Unmatured Event of
Defaults and Events of Default coming to the Financial Officer's attention or,
if none, a statement to that effect;
(d) within one hundred twenty (120) days after the end of each of its
fiscal years, an annual audit report of Borrowers and their Subsidiaries for
that year prepared on a Consolidated and consolidating basis, in accordance with
GAAP, and in form and detail satisfactory to Bank and certified by an
independent public accountant satisfactory to Bank, which report shall include
balance sheets and statements of income (loss), stockholders equity and
cash-flow for that period, together with a certificate by the accountant setting
forth the Unmatured Event of Defaults and Events of Default coming to its
attention during the course of its audit or, if none, a statement to that
effect;
(e) with the delivery of the quarterly and annual financial statements in
(c) and (d) above, a copy of any management report, letter or similar writing
furnished to the Companies by the accountants in respect of the Companies'
systems, operations, financial condition or properties;
(f) as soon as available, copies of all notices, reports, definitive proxy
or other statements and other documents sent by Borrowers to their shareholders,
to the holders of any of its debentures or bonds or the trustee of any indenture
securing the same or pursuant to which they are issued, or sent by Borrowers (in
final form) to any securities exchange or over the counter authority or system,
or to the Securities and Exchange Commission or any similar federal agency
having regulatory jurisdiction over the issuance of Borrowers' securities; and
(g) within ten (10) days of Bank's written request, such other information
about the financial condition, properties and operations of any Company as Bank
may from time to time reasonably request, which information shall be submitted
in form and detail satisfactory to Bank and certified by a Financial Officer of
the Company or Companies in question; provided, however, if the information
requested cannot reasonably be provided within ten (10) days, Borrowers shall
provide such information within a reasonable time, but in no event more than
forty-five (45) days after Bank's request.
SECTION 4.4 FINANCIAL RECORDS. Each Company shall at all times maintain
true records and books of account including, without limiting the generality of
the foregoing, appropriate reserves for possible losses and liabilities all in
accordance with GAAP, and at all reasonable times (during normal business hours
and upon notice to such Company) permit Bank to examine that Company's books and
records and to make excerpts therefrom and transcripts thereof.
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SECTION 4.5. FRANCHISES. Each Company shall preserve and maintain at all
times its existence, rights and franchises.
SECTION 4.6. ERISA COMPLIANCE. No Company shall incur any material
accumulated funding deficiency within the meaning of ERISA, or any material
liability to the PBGC, established thereunder in connection with any ERISA Plan.
Borrowers shall furnish to Bank (a) as soon as possible and in any event within
thirty (30) days after any Company knows or has reason to know that any
Reportable Event, as defined under ERISA Section 4043, with respect to any ERISA
Plan has occurred, a statement of a Financial Officer of such Company, setting
forth details as to such Reportable Event and the action which such Company
proposes to take with respect thereto, together with a copy of the notice of
such Reportable Event given to the PBGC if a copy of such notice is available to
such Company, (b) promptly after the filing thereof with the Internal Revenue
Service, copies of each annual report with respect to each ERISA Plan
established or maintained by such Company for each plan year, including
(i) where required by law, a statement of assets and liabilities of such ERISA
Plan as of the end of such plan year and statements of changes in fund balance
and in financial position, or a statement of changes in net assets available for
plan benefits, for such plan year, certified by an independent public accountant
satisfactory to Bank and (ii) an actuarial statement of such ERISA Plan
applicable to such plan year, certified by an enrolled actuary of recognized
standing acceptable to Bank, and (c) promptly after receipt thereof a copy of
any notice such Company, or any member of the Controlled Group may receive from
the PBGC or the Internal Revenue Service with respect to any ERISA Plan
administered by such Company; provided, that this latter clause shall not apply
to notices of general application promulgated by the PBGC or the Internal
Revenue Service. Borrowers shall promptly notify Bank of any material taxes
assessed, proposed to be assessed or which Borrowers have reason to believe may
be assessed against a Company by the Internal Revenue Service with respect to
any ERISA Plan. As used in this Section "material" means the measure of a
matter of significance which shall be determined as being an amount equal to
five percent (5%) of the Consolidated Net Worth of Borrowers and its
Subsidiaries. As soon as practicable, and in any event within twenty (20) days,
after any Company becomes aware that an ERISA Event has occurred, such Company
shall provide Bank with notice of such ERISA Event with a certificate by the
chief financial officer or other authorized officer of such Company setting
forth the details of the event and the action such Company or another Controlled
Group member proposes to take with respect thereto.
SECTION 4.7. FINANCIAL COVENANTS.
(a) Debt Service Coverage. Borrowers shall maintain a ratio of
Cash-In-Flow to Cash-Out-Flow of no less than (i) 1.0 to 1.0 from the fiscal
year ending December 31, 1997, and (ii) 1.20 to 1.0 for the fiscal year ending
December 31, 1998 and for each fiscal year ending thereafter, said ratio to be
tested as of the end of each calendar quarter, based upon Borrowers' most recent
financial statements for the applicable period.
(b) Minimum Tangible Net Worth. Borrowers shall not suffer or permit
Consolidated Adjusted Tangible Net Worth at any one time to be below (i) One
Million Seven Hundred Fifty Thousand and no/100 Dollars ($1,750,000.00) from the
Closing Date through and including
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December 30, 1997, (ii) Two Million and no/100 Dollars ($2,000,000.00) from
December 31, 1997 through and including December 30, 1998, and (iii) Two Million
Seven Hundred Fifty Thousand and no/100 Dollars ($2,750,000.00) from
December 31, 1998 and thereafter, said ratio to be tested as of the end of each
calendar quarter, based upon Borrowers' most recent financial statements for the
applicable period.
(c) Leverage Ratio. Borrowers shall not suffer or permit at any time the
ratio of (a) Total Liabilities, minus Subordinated Indebtedness to the
Subordinated Creditors to (b) Consolidated Adjusted Tangible Net Worth, to
exceed (i) 4.0 to 1.0 from the Closing Date through and including December 30,
1997, (ii) 3.25 to 1.00 from December 31, 1997 through and including
December 30, 1998, and (iii) 2.50 to 1.0 from December 31, 1998 and thereafter,
said ratio to be tested as of the end of each calendar quarter, based upon
Borrowers' most recent financial statements for the applicable period.
SECTION 4.8. BORROWING. No Company shall create, incur or have
outstanding any obligation for borrowed money or any Indebtedness of any kind;
provided, that this Section shall not apply to (a) the Loans; (b) any loan or
loans granted to Borrowers evidenced by a promissory note issued pursuant to any
other agreement hereafter in effect so long as the aggregate principal amount of
all such loans does not exceed Two Hundred Thousand Dollars ($200,000) at any
one time outstanding plus an amount equal to the indebtedness set forth on
Schedule 4.8 pursuant to Section (c) herein as of the Closing Date; (c) the
indebtedness set forth in Schedule 4.8 attached hereto and made a part hereof,
(d) loans to a Company from a Company so long as each such Company is a
Guarantor of Payment.
SECTION 4.9. LIENS. No Company shall create, assume or suffer to exist
any Lien upon any of its property or assets whether now owned or hereafter
acquired; provided that this Section shall not apply to the following:
(a) Liens for taxes not yet due or which are being actively contested in
good faith by appropriate proceedings and for which adequate reserves have been
established in accordance with GAAP;
(b) other statutory Liens incidental to the conduct of its business or the
ownership of its property and assets which (i) were not incurred in connection
with the borrowing of money or the obtaining of advances or credit, (ii) which
do not in the aggregate materially detract from the value of its property or
assets or materially impair the use thereof in the operation of its business,
and (iii) are Subordinated to the Liens of Bank;
(c) Liens on property or assets of a Subsidiary to secure obligations of
such Subsidiary to Borrowers or another Subsidiary;
(d) any mortgage, security interest of Lien securing only indebtedness
incurred to Bank;
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(e) purchase money Liens on fixed assets securing the loans pursuant to
Section 4.8(b) hereof or;
(f) Liens presently existing on the date hereof as set forth in
SCHEDULE 4.9 attached hereto and made a part hereof.
No Company shall enter into any contract or agreement which would prohibit Bank
from acquiring a security interest, mortgage or other Lien on, or a collateral
assignment of, any of the property or assets of either Borrower and or any of
their Subsidiaries.
SECTION 4.10. REGULATIONS U AND X. No Company shall take any action that
would result in any non-compliance of the Loans made hereunder with Regulations
U and X of the Board of Governors of the Federal Reserve System.
SECTION 4.11. INVESTMENTS AND LOANS. No Company shall (a) create,
acquire or hold any Subsidiary without the prior written consent of Bank and in
all cases such Subsidiary shall execute and deliver to Bank a Guaranty of
Payment and such other information as Bank may reasonably request, (b) make or
hold any investment in any stocks, bonds or securities of any kind; provided,
however, Borrowers shall be permitted to repurchase the shares of Telecomm
Industries Corp. from the individuals listed on Schedule 4.11 attached hereto
and made a part hereof, (c) be or become a party to any joint venture or other
partnership, (d) make or keep outstanding any advance or loan to any Person;
provided, however, Borrowers shall be permitted to make advances, consistent
with the past practices of Borrowers, to employees of borrowers based on such
employees anticipated earnings for a particular period, or (e) be or become a
Guarantor of any kind, except guarantees securing only indebtedness of the
Companies incurred pursuant to this Agreement; provided, that this Section shall
not apply to (i) any endorsement of a check or other medium of payment for
deposit or collection through normal banking channels or similar transaction in
the normal course of business, (ii) any investment in direct obligations of the
United States of America or in certificates of deposit issued by a member bank
of the Federal Reserve System, (iii) any investment in commercial paper or
securities which at the time of such investment is assigned the highest quality
rating in accordance with the rating systems employed by either Moody's Investor
Service, Inc. or Standard and Poor's Corporation; or (iv) the holding of
Subsidiaries listed on SCHEDULE 4.11.
SECTION 4.12. MERGER OR SALE OF ASSETS. Without the prior written consent
of Bank, no Company shall merge or consolidate with any other Person, or sell,
lease or transfer or otherwise dispose of all or a substantial part of its
assets to any Person, except that if no Unmatured Event of Default or Event of
Default shall then exist or immediately thereafter shall begin to exist,
(a) any Subsidiary may merge with (i) a Borrower (provided that the
Borrower shall be the continuing or surviving corporation) or (ii) any one or
more other Subsidiaries, provided that either (x) the continuing or surviving
corporation shall be a Wholly-Owned Subsidiary, or (y) after giving effect to
any merger pursuant to this sub-clause (ii), the applicable Borrower and/or
one or more Wholly-Owned Subsidiaries shall own not less than the same
percentage of the outstanding
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Voting Stock of the continuing or surviving corporation as such Borrower and/or
one or more Wholly-Owned Subsidiaries owned of the merged Subsidiary immediately
prior to such merger, or
(b) any Subsidiary may sell, lease, transfer or otherwise dispose of any
of its assets to (i) a Borrower, (ii) any Wholly-Owned Subsidiary, or (iii) any
Subsidiary, of which the applicable Borrower and/or one or more Wholly-Owned
Subsidiaries shall own not less than the same percentage of Voting Stock as the
applicable Borrower and/or one or more Wholly-Owned Subsidiaries then own of the
Subsidiary making such sale, lease, transfer or other disposition.
SECTION 4.13. ACQUISITIONS. No Company shall acquire the assets or stock
of any other corporation without the prior written consent of Bank.
SECTION 4.14. NOTICE. Borrowers shall cause their Financial Officers to
promptly notify Bank whenever any Unmatured Event of Default or Event of Default
may occur hereunder or any other representation or warranty made in Article VI
hereof or elsewhere in this Agreement or in any Related Writing may for any
reason cease in any material respect to be true and complete.
SECTION 4.15. ENVIRONMENTAL COMPLIANCE. Each Company shall comply in all
material respects with any and all Environmental Laws including, without
limitation, all Environmental Laws in jurisdictions in which a Company owns or
operates a facility or site, arranges for disposal or treatment of hazardous
substances, solid waste or other wastes, accepts for transport any hazardous
substances, solid waste or other wastes or holds any interest in real property
or otherwise. Each Company shall furnish to Bank promptly after receipt thereof
a copy of any notice such Company may receive from any governmental authority,
private person or entity or otherwise that any material litigation or proceeding
pertaining to any environmental, health or safety matter has been filed or is
threatened against such Company, any real property in which such Company holds
any interest or any past or present operation of such Company. No Company shall
allow the release or disposal of hazardous waste, solid waste or other wastes
on, under or to any real property in any Company holds any interest or performs
any of its operations, in violation of any Environmental Law. As used in this
Section, "litigation or proceeding" means any demand, claim, notice, suit, suit
in equity action, administrative action, investigation or inquiry whether
brought by any governmental authority, private person or entity or otherwise.
Borrowers shall defend, indemnify and hold Bank harmless against all costs,
expenses, claims, damages, penalties and liabilities of every kind or nature
whatsoever (including attorneys fees) arising out of or resulting from the
noncompliance of any Company with any Environmental Law.
SECTION 4.16. USE OF PROCEEDS. Borrowers' use of the proceeds of the Line
of Credit Notes shall be solely for working capital and other general corporate
purposes of Borrowers and such Borrower's Subsidiaries. Borrower's use of the
proceeds of the Term Note shall be solely for refinancing of all Borrowers'
existing bank debt.
SECTION 4.17. CAPITAL EXPENDITURES. Borrowers and their Subsidiaries
shall not invest in Capital Expenditures more than an aggregate amount equal to
One Hundred Fifty Thousand Dollars ($150,000) during each fiscal year of
Borrowers. This provision shall not apply
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to Capital Expenditures relating to the Ameritech co-op monies incurred in the
ordinary course of business to facilitate the Ameritech relationship.
SECTION 4.18. CORPORATE NAMES AND LOCATION OF COLLATERAL. No Company will
change its corporate name, unless, in each case, such Company shall provide Bank
with at least thirty (30) days prior written notice thereof. No Company will
use trade names, assumed names or fictitious names without giving Bank at least
thirty (30) days' prior written notice thereof. Borrowers shall also provide
Bank with at least thirty (30) days' prior written notification of: (a) any
change in any location where any Company's Inventory or Equipment is maintained,
and any new locations where any Company's Inventory or Equipment is to be
maintained; (b) any change in the location of the office where any Company's
records pertaining to its Accounts are kept; (c) the location of any new places
of business and the changing or closing of any of its existing places of
business; and (d) any change in any Company's chief executive office.. In the
event of any of the foregoing, Borrowers shall promptly execute and deliver to
Bank (and Borrowers agree that Bank may execute and deliver the same as
Borrowers' irrevocable attorney-in-fact) new U.C.C. financing statements
describing the Collateral and otherwise in form and substance sufficient for
recordation wherever necessary or appropriate, as determined in Bank's sole
discretion, to perfect or continue perfected Bank's security interest in the
Collateral based upon such new places of business or names, and Borrowers shall
pay all filing and recording fees and taxes in connection with the filing or
recordation of such financing statements and shall immediately reimburse Bank
therefor if Bank pays the same. Such amounts shall be Related Expenses
hereunder.
SECTION 4.19. SUBSIDIARY GUARANTIES. Each Subsidiary or other affiliate
of a Company, created, acquired or held subsequent to the Closing Date, shall
execute and deliver to Bank a Guaranty of Payment of all of the Debt, such
agreement to be in form and substance acceptable to Bank.
SECTION 4.20. COLLATERAL. Borrowers shall:
(a) at all reasonable times allow Bank by or through any of its officers,
agents, employees, attorneys, or accountants to (i) examine, inspect, and make
extracts from Borrowers' books and other records, including, without limitation,
the tax returns of Borrowers; (ii) arrange for verification of Borrowers'
Accounts, under reasonable procedures, directly with Account Debtors or by other
methods; and (iii) examine and inspect Borrowers' Inventory and Equipment,
wherever located;
(b) promptly furnish to Bank upon request (i) additional statements and
information with respect to the Collateral, and all writings and information
relating to or evidencing any of Borrowers' Accounts (including, without
limitation, computer printouts or typewritten reports listing the mailing
addresses of all present Account Debtors), and (ii) any other writings and
information as Bank may request;
(c) notify Bank in writing immediately upon the creation of any Accounts
with respect to which the Account Debtor is the United States of America or any
state, city, county or other
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governmental authority or any department, agency or instrumentality of any of
them, or any foreign government or instrumentality thereof or any business which
is located in a foreign country;
(d) mark its books and records of Accounts to indicate the security
interest granted to Bank hereunder;
(e) immediately notify Bank in writing of any information which Borrowers
have or may receive with respect to the Collateral which might in any manner
materially and adversely affect the value thereof or the rights of Bank with
respect thereto;
(f) maintain the Equipment in good operating condition and repair,
ordinary wear and tear excepted, making all necessary replacements thereof so
that the value and operating efficiency thereof shall at all times be maintained
and preserved, and promptly inform Bank of any additions to or deletions from
the Equipment; and
(g) upon request of Bank, promptly take such action and promptly make,
execute, and deliver all such additional and further items, deeds, assurances,
and instruments as Bank may require, including, without limitation, financing
statements, so as to completely vest in and ensure to Bank its rights hereunder
and in or to the Collateral.
A carbon, photographic, or other reproduction of this Agreement may be used
as a financing statement. If certificates of title or applications for title
are issued or outstanding with respect to any of Borrowers' Inventory or
Equipment, Borrowers shall, upon request of Bank, (i) execute and deliver to
Bank a short form security agreement, in the form of EXHIBIT D hereto, and (ii)
deliver such certificate or application to Bank and cause the interest of Bank
to be properly noted thereon. Borrowers hereby authorize Bank or Bank's
designated agent (but without obligation by Bank to do so) to incur Related
Expenses (whether prior to, upon, or subsequent to any Unmatured Event of
Default or Event of Default), and Borrowers shall promptly repay, reimburse, and
indemnify Bank for any and all Related Expenses. If Borrowers fail to keep and
maintain the Equipment in good operating condition, Bank may (but shall not be
required to) so maintain or repair all or any part of the Equipment and the cost
thereof shall be a Related Expense. All Related Expenses are payable to Bank
upon demand therefor; Bank may, at its option, debit Related Expenses directly
to the Line of Credit Note or any other Note.
SECTION 4.21. MERGER; DISSOLUTION OF CORPORATIONS. Borrowers shall use
its best efforts to cause Centel Corp., an Ohio corporation and Authorized
Network Distributors, Inc. (fka AND Acquisition Corporation), an Ohio
corporation, to either be (a) merged with a Borrower (provided that the Borrower
shall be the continuing or surviving corporation), or (b) voluntarily dissolved
pursuant to Section 1701.86 of the Ohio Revised Code. Borrowers shall
effectuate such merger or dissolution by December 31, 1997.
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ARTICLE V. SECURITY
SECTION 5.1. SECURITY INTEREST IN COLLATERAL. In consideration of and as
security for the full and complete payment of all of the Debt, Borrowers do
hereby grant to Bank a security interest in and an assignment of the Collateral.
SECTION 5.2. COLLECTIONS AND RECEIPT OF PROCEEDS BY BORROWERS. Prior to
exercise by Bank of its rights under Article VIII of this Agreement, both (a)
the lawful collection and enforcement of all of Borrowers' Accounts, and (b) the
lawful receipt and retention by Borrowers of all Proceeds of all of Borrowers'
Accounts and Inventory shall be as the agent of Bank. Upon written notice to
Borrowers from Bank after the occurrence of an Event of Default, a Cash
Collateral Account shall be opened by Borrowers at the main office of Bank and
all such lawful collections of Borrowers' Accounts and such Proceeds of
Borrowers' Accounts and Inventory shall be remitted daily by Borrowers to Bank
in the form in which they are received by Borrowers, either by mailing or by
delivering such collections and Proceeds to Bank, appropriately endorsed for
deposit in the Cash Collateral Account. In the event that such notice is given
to Borrowers from Bank, Borrowers shall not commingle such collections or
Proceeds with any of Borrowers' other funds or property, but will hold such
collections and Proceeds separate and apart therefrom upon an express trust for
Bank. In such case, Bank may, in its sole discretion, at any time and from time
to time, apply all or any portion of the account balance in the Cash Collateral
Account as a credit against (i) the outstanding principal or interest of any
Note or Notes, or (ii) any other Debt. If any remittance shall be dishonored,
or if, upon final payment, any claim with respect thereto shall be made against
Bank on its warranties of collection, Bank may charge the amount of such item
against the Cash Collateral Account or any other Deposit Account maintained by
Borrowers with Bank, and, in any event, retain same and Borrowers' interest
therein as additional security for the Debt. Bank may, in its sole discretion,
at any time and from time to time, release funds from the Cash Collateral
Account to Borrowers for use in Borrowers' business. The balance in the Cash
Collateral Account may be withdrawn by Borrowers upon termination of this
Agreement and payment in full of all of the Debt. At Bank's request after the
occurrence of an Event of Default, Borrowers shall cause all remittances
representing collections and Proceeds of Collateral to be mailed to a lock box
in Cleveland, Ohio, to which Bank shall have access for the processing of such
items in accordance with the provisions, terms, and conditions of Bank's
customary lock box agreement.
Bank, or Bank's designated agent, is hereby constituted and appointed
Borrowers attorney-in-fact with authority and power to endorse any and all
instruments, documents, and chattel paper upon Borrowers' failure to do so.
Such authority and power, being coupled with an interest, shall be
(A) irrevocable until all of the Debt is paid, (B) exercisable by Bank at any
time and without any request upon Borrowers by Bank to so endorse, and (C)
exercisable in Bank's name or Borrowers' name. Borrowers hereby waive
presentment, demand, notice of dishonor, protest, notice of protest, and any and
all other similar notices with respect thereto, regardless of the form of any
endorsement thereof Bank shall not be bound or obligated to take any action to
preserve any rights therein against prior parties thereto.
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SECTION 5.3. COLLECTIONS AND RECEIPT OF PROCEEDS BY BANK. Borrowers
hereby constitute and appoint Bank, or Bank's designated agent, as Borrowers'
attorney-in-fact to exercise, at any time, all or any of the following powers
which, being coupled with an interest, shall be irrevocable until the complete
and full payment of all of the Debt:
(a) to receive, retain, acquire, take, endorse, assign, deliver, accept,
and deposit, in Bank's name or either Borrower's name, any and all of Borrowers'
cash, instruments, chattel paper, documents, Proceeds of Accounts, Proceeds of
Inventory, collection of Accounts, and any other writings relating to any of the
Collateral;
(b) to transmit to Account Debtors, on any or all of Borrowers' Accounts,
notice of assignment to Bank thereof and Bank's security interest therein and to
request from such Account Debtors at any time, in Bank's name or in Borrowers'
name, information concerning Borrowers' Accounts and the amounts owing thereon;
(c) to transmit to purchasers of any or all of Borrowers' Inventory,
notice of Bank's security interest therein, and to request from such purchasers
at any time, in Bank's name or in Borrowers' name, information concerning
Borrowers' Inventory and the amounts owing thereon by such purchasers;
(d) to notify and require Account Debtors on Borrowers' Accounts and
purchasers of Borrowers' Inventory to make payment of their indebtedness
directly to Bank;
(e) to take or bring, in Bank's name or Borrowers' name, all steps,
actions, suits, or proceedings deemed by Bank necessary or desirable to effect
the receipt, enforcement, and collection of the Collateral; and
(f) to accept all collections in any form relating to the Collateral,
including remittances which may reflect deductions, and to deposit the same,
into Borrowers' Cash Collateral Account or, at the option of Bank, to apply them
as a payment against any Note or Notes.
SECTION 5.4. USE OF INVENTORY AND EQUIPMENT. Until any Event of Default
shall occur, Borrowers may: (a) retain possession of and use their Inventory and
Equipment in any lawful manner not inconsistent with this Agreement or with the
terms, conditions, or provisions of any policy of insurance thereon; (b) sell or
lease their Inventory in the ordinary course of business; provided, however,
that a sale or lease in the ordinary course of business does not include a
transfer in partial or total satisfaction of an Indebtedness, except for
transfers in satisfaction of partial or total purchase money prepayments by a
buyer in the ordinary course of Borrowers' business; and (c) also use and
consume any raw materials or supplies, the use and consumption of which are
necessary in order to carry on Borrowers' business.
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ARTICLE VI. REPRESENTATIONS AND WARRANTIES
Subject only to such exceptions, if any, as may be fully disclosed in an
officer's certificate or written opinion of counsel furnished by Borrowers to
Bank prior to the execution and delivery hereof, Borrowers represent and warrant
as follows:
SECTION 6.1. CORPORATE EXISTENCE; SUBSIDIARIES; FOREIGN QUALIFICATION.
Each Company is a corporation duly organized, validly existing, and in good
standing under the laws of its state of incorporation and is duly authorized to
do business and is in good standing as a foreign corporation in the
jurisdictions set forth opposite its name on SCHEDULE 6.1, which are all of the
states or jurisdictions where the character of its property or its business
activities makes such qualification necessary, except where the failure to so
qualify will not cause or result in a material adverse effect to the business,
operations or condition (financial or otherwise) of such Company. SCHEDULE 6.1
sets forth each Subsidiary, its state of incorporation, its relationship to
Borrowers, including the percentage of each class of stock owned by a Company or
the percentage of stock of Borrowers owned by it, the location of its chief
executive offices and its principal place of business. Borrowers own all of the
capital stock of each of their Subsidiaries.
SECTION 6.2. CORPORATE AUTHORITY. Borrowers have the right and power and
are duly authorized and empowered to enter into, execute, deliver the Loan
Documents to which either is a party and to perform and observe the provisions
of the Loan Documents. The Loan Documents to which either Borrower is a party
have been duly authorized and approved by such Borrower's Board of Directors and
are the valid and binding obligations of such Borrower, enforceable against such
Borrower in accordance with their respective terms. The execution, delivery and
performance of the Loan Documents will not conflict with nor result in any
breach in any of the provisions of, or constitute a default under, or result in
the creation of any Lien (other than Liens permitted under Section 4.9 of this
Agreement) upon any assets or property of Borrowers under the provisions of,
either Borrower's Certificate of Incorporation, Bylaws or any agreement (except
to the extent such a conflict or breach will not cause or result in a material
adverse effect to the business, operations or condition (financial or otherwise)
of either Borrower).
SECTION 6.3. COMPLIANCE WITH LAWS. Each Company:
(a) holds permits, certificates, licenses, orders, registrations,
franchises, authorizations, and other approvals from federal, state, local, and
foreign governmental and regulatory bodies necessary for the conduct of its
business and is in compliance with all applicable laws relating thereto;
(b) is in compliance with all federal, state, local, or foreign applicable
statutes, rules, regulations, and orders including, without limitation, those
relating to environmental protection, occupational safety and health, and equal
employment practices; and
(c) is not in violation of or in default under any agreement to which it
is a party or by which its assets are subject or bound.
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SECTION 6.4. LITIGATION AND ADMINISTRATIVE PROCEEDINGS. Except as
disclosed on SCHEDULE 6.4., hereto, there are (a) no lawsuits, actions,
investigations, or other proceedings pending or threatened against Borrowers or
any of their Subsidiaries, or in respect of which Borrowers or any of their
Subsidiaries may have any liability, in any court or before any governmental
authority, arbitration board, or other tribunal, (b) no orders, writs,
injunctions, judgments, or decrees of any court or government agency or
instrumentality to which any Company is a party or by which the property or
assets of any Company are bound and (c) no grievances, disputes, or
controversies outstanding with any union or other organization of the employees
of any Company, or threats of work stoppage, strike, or pending demands for
collective bargaining, which would have or would be reasonably expected to have
a material adverse effect on the business, property or operations (financial or
otherwise) of a Company.
SECTION 6.5. LOCATION. Borrowers have places of business or maintains
their Inventory or Equipment at the locations listed on SCHEDULE 6.5. The chief
executive office of both Borrowers is 9310 Progress Parkway, Mentor, Ohio 44060
and the office where Borrowers keep their records concerning its Accounts is
9310 Progress Parkway, Mentor, Ohio 44060.
SECTION 6.6. TITLE TO ASSETS. Each Company has good title to and
ownership of all property it purports to own, which property is free and clear
of all Liens, except those permitted under Section 6.6 hereto.
SECTION 6.7. LIENS AND SECURITY INTERESTS. On and after the Closing
Date, except for Liens permitted pursuant to Section 4.9 hereof, (a) there is no
financing statement outstanding covering any personal property of Borrowers or
of any Subsidiary, other than a financing statement in favor of Bank, if any;
(b) there is no mortgage outstanding covering any real property of Borrowers or
of any Subsidiary, other than a mortgage in favor of Bank, if any; and (c) no
real or personal property of Borrowers or of any Subsidiary is subject to any
security interest or Lien of any kind other than any security interest or Lien
which may be granted to Bank. Bank has a valid and enforceable first security
interest in the Collateral. On and after the Closing Date, neither Borrowers
nor any Subsidiary has entered into any contract or agreement which would
prohibit Bank from acquiring a security interest, mortgage or other Lien on, or
a collateral assignment of, any of the property or assets of Borrowers and/or
any of its Subsidiaries.
SECTION 6.8. TAX RETURNS. All federal, state and local tax returns and
other reports required by law to be filed in respect of the income, business,
properties and employees of Borrowers have been filed and except as disclosed on
Schedule 6.8 attached hereto and incorporated herein, which shall be paid within
ten (10) business days of the Closing Date, all taxes, assessments, fees and
other governmental charges which are due and payable have been paid, except as
otherwise permitted herein or the failure to do so does not and will not cause
or result in a material adverse effect on the business, operations or condition
(financial or otherwise) of Borrowers. The provision for taxes on the books of
Borrowers is adequate for all years not closed by applicable statutes and for
the current fiscal year.
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SECTION 6.9. ENVIRONMENTAL LAWS. Each Company is in compliance with any
and all Environmental Laws including, without limitation, all Environmental Laws
in all jurisdictions in which any Company owns or operates, or has owned or
operated, a facility or site, arranges or has arranged for disposal or treatment
of hazardous substances, solid waste or other wastes, accepts or has accepted
for transport any hazardous substances, solid waste or other wastes or holds or
has held any interest in real property or otherwise. No litigation or
proceeding arising under, relating to or in connection with any Environmental
Law is pending or, to the best of their knowledge, threatened against any
Company, any real property in which any Company holds or has held an interest or
any past or present operation of any Company. No release, threatened release or
disposal of hazardous waste, solid waste or other wastes is occurring, or has
occurred (other than those that are currently being cleaned up in accordance
with Environmental Laws), on, under or to any real property in which any Company
holds any interest or performs any of its operations, in violation of any
Environmental Law. As used in this Section, "litigation or proceeding" means
any demand, claim, notice, suit, suit in equity, action, administrative action,
investigation or inquiry whether brought by any governmental authority, private
person or entity or otherwise.
SECTION 6.10. CONTINUED BUSINESS. There exists no actual, pending, or, to
the best of Borrowers' knowledge, any threatened termination, cancellation or
limitation of, or any modification or change in the business relationship of any
Company and any customer or supplier, or any group of customers or suppliers,
whose purchases or supplies, individually or in the aggregate, are material to
the business of any Company, and there exists no present condition or state of
facts or circumstances which would materially affect adversely any Company in
any respect or prevent a Company from conducting such business or the
transactions contemplated by this Agreement in substantially the same manner
which it was theretofore conducted.
SECTION 6.11. EMPLOYEE BENEFITS PLANS. SCHEDULE 6.11 identifies each
ERISA Plan. No ERISA Event has occurred or is expected to occur with respect to
an ERISA Plan. Full payment has been made of all amounts which a Controlled
Group member is required, under applicable law or under the governing documents,
to have been paid as a contribution to or a benefit under each ERISA Plan. The
liability of each Controlled Group member with respect to each ERISA Plan has
been fully funded based upon reasonable and proper actuarial assumptions, has
been fully insured, or has been fully reserved for on its financial statements.
No changes have occurred or are expected to occur that would cause a material
increase in the cost of providing benefits under the ERISA Plan. With respect
to each ERISA Plan that is intended to be qualified under Code Section 401(a):
(a) the ERISA Plan and any associated trust operationally comply with the
applicable requirements of Code Section 401 (a), (b) the ERISA Plan and any
associated trust have been amended to comply with all such requirements as
currently in effect, other than those requirements for which a retroactive
amendment can be made within the "remedial amendment period" available under
Code Section 401 (b) (as extended under Treasury Regulations and other Treasury
pronouncements upon which taxpayers may rely), (c) the ERISA Plan and any
associated trust have received a favorable determination letter from the
Internal Revenue Service stating that the ERISA Plan qualifies under Code
Section 401(a), that the associated trust qualifies under Code Section 501 (a)
and, if applicable, that any cash or deferred arrangement under the ERISA Plan
qualifies under Code Section 401(k), unless the ERISA Plan was first adopted at
a time for which the above-
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described "remedial amendment period" has not yet expired, (d) the ERISA Plan
currently satisfies the requirements of Code Section 410(b), without regard to
any retroactive amendment that may be made within the above-described "remedial
amendment period", and (e) no contribution made to the ERISA Plan is subject to
an excise tax under Code Section 4972. With respect to any Pension Plan, the
"accumulated benefit obligation" of Controlled Group members with respect to the
Pension Plan has determined in accordance with Statement of Accounting Standards
No. 87, "Employers' Accounting for Pensions") does not exceed the fair market
value of Pension Plan assets. The aggregate potential amount of liability that
would result if all Controlled Group members withdrew from all Multiemployer
Plans in a "complete withdrawal" (within the meaning of ERISA Section 4203)
would not exceed Twenty-Five Thousand Dollars ($25,000).
SECTION 6.12. CONSENTS OR APPROVALS. No consent, approval or
authorization of, or filing, registration or qualification with, any
governmental authority or any other Person is required to be obtained or
completed by Borrowers in connection with the execution, delivery or performance
of any of the Loan Documents, which has not already been obtained or completed.
SECTION 6.13. SOLVENCY. Borrowers have each received consideration which
is the reasonable equivalent value of the obligations and liabilities that
Borrowers have incurred to Bank. Neither Borrower is insolvent as defined in
any applicable state or federal statute, nor will either Borrower be rendered
insolvent by the execution and delivery of the Loan Documents to Bank. Neither
Borrower is engaged or about to engage in any business or transaction for which
the assets retained by it will be an unreasonably small capital, taking into
consideration the obligations to Bank incurred hereunder. Neither Borrower
intends to, nor does it believe that it will, incur debts beyond its ability to
pay them as they mature.
SECTION 6.14. FINANCIAL STATEMENTS. The June 30, 1997 Consolidated
financial statements of Telecomm Industries Corp. furnished to Bank, are true
and complete, have been prepared in accordance with GAAP, and fairly present the
Companies' financial condition as of the date of such financial statements and
the results of their operations for the interim period then ending. Since that
date, there has been no material adverse change in any Company's financial
condition, properties or business nor any change in any Company's accounting
procedures.
SECTION 6.15. REGULATIONS. Borrowers are not engaged principally or as
one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying any "margin stock" (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System of the
United States of America). Neither the granting of any Loans (or any conversion
thereof) nor the use of the proceeds of the Loans will violate, or be
inconsistent with, the provisions of Regulation U or X of said Board of
Governors.
SECTION 6.16. MATERIAL AGREEMENTS. Except as disclosed on SCHEDULE 6.16
attached to this Agreement, Borrowers nor any of their Subsidiaries is a party
to any (a) debt instrument; lease (capital, operating or otherwise), whether as
lessee or lessor thereunder; (c) contract, commitment, agreement, or other
arrangement involving the purchase or sale of any
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inventory by it, or the license of any right to or by it; (d) contract,
commitment, agreement, or other arrangement with any of its "Affiliates" (as
such term is defined in the Securities Exchange Act of 1934, as amended); (e)
management or employment contract or contract for personal services with any of
its Affiliates which is not otherwise terminable et will or on less than ninety
(90) days' notice without liability; (f) collective bargaining agreement; or (g)
other contract, agreement, understanding, or arrangement which, as to
subsections (a) through (g), above, if violated, breached, or terminated for any
reason, would have or would be reasonably expected to have a material adverse
effect on the business, operation or condition (financial or otherwise) of
Borrowers.
SECTION 6.17. INTELLECTUAL PROPERTY. Each Company owns, possesses, or has
the right to use all the patents, patent applications, trademarks, service
marks, copyrights, licenses, and rights with respect to the foregoing necessary
for the conduct of its business without any known conflict with the rights of
others.
SECTION 6.18. INSURANCE. Each Company maintains with financially sound
and reputable insurers insurance with coverage and limits as required by law and
as is customary with persons engaged in the same businesses as the Companies.
SCHEDULE 6.18 sets forth all insurance carried by the Companies, setting forth
in detail the amount and type of such insurance.
SECTION 6.19. ACCURATE AND COMPLETE STATEMENTS. Neither the Loan
Documents nor any written statement made by any Company in connection with any
of the Loan Documents contains any untrue statement of a material fact or omits
a material fact necessary to make the statements contained therein or in the
Loan Documents not misleading. After due inquiry by Borrowers, there is no
known fact which any Company has not disclosed to Bank which has a material
adverse effect on the business, operations or condition (financial or otherwise)
of any Company.
SECTION 6.20. DEFAULTS. No Unmatured Event of Default or Event of Default
exists hereunder, nor will any begin to exist immediately after the execution
and delivery hereof.
SECTION 6.21. CONSUMMATION OF ACQUISITION. The acquisition of the assets
of Unitel, Inc., an Indiana corporation ("Unitel"), by Teleco has been fully
consummated in accordance with all of the terms and conditions of that certain
Asset Purchase Agreement, dated July 7, 1997, among Unitel, Paul Satterthwaite,
John Satterthwaite and Borrowers.
ARTICLE VII. EVENTS OF DEFAULT
Each of the following shall constitute an Event of Default hereunder:
SECTION 7.1. PAYMENTS. If the principal of or interest on any Note or
any or other fee shall not be paid in full punctually when due and payable.
SECTION 7.2. SPECIAL COVENANTS. If any Company or any Obligor shall
fail or omit to perform and observe Sections 4.5, 4.7, 4.12 or 4.13 hereof.
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SECTION 7.3. OTHER COVENANTS. If any Company or any Obligor shall fail
or omit to perform and observe any agreement or other provision (other than
those referred to in Sections 7.1 or 7.2 hereof) contained or referred to in
this Agreement or any Related Writing that is on such Company's or such
Obligor's part, as the case may be, to be complied with, and that Unmatured
Event of Default shall not have been fully corrected within ten (10) business
days after the giving of written notice thereof to Borrowers by Bank that the
specified Unmatured Event of Default is to be remedied.
SECTION 7.4. REPRESENTATIONS AND WARRANTIES. If any representation,
warranty or statement made in or pursuant to this Agreement or any Related
Writing or any other material information furnished by any Company or any
Obligor to Bank or any other holder of any Note, shall be false or erroneous in
any material respect.
SECTION 7.5. CROSS DEFAULT. If any Company or any Obligor shall default
in the payment of principal or interest due and owing upon any other obligation
for borrowed money in excess of Fifty Thousand Dollars ($50,000) beyond any
period of grace provided with respect thereto or in the performance or
observance of any other agreement, term or condition contained in any agreement
under which such obligation is created, if the effect of such default is to
accelerate the maturity of such indebtedness or to permit the holder thereof to
cause such indebtedness to become due prior to its stated maturity.
SECTION 7.6. ERISA DEFAULT. The occurrence of one or more ERISA Events
which (a) Bank determines could have a material adverse effect on the financial
condition of any Company, or (b) results in a Lien on any of the assets of any
Company.
SECTION 7.7. MONEY JUDGMENT. A final judgment or order for the payment
of money shall be rendered against any Company or any Obligor by a court of
competent jurisdiction, which remains unpaid or unstayed and undischarged for a
period (during which execution shall not be effectively stayed) of thirty (30)
days after the date on which the right to appeal has expired.
SECTION 7.8. MATERIAL ADVERSE CHANGE. There shall have occurred any
condition or event which Bank determines has or is reasonably likely to have a
material and adverse effect on the business, prospects, operations or financial
condition of Borrowers or any Subsidiary or on the rights and remedies of Bank
under the Loan Documents or the ability of Borrowers or any Subsidiary to
perform its obligations under the Loan Documents.
SECTION 7.9. SOLVENCY. If any Company or any Obligor shall (a)
discontinue business, or (b) generally not pay its debts as such debts become
due, or (c) make a general assignment for the benefit of creditors, or (d) apply
for or consent to the appointment of a receiver, a custodian, a trustee, an
interim trustee or liquidator of all or a substantial part of its assets, or
(e) be adjudicated a debtor or have entered against it an order for relief under
Title 11 of the United States Code, as the same may be amended from time to
time, or (f) file a voluntary petition in bankruptcy or file a petition or an
answer seeking reorganization or an arrangement with creditors or seeking to
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take advantage of any other law (whether federal or state) relating to relief of
debtors, or admit (by answer, by default or otherwise) the material allegations
of a petition filed against it in any bankruptcy, reorganization, insolvency or
other proceeding (whether federal or state) relating to relief of debtors, or
(g) suffer or permit to continue unstayed and in effect for thirty (30)
consecutive days any judgment, decree or order entered by a court of competent
jurisdiction, which approves a petition seeking its reorganization or appoints a
receiver, custodian, trustee, interim trustee or liquidator of all or a
substantial part of its assets, or (h) take, or omit to take, any action in
order thereby to effect any of the foregoing.
ARTICLE VIII. REMEDIES UPON DEFAULT
Notwithstanding any contrary provision or inference herein or elsewhere,
SECTION 8.1. OPTIONAL DEFAULTS. If any Event of Default referred to in
Section 7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8 or 7.9 hereof shall occur, Bank
shall have the right in its discretion, to give written notice to Borrowers, to:
(a) terminate the Commitments and the credits hereby established, if not
theretofore terminated, and, immediately upon such election, the obligation of
Bank to make any further Loan or Loans hereunder, immediately shall be
terminated, and/or
(b) accelerate the maturity of all of Borrowers' Debt (if it be not
already due and payable), whereupon all of the Debt shall become and thereafter
be immediately due and payable in full without any presentment or demand and
without any further or other notice of any kind, all of which are hereby waived
by Borrowers.
SECTION 8.2. AUTOMATIC DEFAULTS. If any Event of Default referred to in
Section 7.9 hereof shall occur:
(a) all of the Commitments and the credits hereby established shall
automatically and immediately terminate, if not theretofore terminated, and Bank
thereafter shall not be under any obligation to grant any further Loan or Loans
hereunder, and
(b) the principal of and interest on any Notes then outstanding, and all
of Borrowers' Debt to Bank, shall thereupon become and thereafter be immediately
due and payable in full (if it be not already due and payable), all without any
presentment, demand or notice of any kind, which are hereby waived by Borrowers.
SECTION 8.3. OFFSETS. If there shall occur or exist any Unmatured Event
of Default referred to in Section 7.9 hereof or if the maturity of the Notes is
accelerated pursuant to Section 8.1 or 8.2 hereof, Bank shall have the right at
any time to set off against, and to appropriate and apply toward the payment of,
any and all Debt then owing by Borrowers to Bank, whether or not the same shall
then have matured, any and all deposit balances and all other indebtedness then
held or owing by Bank to or for the credit or account of Borrowers, all without
notice to or demand upon
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Borrowers or any other person, all such notices and demands being hereby
expressly waived by Borrowers.
SECTION 8.4. COLLATERAL. Upon the occurrence of any Event of Default,
and at all times thereafter, Bank shall have the rights and remedies of a
secured party under the Ohio Revised Code, in addition to the rights and
remedies of a secured party provided elsewhere within this Agreement or in any
other writing executed by Borrowers. Bank may require Borrowers to assemble the
Collateral, which Borrowers agree to do, and make it available to Bank at a
reasonably convenient place to be designated by Bank. Bank may, with or without
notice to or demand upon Borrowers and with or without the aid of legal process,
make use of such force as may be necessary to enter any premises where the
Collateral, or any thereof, may be found and to take possession thereof
(including anything found in or on the Collateral that is not specifically
described in this Agreement, each of which findings shall be considered to be an
accession to and a part of the Collateral) and for that purpose may pursue the
Collateral wherever the same may be found, without liability for trespass or
damage caused thereby to Borrowers. After any delivery or taking of possession
of the Collateral, or any thereof, pursuant to this Agreement, then, with or
without resort to either Borrower or any other Person or property, all of which
Borrowers hereby waive, and upon such terms and in such manner as Bank may deem
advisable, Bank, in its discretion, may sell, assign, transfer and deliver any
of the Collateral at any time or, from time to time. No prior notice need be
given to Borrowers or to anyone else in the case of any sale of Collateral which
Bank determines to be perishable or to be declining speedily in value or which
is customarily sold in any recognized market, but in any other case Bank shall
give Borrowers not fewer than ten (10) days' prior notice of either the time and
place of any public sale of the Collateral or of the time after which any
private sale or other intended disposition thereof is to be made. Borrowers
waive advertisement of any such sale and (except to the extent specifically
required by the preceding sentence) waives notice of any kind in respect of any
such sale. At any such public sale, Bank may purchase the Collateral, or any
part thereof, free from any right of redemption, all of which rights Borrowers
hereby waive and release. After deducting all Related Expenses, and after
paying all claims, if any, Secured by liens having precedence over this
Agreement, Bank may apply the net proceeds of each such sale to or toward the
payment of the Debt, whether or not then due, in such order and by such division
as Bank in its sole discretion may deem advisable. Any excess, to the extent
permitted by law, shall be paid to Borrowers, and Borrowers shall remain liable
for any deficiency. In addition, Bank shall at all times have the right to
obtain new appraisals of Borrowers or the Collateral, the cost, of which shall
be paid by Borrowers.
ARTICLE IX. MISCELLANEOUS
SECTION 9.1. NO WAIVER; CUMULATIVE REMEDIES; RELATIONSHIP OF PARTIES.
No omission or course of dealing on the part of Bank or the holder of any Note
in exercising any right, power or remedy hereunder or under any of the Loan
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder
or under any of the Loan Documents. The remedies herein provided are cumulative
and in addition to any other rights, powers or privileges under any of the Loan
Documents, held by
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operation of law, by contract or otherwise. Nothing contained in this Agreement
and no action taken by Bank pursuant hereto shall be deemed to constitute
Borrowers and Bank a partnership, association, joint venture or other entity.
The relationship between Borrowers and Bank with respect to the Loan Documents
and the Related Writings is and shall be solely that of debtor and creditor,
respectively, and Bank shall have no fiduciary obligation toward Borrowers with
respect to any such documents or the transactions contemplated thereby.
SECTION 9.2. AMENDMENTS, CONSENTS. No amendment, modification,
termination, or waiver of any provision of this Agreement or of the Notes nor
consent to any variance therefrom, shall be effective unless the same shall be
in writing and signed by Bank and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 9.3. NOTICES. All notices, requests, demands and other
communication, provided for hereunder shall be in writing and, if to Borrowers,
mailed or delivered to it, addressed to it at the address specified on the
signature pages of this Agreement, or if to Bank, mailed or delivered to it,
addressed to the address of Bank specified on the signature pages of this
Agreement. All notices, statements, requests, demands and other communications
provided for hereunder shall be deemed to be given or made when delivered or
forty-eight (48) hours after being deposited in the mails with postage prepaid
by registered or certified mail, except that notices from Borrowers to Bank
pursuant to any of the provisions hereof shall not be effective until received
by Bank.
SECTION 9.4. COSTS, EXPENSES AND TAXES. Borrowers agree to pay on demand
all costs and expenses of Bank, any expenses incurred in connection with the
preparation of this Agreement and any Related Writings, and all Related
Expenses, including but not limited to, (a) administration and out-of-pocket
expenses of Bank in connection with the administration of this Agreement, the
Notes, the collection and disbursement of all funds hereunder and the other
instruments and documents to be delivered hereunder, (b) extraordinary expenses
of Bank in connection with the administration of this Agreement, the Notes and
the other instruments and documents to be delivered hereunder, (c) the
reasonable fees and out-of-pocket expenses of special counsel for Bank, with
respect thereto and of local counsel, if any, who may be retained by said
special counsel with respect thereto, and (d) all costs and expenses, including
reasonable attorneys' fees, in connection with the restructuring or enforcement
of this Agreement or any Related Writing. In addition, Borrowers shall pay any
and all stamp and other taxes and fees payable or determined to be payable in
connection with the execution and delivery of this Agreement or the Notes, and
the other instruments and documents to be delivered hereunder, and agrees to
save Bank harmless from, and against any and all liabilities with respect to or
resulting from any delay in paying or omission to pay such taxes or fees.
SECTION 9.5. INDEMNIFICATION. Borrowers agree to defend, indemnify and
hold harmless Bank from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including attorney fees), or disbursements of any kind or nature whatsoever
which may be imposed on, incurred by or asserted against Bank in connection with
any investigative, administrative or judicial proceeding (whether or not Bank
shall be
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designated thereto) or any other claim by any Person relating to or arising out
of the Loan Documents or any actual or proposed use of proceeds of the Loans or
any activities of any Company or any Obligor or any of their respective
affiliates; provided that Bank shall not have the right to be indemnified under
this Section 9.5 for its own gross negligence or willful misconduct as
determined by a court of competent jurisdiction. All obligations provided for
in this Section 9.5 shall survive any termination of this Agreement.
SECTION 9.6. CAPITAL ADEQUACY. If Bank shall have determined, after the
date hereof, that the adoption of any applicable law, rule, regulation or
guideline regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Bank (or its lending office) with any
request or directive regarding capital adequacy (whether or not having the force
of law) of any such authority, central bank or comparable agency, has or would
have the effect of reducing the rate of return on Bank's capital (or the capital
of its holding company) as a consequence of its obligations hereunder to a level
below that which Bank (or its holding company) could have achieved but for such
adoption, change or compliance (taking into consideration Bank's policies or the
policies of its holding company with respect to capital adequacy) by an amount
deemed by Bank to be material, then from time to time, within fifteen (15) days
after demand by Bank, which shall not be made until Bank has given Borrowers
thirty (30) days' advance written notice, Borrowers shall pay to Bank such
additional amount or amounts as will compensate Bank (or its holding company)
for such reduction. Bank shall designate a different lending office if such
designation will avoid the need for, or reduce the amount of, such compensation
and will not, in the judgment of Bank, be otherwise disadvantageous to Bank. A
certificate of Bank claiming compensation under this section and setting forth
the additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of manifest error. In determining such amount, Bank may use any
reasonable averaging and attribution methods. Failure on the part of Bank to
demand compensation for any reduction in return on capital with respect to any
period shall not constitute a waiver of Bank's rights to demand compensation for
any reduction in return on capital in such period or in any other period. The
protection of this section shall be available to Bank regardless of any possible
contention of the invalidity or inapplicability of the law, regulation or other
condition which shall have been imposed.
SECTION 9.7. BINDING EFFECT; ASSIGNMENT. This Agreement shall become
effective when it shall have been executed by Borrowers and Bank and thereafter
shall be binding upon and inure to the benefit of Borrowers and Bank and their
respective successors and assigns, except that Borrowers shall not have the
right to assign its rights hereunder or any interest herein without the prior
written consent of Bank. No Person, other than Bank, shall have or acquire any
obligation to grant Borrowers any Loans.
SECTION 9.8. GOVERNING LAW; SUBMISSION TO JURISDICTION. This Agreement,
each of the Notes and any Related Writing shall be governed by and construed in
accordance with the laws of the State of Ohio and the respective rights and
obligations of Borrowers and Bank shall be governed by Ohio law, without regard
to principles of conflict of laws. Borrowers hereby irrevocably submit to the
non-exclusive jurisdiction of any Ohio state or federal court sitting
- 35 -
<PAGE>
in Cleveland, Ohio, over any action or proceeding arising out of or relating to
this Agreement, any Loan Document or any Related Writing, and Borrowers hereby
irrevocably agree that all claims in respect of such action or proceeding may be
heard and determined in such Ohio state or federal court. Borrowers, on behalf
of themselves and their Subsidiaries, hereby irrevocably waive, to the fullest
extent permitted by law, any objection it may now or hereafter have to the
laying of venue in any action or proceeding in any such court as well as any
right it may now or hereafter have to remove such action or proceeding, once
commenced, to another court on the grounds of FORUM NON CONVENIENS or otherwise.
Borrowers agree that a final, nonappealable judgment in any such action or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law.
SECTION 9.9. SEVERABILITY OF PROVISIONS; CAPTIONS. 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
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. The several captions to sections herein are inserted for
convenience only and shall be ignored in interpreting the provisions of this
Agreement.
SECTION 9.10. ENTIRE AGREEMENT. This Agreement, any Note, any Related
Writing and any other agreement, document or instrument attached hereto or
referred to herein or executed on or as of the date hereof integrate all the
terms and conditions mentioned herein or incidental hereto and supersede all
oral representations and negotiations and prior writings with respect to the
subject matter hereof.
SECTION 9.11. RULE OF CONSTRUCTION. The Loan Documents were negotiated
by the parties with the benefit of legal representation and any rule of
construction or interpretation otherwise requiring this Agreement or any other
Loan Document to be construed or interpreted against any party shall not apply
to any construction or interpretation hereof or thereof.
SECTION 9.12. JURY TRIAL WAIVER. BORROWERS AND BANK WAIVE ANY RIGHT TO
HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT,
TORT OR OTHERWISE, AMONG BORROWERS, BANK, OR ANY OF THEM, ARISING OUT OF, IN
CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG
THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT
OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS
RELATED THERETO. THIS WAIVER SHALL NOT IN ANY WAY AFFECT, WAIVE, LIMIT, AMEND
OR MODIFY BANK'S ABILITY TO PURSUE REMEDIES PURSUANT TO ANY CONFESSION OF
JUDGMENT OR COGNOVIT PROVISION CONTAINED IN ANY NOTE OR OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT AMONG BORROWERS, BANK, OR ANY OF THEM.
- 36 -
<PAGE>
Address: 9310 Progress Parkway TELECOMM INDUSTRIES CORP.,
Mentor, Ohio 44060 a Delaware corporation
Attn:
--------------------
By: /s/ James M. Lowery
--------------------------------
Name: James M. Lowery
--------------------------------
Title: Chairman-CEO
--------------------------------
And:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
Address: 9310 Progress Parkway TELECO ACQUISITION
Mentor, Ohio 44060 CORPORATION, an Ohio corporation
Attn:
--------------------
By: /s/ James M. Lowery
--------------------------------
Name: James M. Lowery
--------------------------------
Title: Chairman-CEO
--------------------------------
And:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
Address: 7800 Reynolds Road PEOPLES BANK, N.A.
Mentor, Ohio 44060
Attn:
-------------------- By: /s/ Ken Sinha V.P.
--------------------------------
Ken Sinha, Vice President
- 37 -
<PAGE>
EXHIBIT A
LINE OF CREDIT NOTE
$2,000,000.00 Cleveland, Ohio
______________, 1997
FOR VALUE RECEIVED, the undersigned Telecomm Industries Corp., a Delaware
corporation, and Teleco Acquisition Corporation, an Ohio corporation
(collectively, "Borrowers", and individually, "Borrower"), jointly and
severally, promise to pay on demand, to the order of Peoples Bank, N.A. ("Bank")
at 7800 Reynolds Road, Mentor, Ohio 44060, or at such other place as Bank shall
designate, the principal sum of TWO MILLION AND 00/100 DOLLARS ($2,000,000.00)
or the aggregate unpaid principal amount of all Line of Credit Loan made by Bank
to Borrowers pursuant to Section 2.1 A of the Credit and Security Agreement, as
hereinafter defined, whichever is less, in lawful money of the United States of
America. As used herein, "Credit and Security Agreement" means the Credit and
Security Agreement dated as of , 1997, among Borrowers and
Bank, as the same may from time to time be restated, amended or otherwise
modified. Capitalized terms used herein shall have the meanings ascribed to
them in the Credit and Security Agreement.
Borrowers also promise to pay interest on the unpaid principal amount of
each Line of Credit Loan from time to time outstanding, from the date of such
Loan until the payment in full thereof, at the rates per annum which shall be
determined in accordance with the provisions of Section 2.1A of the Credit and
Security Agreement. Such interest shall be payable on each date provided for in
Section 2.1 A; provided, however, that interest on any principal portion which
is not paid when due shall be payable on demand.
The amount of Line of Credit Loan, and payments of principal and interest
thereon, shall be shown on the records of Bank by such method as Bank may
generally employ; provided, however, that failure to make any such entry shall
in no way detract from Borrowers' obligations under this Note.
If this Note shall not be paid at maturity, whether such maturity occurs by
reason of lapse of time or by operation of any provision for acceleration of
maturity contained in the Credit and Security Agreement, the principal hereof
and the unpaid interest thereon shall bear interest, until paid, at a rate per
annum which shall be the Default Rate. All payments of principal of and
interest on this Note shall be made in immediately available funds. In the
event of a failure to pay interest or principal, when the same becomes due, Bank
may collect and Borrowers agree to pay a late charge of an amount equal to seven
percent (7%) of the amount of such late payment or thirty-five dollars ($35.00),
whichever is greater.
This Note is the Line of Credit Note referred to in the Credit and Security
Agreement. Reference is made to the Credit and Security Agreement for a
description of the right of the
Page 1 of Exhibit A
<PAGE>
undersigned to prepay payments hereof, the right of the holder hereof to declare
this Note due prior to its stated maturity, and other terms and conditions upon
which this Note is issued.
Except as provided in the Credit and Security Agreement, Borrowers
expressly waive presentment, demand, protest and notice of any kind.
The undersigned authorize any attorney at law at any time or times after
the maturity hereof (whether maturity occurs by lapse of time or by
acceleration) to appear in any state or federal court of record in the United
States of America, to waive the issuance and service of process, to admit the
maturity of this Note and the nonpayment thereof when due, to confess judgment
against the undersigned in favor of the holder of this Note for the amount then
appearing due, together with interest and costs of suit, and thereupon to
release all errors and to waive all rights of appeal and stay of execution. The
foregoing warrant of attorney shall survive any judgment and if any judgment be
vacated for any reason, the holder hereof nevertheless may thereafter use the
foregoing warrant of attorney to obtain an additional judgment or judgments
against the undersigned. The undersigned agree that Bank's attorney may confess
judgment pursuant to the foregoing warrant of attorney. The undersigned further
agree that the attorney confessing judgment pursuant to the foregoing warrant of
attorney may receive a legal fee or other compensation from Bank.
- --------------------------------------------------------------------------------
"WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT
OR ANY OTHER CAUSE."
- --------------------------------------------------------------------------------
TELECOMM INDUSTRIES CORP., TELECO ACQUISITION CORPORATION,
a Delaware corporation an Ohio corporation
By: By:
---------------------------- ----------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
And: And:
---------------------------- ----------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
Page 2 of Exhibit A
<PAGE>
EXHIBIT B
TERM NOTE
$2,000,000.00 Cleveland, Ohio
______________, 1997
FOR VALUE RECEIVED, the undersigned Telecomm Industries Corp., a
Delaware corporation, and Teleco Acquisition Corporation, an Ohio corporation
(collectively, "Borrowers", and individually, "Borrower"), jointly and
severally, promise to pay to the order of Peoples Bank, N.A. ("Bank"), at 7800
Reynolds Road, Mentor, Ohio 44060, or at such other place as Bank shall
designate, the principal sum of TWO MILLION AND 00/100 DOLLARS ($2,000,000.00)
in lawful money of the United States of America in fifty-nine (59) consecutive
monthly installments of Forty-One Thousand Seven Hundred Forty and 32/100
Dollars ($41,740.32) each, commencing November 1, 1997, and continuing on the
first day of each month thereafter, with the balance thereof payable in full on
November 1, 2002. As used herein, "Credit and Security Agreement" means the
Credit and Security Agreement, dated as of , 1997, among
Borrowers and Bank, as the same may from time to time be restated, amended or
otherwise modified. Capitalized terms used herein shall have the meanings
ascribed to them in the Credit and Security Agreement.
Borrowers also promise to pay interest on the unpaid principal amount of
the Term Loan From time to time outstanding, from the date of such Loan until
the payment in full thereof, at the fixed rate of nine and twenty-three
hundredths percent (9.23%) per annum, in accordance with the provisions of
Section 2.1 B of the Credit and Security Agreement. Such interest shall be
payable on each date provided for in Section 2.1 B; provided, however, that
interest on any principal portion which is not paid when due shall be payable on
demand.
The amount of the Term Loan, and payments of principal and interest
thereof, shall be shown on the records of Bank by such method as Bank may
generally employ; provided, however, that failure to make any such entry shall
in no way detract from Borrowers' obligations under this Note.
If this Note shall not be paid at maturity, whether such maturity occurs
by reason of lapse of time or by operation of any provision for acceleration of
maturity contained in the Credit and Security Agreement, the principal hereof
and the unpaid interest thereon shall bear interest, until paid, at a rate per
annum which shall be the Default Rate. All payments of principal of and
interest on this Note shall be made in immediately available funds. In the
event of a failure to pay interest or principal, when the same becomes due, Bank
may collect and Borrowers agree to pay a late charge of an amount equal to seven
percent (7%) of the amount of such late payment of thirty-five dollars ($35.00),
whichever is greater.
This Note is the Term Note referred to in the Credit and Security
Agreement. Reference is made to the Credit and Security Agreement for a
description of the right of the undersigned to prepay
Page 1 of Exhibit B
<PAGE>
payments hereof, the right of the holder hereof to declare this Note due prior
to its stated maturity, and other terms and conditions upon which this Note is
issued.
Except as expressly provided in the Credit and Security Agreement,
Borrowers expressly waive presentment, demand, protest and notice of any kind.
The undersigned authorize any attorney at law at any time or times after
the maturity hereof (whether maturity occurs by lapse of time or by
acceleration) to appear in any state or federal court of record in the United
States of America, to waive the issuance and service of process, to admit the
maturity of this Note and the nonpayment thereof when due, to confess judgment
against the undersigned in favor of the holder of this Note for the amount then
appearing due, together with interest and costs of suit, and thereupon to
release all errors and to waive all rights of appeal and stay of execution. The
foregoing warrant of attorney shall survive any judgment, and if any judgment be
vacated for any reason, the holder hereof nevertheless may thereafter use the
foregoing warrant of attorney to obtain an additional judgment or judgments
against the undersigned. The undersigned agree that Bank's attorney may confess
judgment pursuant to the foregoing warrant of attorney. The undersigned further
agree that the attorney confessing judgment pursuant to the foregoing warrant of
attorney may receive a legal fee or other compensation from Bank.
- --------------------------------------------------------------------------------
"WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT
OR ANY OTHER CAUSE."
- --------------------------------------------------------------------------------
TELECOMM INDUSTRIES CORP., TELECO ACQUISITION CORPORATION,
a Delaware corporation an Ohio corporation
By: By:
---------------------------- ----------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
And: And:
---------------------------- ----------------------------
Name: Name:
---------------------------- ----------------------------
Title: Title:
---------------------------- ----------------------------
Page 2 of Exhibit B
<PAGE>
EXHIBIT C
BORROWER'S CERTIFICATE
Computed as of: ______________
I the undersigned and _________________ of Telecomm Industries Corp. and Teleco
Acquisition Corporation, ("Borrowers"), do hereby certify pursuant to the Credit
and Security Agreement among Borrowers and Peoples Bank, N.A., dated
September ___, 1997 (the "Agreement"), that the computations listed below have
been made in accordance with the provisions of the Agreement and without
duplications or overlap. All terms used herein and not defined herein shall
have the meaning ascribed to them in the Agreement.
1. Total Accounts Receivable $
-------------------
2. Less: Unqualified Accounts Receivable $
-------------------
3. Total Eligible Accounts Receivable $
-------------------
4. 80% of Eligible Accounts Receivable $
-------------------
5. Local Exchange Carrier Receivables $
-------------------
6. Less: Unqualified Local Exchange Carrier
Accounts Receivable $
-------------------
7. Total Eligible Local Exchange Carrier
Receivables $
-------------------
8. 80% of Eligible Local Exchange
Carrier Receivables $
-------------------
9. Ameritech Residual Receivables $
-------------------
10. 90% of Ameritech Residual Receivables
(Ameritech Residual Receivables Discount Value) $
-------------------
11. Eligible Ameritech Residual Receivables (line 10) $
-------------------
12. 60% of Eligible Ameritech Residual Receivables $
-------------------
13. 40% of Eligible Inventory $
-------------------
Page 1 of Exhibit C
<PAGE>
14. 50% of Eligible Net Book Value of Fixed Assets $
-------------------
15. 60% of Net Buyout of Culver Contract $
-------------------
16. Total Availability (Line 4 + 8 + 12 + 13 + 14 + 15) $
-------------------
17. Less: Term Loan Balance $
-------------------
18. Borrowing Base Availability (Line 16 - 17) $
-------------------
19. Line Availability (Line 18 or $2,000,000,
whichever is less) $
-------------------
20. Less Current Line Balance $
-------------------
21. Net Line Availability $
-------------------
The undersigned further certifies that, to the best of their knowledge and
belief as of the date hereof, no Unmatured Event of Default (each as defined in
the Agreement) exists under the Agreement.
Dated:
---------------------
By:
---------------------
Title:
---------------------
Page 2 of Exhibit C
<PAGE>
EXHIBIT D
SHORT-FORM SECURITY AGREEMENT
The undersigned, ________________ ("Debtor") hereby confirms that pursuant to
a Credit and Security Agreement dated as of the _____ day of _____________,
19__ Debtor has granted and does hereby grant to ____________________
("Bank") a security interest in the motor vehicles described below. The
vehicles are described as follows:
YEAR MANUFACTURER MODEL SERIAL NUMBER
The aforesaid security interest secures all of Debtor's existing and future
indebtedness to Bank, including, without limitation, loans evidenced by
promissory notes aggregating __________________________________ Dollars ($
________________), and other indebtedness owing to Bank from time to time.
Executed and delivered at Cleveland, Ohio, as of the _____ day of
________________, 199___.
------------------------------------------
By:
-----------------------------------
Title:
-----------------------------------
Page 3 of Exhibit C
<PAGE>
Exhibit 21
Subsidiaries of Registrant
1. Teleco Acquisition Corp.
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<PAGE>
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<PERIOD-TYPE> YEAR
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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0
0
<COMMON> 123,008
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<EXTRAORDINARY> 0
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<EPS-DILUTED> .10
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<TABLE> <S> <C>
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<ARTICLE> 5
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<S> <C> <C> <C> <C>
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0 0 0 0
0 0 0 0
<COMMON> 122,508 102,008 102,008 96,428
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<TOTAL-REVENUES> 10,671,963 5,742,231 2,594,059 10,560,785
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<TOTAL-COSTS> 8,172,504 5,211,687 2,361,530 9,608,978
<OTHER-EXPENSES> 122,477 0 (29,991) 870
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 0 65,417 32,683 27,511
<INCOME-PRETAX> 1,376,982 467,839 202,538 923,426
<INCOME-TAX> 552,178 187,136 81,015 371,200
<INCOME-CONTINUING> 0 0 121,523 552,226
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 824,804 280,703 121,523 552,226
<EPS-PRIMARY> .08 .03 .01 .06
<EPS-DILUTED> .07 .03 .01 .06
</TABLE>
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS
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<PERIOD-START> JAN-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 JUN-30-1996
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<PP&E> 699,706 625,362
<DEPRECIATION> 217,834 (186,420)
<TOTAL-ASSETS> 4,791,663 3,730,650
<CURRENT-LIABILITIES> 2,134,449 1,269,543
<BONDS> 0 0
0 0
0 0
<COMMON> 96,078 96,078
<OTHER-SE> 2,275,757 2,111,692
<TOTAL-LIABILITY-AND-EQUITY> 4,791,663 3,730,650
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<TOTAL-REVENUES> 6,834,289 4,246,182
<CGS> 0 0
<TOTAL-COSTS> 6,095,532 1,525,600
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