<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: March 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________.
Commission File No. 0-4410.
TELECOMM INDUSTRIES CORP.
------------------------------------------
(Exact name of Issuer as specified in its charter)
DELAWARE 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 June 30, 1997: 10,300,746.
Transitional Small Business Disclosure Format:
Yes No X
---------- ---------
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARIES
INDEX
Part I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (unaudited) 1
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 2
Consolidated Statements of Cash Flows -
three months ended March 31, 1997 and
March 31, 1996 3
Consolidated Statements of Operations -
the three months ended March 31, 1997 and
March 31, 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 6
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
The Registrant's Financial Statements follow this page.
<PAGE>
Telecomm Industries Corp.
Unaudited Consolidated Balance Sheet
March 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
Quarter Year
ended ended
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 183,367 $ 238,312
Notes receivable - current portion 0 400,000
Accounts receivable - trade 2,238,207 2,548,961
Inventories 555,119 616,147
Prepaid income taxes 55,465 48,260
Prepaid expenses 21,531 38,660
Employee advances 241,612 139,887
------------ ------------
Total current assets 3,295,301 4,030,227
------------ ------------
Property and equipment-at cost net of accumulated depreciation of $286,819
and $235,679 at March 31, 1997 and December 31, 1996, respectively 755,377 482,712
Other assets:
Accounts receivable, less current portion 1,423,191 1,013,520
Intangibles - net of accumulated amortization of $38,928 and $20,200 at
March 31, 1997 and December 31, 1996, respectively 1,133,850 81,244
------------ ------------
Total assets $ 6,607,719 $ 5,607,703
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 398,920 $ 113,384
Current portion of long-term debt 295,563 175,823
Accounts payable trade 308,764 408,848
Accrued payroll and related expenses 157,291 122,719
Other accrued expenses 37,411 56,185
Deferred income taxes 106,321 106,321
Accrued commissions and contractor fees 409,293 455,582
Income taxes payable 71,061 81,136
Accrued bonus 445,000 816,900
------------ ------------
Total current liabilities 2,229,624 2,336,898
------------ ------------
Long-term liabilities:
Long-term debt, less current portion 826,782 389,436
Deferred income taxes 483,001 402,913
------------ ------------
Total liabilities 3,539,407 3,129,247
------------ ------------
Stockholders' equity:
Common stock $.01 par value: authorized - 20,000,000 shares: issued - 10,300,746
and 9,742,791: outstanding - 10,200,746 and 9,642,791, at March 31, 1997 and
December 31, 1996 102,008 96,078
Additional paid in capital 2,548,640 2,086,237
Receivables from stockholders (44,531) (44,531)
Retained earnings 462,195 340,672
------------ ------------
Total stockholders' equity 3,068,312 2,478,456
------------ ------------
Total liabilities and stockholders' equity $ 6,607,719 $ 5,607,703
------------ ------------
------------ ------------
See notes to unaudited consolidated balance sheet
</TABLE>
<PAGE>
Telecomm Industries Corp.
Unaudited Consolidated Statements of Cash Flows
for the quarters ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 121,523 $ 149,948
Adjustments to reconcile to net cash provided by (used in) operating activities:
Expenses not requiring the use of cash:
Depreciation and amortization 69,868 28,786
Deferred taxes 80,088 -
Loss (gain) on sales of fixed assets -
Changes in assets and liabilities:
Accounts receivable 310,754 (182,671)
Inventory 61,028 (26,839)
Prepaid income taxes (7,205) -
Prepaid expenses 17,129 19,994
Employee advances (101,725) 9,699
Accounts payable (100,084) (15,193)
Accrued expenses (18,774) (14,253)
Payroll taxes payable 34,572 39,743
Accrued commissions and contractor fees (46,289) (99,372)
Income taxes payable (10,074) (70,330)
Accrued bonuses (371,900) (35,134)
------------ ------------
Total adjustments (82,612) (345,570)
------------ ------------
Net cash provided by (used in) operating activities $ 38,911 $ (195,622)
Cash flows from investing activities:
Purchases of fixed assets (323,805) (107,085)
Purchase acquisition of Long-Tell Communications, Inc. (317,925)
Purchase acquisition of Northeastern Communication Services, Inc. (753,410)
Proceeds from stockholders receivables 41,184
Increase in long-term accounts receivable (409,671) -
Decrease in notes receivable 400,000 15,636
------------ ------------
Net cash used in investing activities (1,404,811) (50,265)
------------ ------------
Cash flows from financing activities:
Payments on long-term debt (79,655) 4,653
Proceeds from issuance of long-term debt 636,741 -
Proceeds from issuance of common stock to employees 45,000
Proceeds from issuance of common stock for purchase acquisitions 423,333
Net borrowings under line of credit 285,536 154,613
------------ ------------
1,310,955 159,266
------------ ------------
Net (decrease) increase in cash (54,945) (86,621)
Cash at beginning of period 238,312 575,367
------------ ------------
Cash at end of period $ 183,367 $ 488,746
------------ ------------
------------ ------------
See notes to unaudited statement of cash flows
</TABLE>
<PAGE>
Telecomm Industries Corp
Consolidated Statement of Operations
(Unaudited)
Quarter Ended Quarter Ended
------------- -------------
March 31, March 31,
1997 1996
------------- -------------
Net revenues $ 2,594,059 $ 1,930,762
Commissions, contractor fees, and related expenses 828,605 660,812
Selling, general and administrative expenses 1,532,925 1,030,317
------------ ------------
Operating income 232,529 239,633
Other income (expense):
Gain(loss) on disposal of assets - -
Interest income 2,692 13,053
Interest expense (32,683) (7,739)
------------ ------------
(29,991) 5,314
------------ ------------
Income from operations before income tax expense 202,538 244,947
Income tax expense (credit) 81,015 95,000
------------ ------------
------------ ------------
Net income $ 121,523 $ 149,947
------------ ------------
------------ ------------
Earnings per common and common equivalent share
------------ ------------
Net income 0.01 0.02
------------ ------------
------------ ------------
Number of shares used in computing earnings per
------------ ------------
common and common equivelant share 10,200,746 9,607,791
------------ ------------
------------ ------------
------------ ------------
Dividends per common share - -
------------ ------------
------------ ------------
See notes to unaudited statement of operations
<PAGE>
TELECOMM INDUSTRIES, CORP.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Certain reclassifications have been made to the financial statements to
conform to the 1996 method of presentation.
2. The accompanying unaudited consolidated condensed interim financial
statements have been prepared in accordance with the instructions to
Form 10-QSB and Regulations S-X and do not include all of the information
and note disclosures required by generally accepted accounting principles.
Therefore, the accompanying interim financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Form 10-QSB of Telecomm Industries Corp. ("Telecomm" or the
"Company") for the year ended December 31, 1996. The statements reflect
all adjustments that are, in the opinion of management, necessary to
present fairly the financial position of the Company as of March 31, 1997
and the results of its operations. These adjustments are of a normal and
recurring nature.
3. The results of operations for the period ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Telecomm was incorporated on December 13, 1967, and until December 1993,
its name was Scoto Data Com., Inc. The Registrant has two wholly owned
subsidiaries, Centel Corporation d/b/a Teleco ("Teleco") and Authorized Network
Distributors, Inc. ("AND"). The operations of Teleco were primarily acquired in
April 1994 and AND was acquired in September 1995. AND was acquired by merger,
in a stock-for-stock exchange. AND acquired Seraphim Information Systems, Inc.
("Seraphim") by merger in January 1996, in a stock-for-stock exchange. The
results of AND for 1995 and Seraphim for 1996 have been pooled with the results
of Teleco.
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 January 3, 1997, Telecomm acquired Northeastern Communications Services,
Inc., ("NCS"), a privately-held Wisconsin corporation. NCS operated as an
authorized Ameritech Distributor of voice and usage services, and as an NEC
distributor for PBX and Key telephone systems. The acquisition was accomplished
through a merger of NCS into Telecomm. The consideration paid by Telecomm was
comprised of (a) $400,000 in cash, (b) 400,000 shares of Telecomm's common
stock, par value $.01 per share (the "Common Stock") and (c) the payment by
Telecomm of $250,000 of liabilities of NCS. On a combined basis, Teleco, AND,
and NCS make Telecomm the largest authorized Ameritech Distributor of voice and
data services and integrated hardware and software networking solutions in the
Ameritech region.
On January 3, 1997, Telecomm also acquired Long-Tell Communications, Inc.
("LTI"), an Ohio corporation, providing long distance access services through
LCI, a major Midwest long distance access provider. This acquisition was
accomplished by a merger of LTI into Telecomm. The consideration paid by
Telecomm was comprised of (a) $25,000 in cash, (b) 112,500 shares of Common
Stock and (c) a promissory note of Telecomm in the principal amount of $200,000,
bearing interest at 9% per annum payable in monthly installments of interest
only, with the principal payable on January 3, 2002. The promissory note is
unsecured and subordinate to all future borrowings by Telecomm. Both the NCS
and LTI transactions were accounted for under the purchase method of accounting,
with the purchase price allocated to the estimated fair market value of the
assets acquired over the liabilities assumed. In the acquisitions of NCS and
LTI, any excess of the purchase price paid over the estimated fair market value
of the assets acquired was allocated to goodwill, which resulted in
approximately $1,045,000 of goodwill reflected on the March 31, 1997 balance
sheet.
<PAGE>
On March 13, 1997, Telecomm entered into a letter of intent to acquire
Unitel Corporation of Indianapolis ("Unitel"). Unitel operates as an Ameritech
and Bell South authorized distributor. Unitel also distributes voice, data, and
LAN equipment and performs in-house software development. There is no assurance
that a transaction will be consummated.
Because of a change in the commission payment structure Ameritech used in
1996, Telecomm adopted a new compensation plan for its sales force. Previous to
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. Telecomm 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. As the new billing and
record system is being implemented, commissions payments to authorized
distributors, such as the Company, continue to be 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; however, the Company anticipates that as changes in the billing and
records system are implemented there will be a positive impact on working
capital and cash flow in the second quarter of 1997.
FIRST THREE MONTHS OF 1997 COMPARED TO FIRST THREE MONTHS OF 1996
The Company's net revenues increased 34% to $2.6 million for the first
three months of 1997 from $1.9 million in the comparable 1996 period,
primarily due to increased equipment sales and services and partially offset
by a reduction in base commissions paid by Ameritech at the time the service
is installed pursuant to the change in Ameritech's commission payment
structure instituted in 1996. Net revenues from equipment sales and services
increased 92% to $1.1 million from $.6 million in the first three months of
1996, including $242,000 in sales generated by NCS. Net revenues from network
services increased 6% to $1.4 million in 1997 from $1.3 million in the
comparable 1996 period. For the three months ended March 31, 1997, sales of
equipment and related services represented 42% of net revenues, sales of
Ameritech services represent 55% of net revenues, and long-distance and other
services represented 2% of net revenue compared to 30% equipment sales and
services and 70% Ameritech sales and services at March 31, 1996. Revenues
attributed to Ameritech services related to data transmission increased 146%
to $235,000 from $161,000 in the comparable 1996 period, and sales of voice
transmission services decreased 13% to $1,038,000 from $1,186,000 in the
comparable period in 1996.
Commission, contractor fees and related expenses increased $168,000 to $.8
million in the first three months of 1997, a 25% increase from such expenses of
$.7 million in the first three months of 1996. The increase was due primarily
to increased costs of labor and equipment to
<PAGE>
support additional sales in the first three months of 1997. As a percentage
of net revenues, these expenses decreased to 32% during the first three
months of 1997, from 34% during the first three months of 1996, primarily due
to shifting to less dependence on sales generated from independent sales
representatives.
Selling, general and administrative expenses ("SG&A") increased $.5
million to $1.5 million in the first three months of 1997, a 52% increase
from SG&A expenses of $1 million in the comparable 1996 period. As a
percentage of net revenues, these expenses increased to 60% during the first
three months of 1997, from 53% during the first three months of 1996,
primarily as a result of an increase in personnel as a result of the NCS
acquisition and an adjustment to increase base sales salaries to more closely
reflect sales production.
Interest income decreased by $10,000 to $3,000 in the first three months of
1996 compared to $13,000 in the first three months of 1996, primarily due to the
use of short-term investments to meet operating expenses. Interest expense
increased by $25,000 to $33,000 in the first three months of 1997 from $8,000,
primarily due to increased borrowing by the Company under its line of credit
facilities and the issuance of new notes in connection with the acquisition of
LTI and NCS.
Income from continuing operations before income taxes decreased by $42,000
to $203,000 in the first three months of 1997, a decrease of 17% from $245,000
in the comparable 1996 period, primarily for the reasons state above.
The provision for income taxes decreased by $14,000 to $81,000 in the first
three months of 1997 compared to $95,000 in the first three months of 1996, due
to lower earnings.
As a result of the foregoing, net income for the first three months of 1997
was $121,000, a decrease of 19%, from net income for the first three months of
1996 of $150,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirement is to fund its growth,
including working capital, acquisitions of other companies, 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 March 31, 1997 decreased $55,000, or 23%, since December 31, 1996.
Net cash provided by operating activities was $39,000 in the first three months
of 1997 compared to cash used in operating activities of $196,000 in the first
three months of 1996. The change was primarily attributable to a $311,000
decrease in accounts receivable in the first three months of 1997, compared to a
$183,000 increase in accounts receivable in the first three months of 1996, 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 $61,000 decrease in inventory in the first
three months of 1997 compared to a
<PAGE>
$27,000 increase in inventory in the first three months of 1996. These
decreases in accounts receivable and inventory were offset by a $372,000
decrease in accrued bonuses in the first three months of 1997 compared to a
$35,000 decrease in accrued bonuses in the first three months of 1996.
Net cash used in investing activities increased to $1.4 million in the
first quarter of 1997 compared to net cash used in investing activities of
$50,000 in the comparable 1996 period, primarily as a result of the acquisitions
of NCS and LTI in the 1997 first quarter.
Cash flow from financing activities was $1.3 million in the first three
months of 1997 compared to $159,000 in the first three months of 1996
primarily because of increased long-term debt and common stock issued to fund
acquisitions in 1997. The Company incurred a promissory note for $400,000,
bearing interest at an annual rate equal to .5% in excess of the prime rate
in effect from time to time, payable in 36 equal monthly installments,
commencing January 10, 1997 and maturing on January 10, 2000. This loan is
secured by a lien on all of Telecomm's assets.
Michael J. Toth, then Chairman of the Board and Chief Executive Officer and
a director of the Company, held 50% of the shares of LTI. In the acquisition of
LTI, he received $25,000 in cash and the $200,000 promissory note from the
Company, bearing interest at 9% per annum payable in monthly installments of
interest only, with the principal payable on January 3, 2002. The promissory
note is unsecured and subordinate to all future borrowings by Telecomm.
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 decreased
$61,000 from December 31, 1996 to March 31, 1997, 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 $100,000 in unused borrowing availability exists under the
credit line of the Company's credit facilities at March 31, 1997. The Company
is attempting to increase its line of credit. The Company believes its cash
reserves and funds available from the line of credit will be sufficient to
provide the liquidity necessary to fund its anticipated capital and operational
requirements over the next twelve months. The Company may also seek to obtain
additional sources of funding, including additional debt or equity financings as
it continues to grow. There is no assurance that the Company will be able to
obtain an increase in its line of credit or 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
supplier, Ameritech, for a significant portion of its revenues; changes in
Ameritech's commission
<PAGE>
payment plan and its billing and record system, adversely affecting the
Company's working capital and cash flow resulting in potential decreases in
long-term accounts receivable; changes arising from greater competition in local
telephone service attributable to passage of the Telecommunications Act; 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 NCS into the Company; the
availability of other acquisitions and the integration of the operations of
those acquisitions, if completed, into the Company; the ability of Telecomm to
continue to grow its sales force internally and to expand its product menu,
particularly in light of the increased competition in the telecommunication
markets in which Telecomm operates; whether or not the Unitel transaction will
be consummated; and general economic conditions, and other risk factors
discussed herein. These risks must be considered by an investor or potential
investor in the Company.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
On January 3, 1997, the Company filed a Form 8-K reporting the
acquisitions of NCS and LTI in Items 2 and 7 of Form 8-K. An amendment to
the January 3, 1997 8-K containing financial statements relating the NCS
acquisition was filed by the Company on June 26, 1997.
On January 8, 1997, the Company filed a Form 8-K to report, in Item
7, a press release of the Company of the same date.
<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: July 7, 1997 /s/ JAMES M. LOWERY
----------------------------------
James M. Lowery, Chairman
Date: July 7, 1997 /s/ FRANK CAMPANALE
----------------------------------
Frank Campanale, Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 183,367
<SECURITIES> 0
<RECEIVABLES> 3,661,398
<ALLOWANCES> 0
<INVENTORY> 555,119
<CURRENT-ASSETS> 3,295,301
<PP&E> 1,042,196
<DEPRECIATION> 286,819
<TOTAL-ASSETS> 6,607,719
<CURRENT-LIABILITIES> 2,229,624
<BONDS> 0
0
0
<COMMON> 102,008
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,966,304
<SALES> 0
<TOTAL-REVENUES> 2,594,059
<CGS> 828,605
<TOTAL-COSTS> 2,361,530
<OTHER-EXPENSES> (29,991)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,683
<INCOME-PRETAX> 202,538
<INCOME-TAX> 81,015
<INCOME-CONTINUING> 121,523
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,523
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
