<PAGE> 1
EXHIBIT 99.1
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE> 2
TELECOM INDUSTRIES CORP.
TABLE OF CONTENTS
<TABLE>
PAGE(S)
<S> <C>
Report of Independent Accountants 1
Financial Statements:
Balance Sheets as of December 31, 1999 and 1998 2
Statements of Operations for the years ended December 31, 1999 and 1998 3
Statements of Equity for the years ended December 31, 1999 and 1998 4
Statements of Cash Flows for the years ended December 31, 1999 and 1998 5
Notes to Financial Statements 6-15
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Telecomm Industries Corp.
In our opinion, the accompanying balance sheets and the related statements of
operations, of equity and of cash flows present fairly, in all material
respects, the financial position of the Telecomm Industries Corp.-Network
Services Agency Division at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 of these
financial statements in accordance with auditing standards generally accepted in
the United States which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
June 7, 2000
<PAGE> 4
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Current assets:
Accounts receivable, net $ 4,210,971 $ 3,378,705
Employee advances 40,300
Prepaid expenses 312,624 42,933
------------ ------------
Total current assets 4,523,595 3,461,938
Property and equipment, net 521,089 658,283
Accounts receivable, net 4,121,843 3,832,623
Intangibles and other assets, net 3,395,148 3,620,572
Deferred income taxes 104,671 323,301
------------ ------------
Total assets $ 12,666,346 $ 11,896,717
============ ============
LIABILITIES AND DIVISIONAL EQUITY
Current liabilities:
Line of credit $ 1,868,182 $ 1,030,377
Current portion of long-term debt 790,980 660,358
Accounts payable 146,709 455,857
Accrued payroll and related expenses 46,350 95,521
Accrued commissions and bonus 194,289 288,869
Deferred income taxes 868,152 553,962
Income taxes payable to Parent 947,421 998,445
Other accrued expenses 200,963 216,830
------------ ------------
Total current liabilities 5,063,046 4,300,219
Long-term debt, less current portion 4,157,365 5,013,121
Deferred income taxes 1,742,924 1,707,193
------------ ------------
Total liabilities 10,963,335 11,020,533
Commitments and contingencies
Divisional equity 1,703,011 876,184
------------ ------------
Total liabilities and divisional equity $ 12,666,346 $ 11,896,717
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE> 5
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Network service revenue $ 9,983,580 $ 10,312,537
Long distance and other revenue 443,521 315,244
------------ ------------
Net revenues 10,427,101 10,627,781
------------ ------------
Commission, contractor fees and related expenses 84,959 190,325
Sales and service costs 559,015 680,871
------------ ------------
Net cost of commissions, contractor fees
and related expenses 643,974 871,196
------------ ------------
Selling, general and administrative expenses 5,273,020 5,574,234
------------ ------------
Operating income 4,510,107 4,182,351
Other income (expense):
Interest expense (608,199) (375,253)
------------ ------------
(608,199) (375,253)
Income from operations before income tax expense 3,901,908 3,807,098
Income tax expense 1,508,268 1,515,976
------------ ------------
Net income $ 2,393,640 $ 2,291,122
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 6
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C>
Balance at January 1, 1998 $ 3,526,899
Net earnings for the year 2,291,122
Distributions to Telecomm Industries Corp., net (4,941,837)
-----------
Balance at December 31, 1998 876,184
Net earnings for the year 2,393,640
Distributions to Telecom Industries Corp., net (1,566,813)
-----------
Balance at December 31, 1999 $ 1,703,011
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 7
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,393,640 $ 2,291,122
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 364,737 343,759
Deferred income taxes, net 568,551 595,876
Provision for bad debt 250,000 525,000
Deferred financing fees 27,848 --
Changes in assets and liabilities:
Accounts receivable, net (1,082,266) (405,742)
Accounts receivable, net - long-term portion (289,220) (1,914,289)
Prepaid expenses (269,691) (9,048)
Employee advances 40,300 68,902
Accounts payable (309,148) 271,850
Accrued payroll and related expenses (49,171) 54,619
Accrued commissions and bonus (94,580) (383,161)
Income taxes payable (51,024) 931,355
Other accrued expenses (15,867) 31,764
----------- -----------
Total adjustments (909,531) 110,885
----------- -----------
Net cash provided by operating activities 1,484,109 2,402,007
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (29,967) (116,265)
Purchase acquisitions -- (10,000)
----------- -----------
Net cash (used in) investing activities (29,967) (126,265)
----------- -----------
Cash flows from financing activities:
Financing fees paid in connection with debt financing -- (167,084)
Proceeds (payments) on long-term debt (725,134) 3,174,012
Net borrowings (payments) under line of credit 837,805 (340,833)
Distributions to Telecomm Industries Corp., net (1,566,813) (4,941,837)
----------- -----------
Net cash (used in) provided by financing activities (1,454,142) (2,275,742)
----------- -----------
Net decrease in cash -- --
Cash at beginning of period -- --
----------- -----------
Cash at end of period $ -- $ --
=========== ===========
Non-cash investing and financing activities:
Telecomm Common stock issued for purchase acquisitions $ -- $ 420,000
=========== ===========
Notes issued for purchase acquisitions $ -- $ 20,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
<PAGE> 8
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
ORGANIZATION
Telecomm Industries Corp.-Network Services Agency Division (the
"Division") is wholly owned by Telecomm Industries Corp. ("Telecomm") and
consists of the operations and related assets and liabilities of Telecomm
required to service the Ameritech Distributor Agreement between Telecomm
and Ameritech. Telecomm is incorporated under the laws of the State of
Delaware and has its principal offices in Naperville, Illinois.
On April 15, 2000, Telecomm entered into an agreement with PentaStar
Communications, Inc. (PentaStar) and its newly-formed, wholly owned
acquisition subsidiary, PentaStar Corporation. The agreement provides
that Telecomm will sell substantially all of the assets and liabilities
of the Division to PentaStar. The transaction will close upon approval by
the shareholders of Telecomm and satisfaction of the other terms of the
purchase agreement.
Consideration expected to be paid by PentaStar to Telecomm in connection
with the transaction includes: cash in the amount of $900,000; a number
of shares of PentaStar Common Stock, which reflects an aggregate fair
market value as of the anticipated closing date of the transaction of
$6,200,000; the assumption of liabilities (as defined in the purchase
agreement) in an approximate amount of $6,500,000; and an Earn-Out Amount
payable pursuant to Section 2.3(b) of the purchase agreement, which will
be valued based upon the Company's performance from April 1, 2000 through
March 31, 2001. The potential earn-out amount for the entire measurement
period is approximately $9 million, with the entire purchase price not to
exceed $22.5 million in total consideration.
BASIS OF PRESENTATION
The accompanying financial statements are a carve-out of amounts reported
for Telecomm, that have been prepared using Division-specific information
where available and allocations where data is not maintained on a
Division specific basis within Telecomm's books and records.
The following accounts are maintained by Telecomm and presented in these
financial statements on a Division specific basis: receivables, prepaid
expenses, intangible assets, accounts payable and accrued expenses,
revenue, commissions, and certain other expense amounts. Property, plant,
and equipment, except items that were not specifically identifiable to
any particular aspect of Telecomm, were also presented on a Division
specific basis. All other balance sheet amounts were allocated to the
Division based on a variety of factors such as the Division's relative
proportion of revenue, employee-headcount, space, and time and effort, to
the Telecomm total. See Notes 6 and 7 for a description of the
presentation of debt and income taxes, respectively.
The Division's financial statements include allocated expenses from the
sharing of certain executive, administrative, accounting, marketing,
personnel, engineering and other support services being performed by
Telecomm. These amounts were allocated to the Division based on
allocation methodologies described above.
-6-
<PAGE> 9
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
Management believes that these estimates and allocations were based on
reasonable methodologies, and the resulting financial statement amounts
properly depict the financial position and results of operations of the
Division. Furthermore, the accompanying statements reflect historical
Telecomm ownership and operation, with no pro-forma adjustments for
specific contract terms governing transfer to a specific buyer or for any
anticipated change in methods of operation. Therefore, actual results
could differ significantly if the Division operated as a separate entity
or as part of another entity other than Telecomm.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles in the United States 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. The
Division receives commission sales revenue from Ameritech that is based
upon the submission of valid sales contracts. Sales transactions in
support of commission sales revenue are subject to adjustment upon
review. Actual results may differ from those estimates.
CAPITAL ACCOUNTS
Separate equity accounts are not maintained for the Division. For the
purposes of these statements, net intercompany activity has been
summarized as Divisional Equity.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Division to
concentrations of credit risk consist primarily of accounts receivable
from Ameritech and its subsidiaries which accounted for 100% of the
Division's revenues for 1999 and 1998. The Division may establish an
allowance for possible losses based upon factors surrounding the credit
and historical information. At December 31, 1999 and 1998, the Division
recorded an allowance for doubtful accounts of approximately $250,000 and
$526,000, respectively.
Management has determined that the carrying values of financial
instruments, primarily accounts receivable, accounts payable and debt
(Note 6), approximate fair value.
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.
-7-
<PAGE> 10
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
REVENUE RECOGNITION
Revenues are recognized when earned and are recorded net of estimated
cancellations and chargebacks.
Network services or chargebacks will be recognized as earned when the
Division receives notification from the carrier that the service has been
installed or discontinued. The residual stream is recognized as earned
only if it can be reasonably estimated and the carrier's contract
stipulates a buyout clause for those future monies, otherwise it will be
recognized on a monthly basis over the term of the contract.
INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of goodwill, customer lists, and loan
acquisition costs and are being amortized over their estimated useful
lives.
Goodwill is the excess of cost over fair value assigned to identifiable
tangible and intangible net assets acquired.
The Division's policy is to evaluate the 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 is recorded in the period such determination is made based on the
fair value of the related businesses.
INCOME TAXES
The Division did not file a separate tax return but rather was included
in the income tax returns filed by Telecomm. The Division's allocated
share of Telecomm's income tax provision was based on the "separate
return" method.
Telecomm utilizes the liability method of computing deferred income
taxes. 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.
ADVERTISING COSTS
In accordance with Statement of Position 93-7, "Reporting On Advertising
Costs," advertising costs are expensed as incurred.
-8-
<PAGE> 11
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
3. ACQUISITIONS:
On February 20, 1998, Telecomm acquired Division-Tel Communications
Group, Inc. ("Division-Tel") under the provisions of an Asset Purchase
Agreement. Under the terms of this agreement, Telecomm issued 350,000
shares of its common stock valued at $420,000, paid $10,000 in cash,
issued a $20,000 promissory note, due August 1998, and assumed
approximately $370,480 of Division-Tel's liabilities in exchange for all
of the outstanding common stock of Division-Tel. 100% of these assets and
liabilities were allocated to the Division.
The net purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 95,876
Property and equipment 80,599
Other assets 156,900
Goodwill 487,105
Liabilities assumed (370,480)
---------
Net purchase price 450,000
Less: Common stock 420,000
Non-cash note payable 20,000
---------
Cash paid for acquisition $ 10,000
=========
</TABLE>
Goodwill is being amortized on a straight-line basis over 15 years.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998, consists of the
following:
<TABLE>
<CAPTION>
USEFUL
LIVES 1999 1998
<S> <C> <C> <C>
Office furniture and fixtures 5-7 years $ 344,840 $ 342,248
Leasehold improvements Life of lease 23,212 15,212
Computer equipment 5 years 618,934 596,079
---------- ---------
986,986 953,539
Less accumulated depreciation 465,897 295,256
--------- ---------
$ 521,089 $ 658,283
========= =========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998,
amounted to $167,161 and $146,183, respectively.
-9-
<PAGE> 12
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
5. INTANGIBLE ASSETS:
Intangible and other assets at December 31, 1999 and 1998, are as
follows:
<TABLE>
<CAPTION>
USEFUL
LIVES 1999 1998
<S> <C> <C> <C>
Goodwill 15-30 years $ 3,676,867 $ 3,676,867
Customer lists 15 years 99,482 99,482
Loan acquisition costs 5 years 139,236 167,084
----------- -----------
3,915,585 3,943,433
Less accumulated depreciation 520,437 322,861
----------- -----------
$ 3,395,148 $ 3,620,572
=========== ===========
</TABLE>
Amortization expense was $197,576 for the years ended December 31, 1999
and 1998.
6. DEBT:
Long-term debt at December 31, 1999 and 1998 consists of the following:
<TABLE>
<S> <C> <C>
Note payable to a financial institution, collateralized by a blanket filing on
corporate assets. Interest accrues at 2.4% over the 30-Day Commercial Paper Rate
(8.0% and 7.5% effective rate at December 31, 1999 and 1998, respectively). The
note required interest only payments for three months with principal and
interest payable thereafter in 60 monthly installments. Monthly principal
payments of $64,776 commenced March 1, 1999 with a balloon payment due on
February 1, 2004 of $1,554,619. $ 4,728,644 $ 5,441,179
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. 200,000 200,000
Capitalized lease obligations payable in monthly installments ranging from $262
to $5,401 (including interest ranging from 4.8% to 29.8%) through November
2003, collateralized by equipment. 19,701 32,300
----------- -----------
Total long-term debt 4,948,345 5,673,479
Less current portion 790,980 660,358
----------- -----------
$ 4,157,365 $ 5,013,121
=========== ===========
</TABLE>
-10-
<PAGE> 13
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Fiscal Year
2000 $ 790,980
2001 783,343
2002 977,311
2003 777,311
2004 and thereafter 1,619,450
-----------
$ 4,948,395
===========
</TABLE>
The fair market value of the Division's long-term debt is estimated based
on the current rates offered to the Division for debt of the same
remaining maturities. At December 31, 1999 and 1998, the fair value of
the long-term debt approximates the amount recorded in the consolidated
financial statements.
Telecomm also has a line of credit (the "Line") with Merrill Lynch for an
amount up to $4,000,000, of which $1,868,182 and $1,030,377 was
outstanding at December 31, 1999 and 1998, respectively. 100% of this
balance was allocated to the Division because, as defined in the
PentaStar purchase agreement, 100% of this Line is required to be assumed
by PentaStar upon the purchase of the Division. Interest is due monthly
at an annualized rate of 2.4% above the 30-day commercial paper rate
(8.0% and 7.5% effective rate as of December 31, 1999 and 1998). The line
of credit is renewable on September 30, 2000, and is secured by all
assets of the Division. As of December 31, 1999, the Division is subject
to certain restrictive and financial covenants including covenants
relating to the Division's liabilities to EBITDA and minimum net cash
flow as defined in the debt agreements. Merrill Lynch also has the right
to call the loan upon the occurrence of a material impairment.
As of December 31, 1999, the Division was not in compliance with the
established loan covenants for the facilities provided by Merrill Lynch
Business Financial Services. The two covenants involve Minimum Net Cash
Flow and Total Liabilities to EBITDA as defined in the debt agreements.
These covenants were set based upon the use by Telecomm of a revolving
credit line of $3,800,000 to complete three acquisitions. This revolving
credit line was not used by Telecomm and expired during 1999. Merrill
Lynch waived these covenants for the measurement period ending December
31, 1999.
-11-
<PAGE> 14
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES
The provision for income tax expense consists of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Federal $ 771,997 $ 731,116
State and local 226,448 216,305
Deferred - federal 449,065 500,798
Deferred - state and local 60,758 67,758
----------- -----------
Provision for income tax expense $ 1,508,268 $ 1,515,977
=========== ===========
</TABLE>
The following is a reconciliation of income taxes computed at the federal
statutory rate with income taxes recorded by the Company at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Statutory federal income tax rate 34.00% 34.00%
State and local taxes (net of federal tax effect) 5.51 5.49
Other 0.11 0.11
----- -----
Effective income tax rate 39.62% 39.60%
===== =====
</TABLE>
The tax effect of the temporary differences which comprise the deferred
tax assets and liabilities at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 203,190 $ 96,500
Accrued payroll 120,111 --
Other -- 8,171
----------- ----------
323,301 104,671
----------- -----------
Deferred tax liabilities:
Deferred accounts receivable 2,212,509 2,212,509
Fixed assets 48,645 55,393
----------- -----------
2,261,154 2,267,902
----------- -----------
Net deferred tax liabilities $ 1,937,853 $ 2,163,231
=========== ===========
</TABLE>
-12-
<PAGE> 15
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
8. LEASES
The Division leases 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, 1999, future minimum rental payments applicable to
noncancelable operating leases were as follows:
<TABLE>
<S> <C>
2000 $ 270,434
2001 222,482
2002 161,472
2003 127,626
2004 and thereafter 58,339
---------
$ 840,353
=========
</TABLE>
Rent expense for all operating leases was $311,561 and $298,526 in 1999
and 1998, respectively.
9. RELATED PARTY TRANSACTIONS:
Telecomm currently leases office and warehouse space through an entity
owned by a director/shareholder. The lease agreement requires Telecomm 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, Telecomm obtained an amendment to the lease which
allowed Telecomm to terminate the existing lease by providing a
twelve-month written notice. Telecomm exercised this option to terminate
the lease effective May 15, 1999 and executed a six-year lease from the
same affiliate which reduces the total monthly payments to $15,000 per
month through June 1, 2005. In June 1999, the building was sold to an
unrelated entity that assumed this lease. Rent expense related to this
lease amounted to $167,700 and $150,500 for the years ended 1999 and
1998. The amount of rent expense allocated to the Division was $78,970
and $74,949 for the years ended 1999 and 1998.
At December 31, 1999, a note for $200,000 was due to a related party.
10. EMPLOYEE BENEFIT PLAN:
Telecomm sponsors a 401(k) plan that covers substantially all eligible
employees. Contributions to the plan are determined by Telecomm's
management. For the years ended December 31, 1999 and 1998, the
Division's allocation of the expense related to Telecomm's savings plan
was $26,214 and $38,587, respectively.
-13-
<PAGE> 16
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
11. COMMITMENTS AND CONTINGENCIES:
The Division 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 Division's financial position, results of
operations or cash flows.
12. FUTURE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARDS:
During 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 established
standards for reporting comprehensive income and its components in a
financial statement. Comprehensive income is defined as the change in
equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources and
includes net income. The Division does not have any comprehensive items.
Therefore, SFAS No. 130 is not applicable to the Division. The FASB also
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information". SFAS No. 131 specifies revised guidelines for
determining an entity's operating segment and the type and level of
financial information to be disclosed. This standard requires that
management identify operating segments based on the way that management
desegregates the entity for making internal operating decisions. The
Division currently operates under the definition of one segment.
Therefore, SFAS No. 131 is not applicable to the Division.
Both of these statements are effective for fiscal years beginning after
December 15, 1997. The Division does not have any comprehensive income
items for the periods presented.
In February 1998, the FASB issued SFAS No. 132 "Employer's Disclosures
about Pensions and Other Post-Retirement Benefits". SFAS No. 132
standardizes the disclosure requirements for pension and other
post-retirement benefits. The statement is effective for fiscal years
beginning after December 15, 1997. The Division does not have a pension
or other post-retirement plan. Therefore, SFAS No. 132 is not applicable
to the Division.
These statements are effective for fiscal years beginning after December
15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and
requires recognition of all derivatives as assets or liabilities in the
statement of financial position and measurement of those instruments at
fair value. The statement is effective for fiscal years beginning after
June 15, 1999. As the Company does not have any derivative instruments on
hedging activities, SFAS No. 133 is not expected to have a material
effect on the Division's financial results.
-14-
<PAGE> 17
TELECOMM INDUSTRIES CORP.
NETWORK SERVICES AGENCY DIVISION
NOTES TO THE FINANCIAL STATEMENTS, CONTINUED
In December 1999, the SEC issued Staff Accounting Bulletin Number ("SAB
No.") 101. "Revenue Recognition in Financial Statements," which provides
additional guidance in applying generally accepted accounting principles
for revenue recognition. The Division is currently evaluating the impact,
if any, that SAB No. 101 may have on its revenue recognition policies.
Although the Division has not yet determined whether SAB No. 101 will
require any changes in its revenue recognition practices, management
expects that any such changes would be accounted for prospectively as a
cumulative effect of a change in accounting policy as permitted by the
SAB No. 101. The SEC initially required any changes resulting from SAB
No. 101 to be reflected in the Division's first quarter 2000 financial
statements. However, on March 25, 2000, the SEC issued SAB No. 101A which
defers required implementation of any changes resulting from SAB No. 101
until the Division's second quarter of 2000. Management does not expect
that any changes in its accounting policies as a result of SAB No. 101
will have a material impact on its 2000 operating results and management
believes that any such change will have no impact on the Division's
previously reported financial position, results of operations or cash
flows.
-15-
