<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-4410.
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TELECOMM INDUSTRIES CORP.
-------------------------------------------------
(Exact name of Issuer as specified in its charter)
Delaware 06-0844558
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9310 Progress Parkway
Mentor, Ohio 44060
----------------------------------------
(Address of principal executive offices)
216-953-1400
---------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of November 15, 1996: 9,607,791.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements (unaudited) 3
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Income -
three and nine months ended September 30, 1996
and September 30, 1995 5
Consolidated Statements of Cash Flows -
nine months ended September 30, 1996 and
September 30, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 9
Part II OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Financial Statements follow this page.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited) ASSETS 1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash $ 371,990 $ 575,367
Note receivable - current portion 61,200 61,200
Accounts receivable 2,815,512 1,348,997
Inventory 519,637 199,610
Prepaid expenses 63,195 145,567
Employee advances 40,675 29,420
------------ ------------
Total current assets $ 3,872,209 $ 2,360,161
------------ ------------
Property and equipment - at cost, net of accumulated depreciation of $217,834
and $131,323 at September 30, 1996 and December 31, 1995, respectively 481,872 364,297
------------ ------------
Other assets:
Note receivable, less current portion 354,805 $ 375,446
Intangibles, net of accumulated amortization of $16,705 and $11,606 at
September 30, 1996 and December 31, 1995, respectively 82,777 87,876
------------ ------------
437,582 463,322
------------ ------------
Total assets $ 4,791,663 $ 3,187,780
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 406,078 $ 126,000
Current portion of long-term debt 98,168 98,168
Accounts payable - trade 553,913 143,388
Payroll taxes payable 89,872 17,987
Other accrued expense 34,563 16,190
Deferred income taxes -- --
Accrued commissions and contractor fees 277,693 318,869
Income taxes payable 292,296 162,130
Accrued bonuses 381,866 142,000
------------ ------------
Total current liabilities 2,134,449 1,024,732
------------ ------------
Long-term liabilities:
Long-term debt, less current portion 126,479 137,120
Deferred income taxes 158,900 158,900
------------ ------------
Total liabilities 2,419,828 1,320,752
Stockholders' equity:
Common stock $.01 par value; authorized - 10,000,000 shares;
9,607,791 issued and outstanding, at September 30, 1996 and
December 31, 1995 96,078 96,078
Additional paid-in capital 2,145,706 2,145,706
Receivables from stockholders (103,999) (163,202)
Accumulated earnings (deficit) 234,050 (211,554)
------------ ------------
Total stockholders' equity 2,371,835 1,867,028
Commitments -- --
------------ ------------
Total liabilities and stockholders' equity $ 4,791,663 $ 3,187,780
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
QUARTERS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
(Unaudited) (Unaudited)
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $2,588,107 $1,189,047 $6,834,289 $3,876,394
Commissions, contractor fees and related expenses 743,735 542,973 2,269,335 1,758,853
Selling, general and administrative expenses 1,571,465 634,508 3,826,197 1,752,186
---------- ---------- ---------- ----------
Operating income 272,907 11,566 738,757 365,355
Other income (expense):
Gain (loss) on disposal of assets (731) (870) (731)
Interest income 10,820 18,524 38,067 50,999
Interest expense (13,683) (6,662) (33,150) (19,626)
---------- ---------- ---------- ----------
(2,863) 11,131 4,047 30,642
---------- ---------- ---------- ----------
Income from continuing operations before income tax expense 270,044 22,697 742,804 395,997
income tax expense 108,100 17,738 297,200 136,738
---------- ---------- ---------- ----------
Net income $ 161,944 $ 4,959 $ 445,604 $ 259,259
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common and common equivalent share:
Net Income 0.02 0.00 0.05 0.03
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Number of shares used in computing earnings per common and common
equivalent share 9,607,791 8,607,791 9,607,791 8,607,791
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Dividends per common share -- -- -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
(Unaudited)
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income: $ 445,604 $ 259,259
Adjustments to reconcile to net cash (used) provided by
operating activities:
Expenses not requiring the use of cash:
Depreciation and amortization 91,610 52,002
Deferred taxes -- 39,100
(Loss) gain on sale of fixed assets -- (731)
Changes in assets and liabilities:
Accounts receivable (1,466,515) (366,631)
Inventory (320,027) (28,381)
Prepaid expenses 82,372 (28,071)
Employee advances (11,254) --
Security deposits -- --
Accounts payable 410,525 (91,981)
Accrued expenses 18,373 --
Payroll taxes payable 71,885 --
Accrued commissions and contractor fees (41,176) 146,665
Income taxes payable 130,166 40,900
Accrued bonuses 239,866 --
----------- ----------
Total adjustments (794,175) (237,128)
----------- ----------
Net cash (used) provided by operating
activities (348,571) 22,131
Cash flows from investing activities:
Proceeds from sale of fixed assets 15,595 9,103
Purchases of fixed assets (219,681) (120,144)
Purchase of Intangibles (2,500)
Proceeds from stockholders receivables 59,203 --
Issuance of stock holders receivables -- (123,826)
----------- ----------
Net cash used in investing activities (144,883) (237,367)
----------- ----------
Cash flows from financing activities:
Payments on long-term debt (105,067) (37,086)
Proceeds from issuance of common stock to employees -- --
Proceeds from sale of common stock -- 75,334
Proceeds from long-term debt 94,426 22,923
Decrease in notes receivable 20,641 113,289
Net borrowings under line of credit 280,077 103,000
----------- ----------
Net cash provided by financing activities 290,077 277,460
----------- ----------
Net increase in cash (203,377) 62,224
Cash at beginning of period 575,367 172,709
----------- ----------
Cash at end of period $ 371,990 $ 234,933
----------- ----------
----------- ----------
</TABLE>
<PAGE>
TELECOMM INDUSTRIES, INC.
NOTES TO CONSOLDIATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL: Certain reclassifications have been made to the financial
statements to conform to the 1996 method of presentation.
In the opinion of management of Telecomm Industries, Inc. (the "Company"), the
accompanying unaudited consolidated condensed interim financial statements
reflect all adjustments necessary to present fairly the financial position of
the Company as of September 30, 1996 and the results of its operations.
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Telecomm Industries Corp. (the "Company") was incorporated on December 13,
1967, and until December 1993, its name was Scoto Data Com., Inc. The Company
has three wholly owned subsidiaries, Centel Corporation d/b/a Teleco ("Teleco"),
Authorized Network Distributors, Inc. ("AND"), and Netserve Corporation. The
operations of Teleco were primarily acquired in April 1994 and AND was acquired
in September 1995. In January 1996, AND acquired Seraphim Information Systems,
Inc. ("Seraphim"), an Ameritech authorized distributor of data services and
integrated hardware and software networking solutions in northern Illinois.
Teleco distributes telecommunications services in the major metropolitan
markets of the State of Ohio for Ameritech Corporation ("Ameritech") and sells
telecommunication equipment and provides related installation, maintenance and
repair services. AND distributes telecommunication services in Illinois,
Indiana and Ohio for Ameritech. On a combined basis, Teleco and AND make the
Company one of the largest Ameritech authorized distributors of voice and data
transmission services.
In order to stimulate internal growth, in the fourth quarter of 1995, the
Company adopted an aggressive commission policy to actively attract and keep
skilled, experienced salespeople, and shifted the Company from an external sales
force of independent representatives to a combined sales force of internal
salesmen and independent representatives. In addition, the Company opened new
offices in several Illinois, Indiana and Ohio cities and expanded the size of
other offices. The Company also restructured its sales forces into specialized
teams dedicated to specific products and services, i.e., data transmission,
voice transmission and cellular and Internet access services.
Ameritech has advised the Company and other authorized distributors of a
change in payment of sales commissions. This change began to take effect in the
third quarter of 1996. Under the revised payment program, a portion of the
earned commission is deferred and paid over the term of the customer contract.
In addition, in the third quarter of 1996, Ameritech also implemented a new
billing and customer record system in an effort to consolidate and standardize
its five non-standard billing systems. As the new billing and record system is
being implemented, commissions payments to authorized distributors, such as the
Company, have been temporarily delayed. The combined effect on the Company of
the change in timing of commission payments and the new system implementation is
a lengthened collection period for receivables, which adversely affects the
Company's working capital and cash flow. Ameritech has advised the Company that
it expects that the new billing and record system will be fully installed during
the fourth quarter of 1996.
<PAGE>
RESULTS OF OPERATIONS
THIRD QUARTER OF 1996 COMPARED TO THIRD QUARTER OF 1995
Net revenues increased 117.6% to $2.6 million for the third quarter of 1996
from $1.2 million in the comparable 1995 period, primarily due to the Company's
office expansion, adoption of a new commission policy and restructuring of its
sales force in the fourth quarter of 1995. To a lesser extent, as the Company
achieved certain specified sales targets, net revenues increased because
Ameritech paid higher commissions per sale to the Company in the third quarter
of 1996 in accordance with the terms of the current agreement between Ameritech
and the Company. Sales of equipment and interconnect services increased 69.3%,
to $748,000 in the third quarter of 1996 from $442,000 in the comparable 1995
period. The increase was attributable to sales of new data hardware equipment
during the quarter. Sales of network services increased 146.2%, to $1.8 million
in the third quarter of 1996 from $748,000 in the comparable 1995 period.
Commissions, contractor fees and related expenses increased $201,000 to
$744,000 during the third quarter of 1996, a 36.9% increase from such
expenses of $543,000 during the third quarter of 1995. The increase was due
primarily to increased costs of labor and equipment to support additional
sales in the third quarter of 1996. As a percentage of net revenues, these
expenses decreased to 28.7% during the third quarter of 1996, from 45.7%
during the third quarter of 1995, primarily due to the Company's
restructuring of its sales force resulting in the accrual of performance
bonuses for sales personnel which led to $290,000 of selling, general and
administrative expenses instead of commission expenses.
Selling, general and administrative ("SG&A") expenses increased
$937,000 to $1.6 million in the third quarter of 1996, a 147.6% increase from
SG&A expenses of $635,000 in the comparable 1995 period. As a percentage of
net revenues, these expenses increased to 60.7% during the third quarter of
1996, from 53.3% during the third quarter of 1995, primarily as a result of
the Company's restructuring of its sales force that shifted $290,000 to SG&A
expenses.
Income from continuing operations before income taxes increased by $243,000
to $270,000 in third quarter of 1996 from $23,000 in the comparable 1995 period
for the reasons stated above, partially offset by a small decrease of $2,800
from investing activities net of interest earned and paid. Interest income
decreased by $8,000 to $11,000 in the third quarter of 1996 compared to $19,000
in the third quarter of 1995, primarily due to the use of short-term investments
to meet operating expenses. Interest expense increased by $7,000 to $14,000 in
the third quarter of 1996 from $7,000 in the third quarter of 1995, primarily
due to increased borrowing by the Company under its line of credit facilities.
The provision for income taxes increased by $90,000 to $108,000 in the
third quarter of 1996 compared to $18,000 in the third quarter of 1995, due to
higher earnings.
As a result of the foregoing, net income increased by $157,000 to $162,000
in third quarter of 1996, from $5,000 in the comparable 1995 period.
<PAGE>
FIRST NINE MONTHS OF 1996 COMPARED TO FIRST NINE MONTHS OF 1995
Net revenues increased 76.3% to $6.8 million for the first nine months of
1996 from $3.9 million in the comparable 1995 period, primarily due to the
Company's office expansion, adoption of a new commission policy and
restructuring of its sales force in fourth quarter 1995. Sales of equipment and
interconnect services increased 47.7%, to $2.0 million in the first nine months
of 1996 from $1.3 million in the comparable 1995 period. The increase was
attributable to sales of new data hardware equipment during the 1996 period.
Sales of network services increased 91.4%, to $4.9 million in the first nine
months of 1996 from $2.5 million in the comparable 1995 period.
Commission, contractor fees and related expenses increased $510,000 to
$2.3 million in the first nine months of 1996, a 29.0% increase from such
expenses of $1.8 million in the first nine months of 1996. The increase was
due primarily to increased costs of labor and equipment to support additional
sales in the first nine months of 1996. As a percentage of net revenues,
these expenses decreased to 33.2% during the first nine months of 1996, from
45.4% during the first nine months of 1995, primarily due to the Company's
restructuring of its sales force resulting in the accrual of performance
bonuses for sales personnel which led to $353,000 of SG&A expenses instead of
commission expenses.
SG&A expenses increased $2.1 million to $3.8 million in the first nine
months of 1996, a 118.3% increase from SG&A expenses of $1.8 million in the
comparable 1995 period. As a percentage of net revenues, these expenses
increased to 56.0% during the first nine months of 1996, from 45.2% during
the first nine months of 1995, primarily as a result of the Company's
restructuring of its sales force that shifted $353,000 to SG&A expenses.
Income from continuing operations before income taxes increased by
$347,000 to $743,000 in the first nine months of 1996, an increase of 87.8%
from $396,000 in the comparable 1995 period, primarily for the reasons stated
above. Interest income decreased by $13,000 to $38,000 in the first nine
months of 1996 compared to $51,000 in the first nine months of 1995,
primarily due to the use of short-term investments to meet operating
expenses. Interest expense increased by $13,000 to $33,000 in the first nine
months of 1996 from $20,000, primarily due to increased borrowing by the
Company under its line of credit facilities.
The provision for income taxes increased by $161,000 to $297,000 in the
first nine months of 1996 compared to $137,000 in the first nine months of 1995,
due to higher earnings.
As a result of the foregoing, net income for the first nine months of 1996
was $446,000, an increase of $186,000, or 71.8%, from net income for the first
nine months of 1995 of $259,000.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including working capital, acquisitions, and the purchase of equipment. The
Company uses cash generated from operations, borrowings under its credit
facilities, the sale of equity in private placements and vendor trade credit to
fund these requirements.
Cash at September 30, 1996 decreased $203,000, or 35.3% since December 31,
1995. Net cash used in operating activities was $349,000 in the first nine
months of 1996 compared to cash from operating activities of $22,000 in the
first nine months of 1995. The change was primarily attributable to a $1.4
million increase in accounts receivable in the first nine months of 1996
compared to a $367,000 increase in accounts receivable in the first nine months
of 1995, as a result of the combined effect on the Company of Ameritech's change
in timing of commission payments and its implementation of a new billing and
customer record system, and to a lesser extent, a $320,000 increase in inventory
in the first nine months of 1996 compared to a $28,000 increase in inventory in
the first nine months of 1995. These increases in accounts receivable and
inventory were partially offset by a $411,000 increase in accounts payable in
the first nine months of 1996 compared to a $92,000 decrease in accounts payable
in the first nine months of 1995.
Net cash used in investing activities, primarily for vehicles and computer
equipment to support increased sales, was $145,000 in the first nine months of
1996 compared to $237,000 in the first nine months of 1995. The change was
primarily the result of purchases of fixed assets of $220,000 in the first nine
months of 1996 compared to fixed asset purchases of $120,000 in the first nine
months of 1995 and $124,000 in receivables from stockholders in the first nine
months of 1995, $59,000 of which was repaid in the first nine months of 1996.
Cash flow from financing activities was $290,000 in the first nine months
of 1996 compared to $277,000 in the first nine months of 1995. Cash flows from
financing activities in the 1995 period reflected the issuance of common stock
in the amount of $75,000 and increased borrowing of $103,000 under the Company's
line of credit facilities. Cash flows from financing activities in the 1996
period reflected increased borrowing of $280,000 under the Company's line of
credit facilities.
Short-term trade credit represents a significant source of financing for
inventory. Trade credit arises from the willingness of the Company's creditors
to grant payment terms for inventory purchases. Inventory levels increased
$320,000 from December 31, 1995 to September 30, 1996, primarily to support the
Company's increased sales. Although the Company has negotiated what it believes
to be favorable payment terms from its primary vendors, there is no assurance
that the Company will be able to obtain these terms in the future.
Approximately $194,000 in unused borrowing availability existed under the
credit line of the Company's credit facilities at September 30, 1996. The
Company believes that funds available under its line of credit facilities, cash
reserves and funds generated from operations will be sufficient to provide the
liquidity necessary to fund its anticipated capital and operational requirements
over the next twelve months. However, as the Company continues to grow, it is
considering additional sources of funding, including additional debt or equity
financings. There is no assurance that the
<PAGE>
Company will be able to obtain any additional debt or equity financing to
support its continued growth.
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 statement. These risks and uncertainties
include, but are not limited to, the dependance of the Company on one principal
customer, Ameritech, for a significant portion of its revenues, changes arising
from greater competition in local telephone service attributable to passage of
the Telecommunications Act, the introduction of competitors into the market, the
availability of other acquisitions and the integration of the operations of
those acquisitions, if completed, into the Company, general economic conditions,
and other risk factors discussed herein. These risks must be considered by an
investor or potential investor in the Company.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 25, 1996, the Company announced that it signed a letter of
intent to acquire Northeastern Communication Systems, a privately-held
company that is headquartered in Green Bay, Wisconsin ("NCS"). NCS is one of
Ameritech's largest distributors of voice and data systems in Wisconsin. In
addition to Green Bay, NCS has offices in Milwaukee, Appleton, Beaver Dam and
several other cities throughout the state from which it services its 12,000
customers. The Company hopes to close the acquisition by the end of the
fourth quarter of 1996, after completion of due diligence. There is no
assurance that the acquisition of NCS will be completed, or if completed,
that it will be closed by the end of the fourth quarter of 1996.
On May 23, 1996, the Board of Directors of the Company adopted an amendment
to the Certificate of Incorporation authorizing an increase in the number of
shares of Common Stock from 10,000,000 to 20,000,000. The additional shares
would be available for issuance in acquisitions and private or public offerings.
The Company anticipates that the proposed amendment will become effective in the
fourth quarter of 1996.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TELECOMM INDUSTRIES CORP.
Date: November 19, 1996 /s/ Andrew G. Gorogiani
------------------------------
Andrew G. Gorogiani, President
Date: November 19, 1996 /s/ Frank Campanale
------------------------------
Frank Campanale, Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 371,990
<SECURITIES> 0
<RECEIVABLES> 3,231,517
<ALLOWANCES> 0
<INVENTORY> 519,637
<CURRENT-ASSETS> 3,872,209
<PP&E> 699,706
<DEPRECIATION> 217,834
<TOTAL-ASSETS> 4,791,663
<CURRENT-LIABILITIES> 2,134,449
<BONDS> 0
0
0
<COMMON> 96,078
<OTHER-SE> 2,275,757
<TOTAL-LIABILITY-AND-EQUITY> 4,791,663
<SALES> 0
<TOTAL-REVENUES> 6,834,289
<CGS> 0
<TOTAL-COSTS> 6,095,532
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,150
<INCOME-PRETAX> 742,804
<INCOME-TAX> 297,200
<INCOME-CONTINUING> 445,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 445,604
<EPS-PRIMARY> .046
<EPS-DILUTED> 0
</TABLE>
