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: June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to________________.
Commission File No. 0-4410
TELECOMM INDUSTRIES CORP.
-------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 34-1765902
(State of Incorporation) (I.R.S. Employer
Identification No.)
1743 Quincy Ave.
Naperville, Illinois 60540
(Address of Principal Executive Offices)
630-369-7111
(Issuer's Telephone Number, including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed since Last Report)
Check whether the issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as the latest practical date:
COMMON STOCK, $0.01 PAR VALUE: 12,650,746 (as of August 14, 1998).
---------------------------------------------------------------
Transitional Small Business Disclosure Format:
Yes No X
---- ----
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
INDEX
PART I FINANCIAL INFORMATION Page No.
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets-
as of June 30, 1998 and December 31, 1997 4
Consolidated Statements of Operations-
three and six months ended June 30,
1998 and 1997 5
Consolidated Statements of Cash Flow-
six month periods ended June 30, 1998 and
1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The Registrant's Financial Statements follow this page.
3
<PAGE>
<TABLE>
<CAPTION>
Telecomm Industries Corp. and Subsidiary
Consolidated Balance Sheets
as of June 30, 1998 and December 31, 1997
(Unaudited)
June 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86,291 $ 97,779
Accounts receivable - trade 4,138,580 3,387,943
Inventories 2,162,417 1,412,196
Prepaid income taxes 63,145 59,557
Prepaid expenses 129,213 133,936
Employee advances 106,816 147,601
------------ ------------
Total current assets 6,686,462 5,239,012
------------ ------------
Property and equipment, net 1,551,046 1,481,566
Accounts receivable, long-term portion 4,263,365 2,992,137
Intangibles, net 3,936,373 3,462,958
------------ ------------
Total assets 16,437,246 13,175,673
$ ============ $ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 2,040,000 $ 1,371,210
Current portion of long-term debt 355,563 404,780
Accounts payable - trade 2,285,024 1,139,776
Accrued payroll and related expenses 189,237 268,191
Accrued bonus 332,702 575,500
Accrued commissions and contractor fees 114,178 180,813
Customer deposits 175,744 118,504
Deferred income taxes 106,321 342,321
Income taxes payable 109,769 109,399
Other accrued expenses 92,901 149,730
------------ ------------
Total current liabilities 5,801,439 4,660,224
Long-term debt, less current portion 3,804,614 2,862,976
Deferred revenue 10,936 10,362
Deferred income taxes 1,340,813 906,913
------------ ------------
Total liabilities 10,957,802 8,440,475
============ ============
Stockholders' equity:
Common stock $.01 par value: authorized 20,000,000 shares;
issued 12,650,746 and 12,300,746; outstanding 12,121,559
and 11,771,559, at June 30, 1998 and December 31, 1997,
respectively 126,508 123,008
Additional paid-in capital 3,994,132 3,577,632
Treasury stock: 529,187 shares at cost (317,512) (317,512)
Receivables from stockholders (91,187) (110,065)
Retained earnings 1,767,503 1,462,135
------------ ------------
Total stockholders' equity 5,479,444 4,735,198
------------ ------------
Total liabilities and stockholders' equity $ 16,437,246 $ 13,175,673
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
4<PAGE>
<TABLE>
<CAPTION>
Telecomm Industries Corp. and Subsidiary
Consolidated Statements of Operations (Unaudited)
For the three and six months ended June 30, 1998 and 1997
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June June June June
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 6,680,038 $ 3,148,192 $ 12,168,175 $ 5,742,251
Commissions, contractor fees and related expenses 3,328,997 1,119,139 5,701,925 1,947,744
Selling, general and administrative expenses 3,076,734 1,729,640 5,757,696 3,263,943
----------- ----------- ------------ ------------
Operating income 274,307 299,413 708,554 530,564
Other income (expense):
Gain on disposal of assets 892 - 1,642 -
Interest income - - - 2,692
Interest expense (132,960) (34,113) (203,168) (65,417)
----------- ------------ ------------ ------------
(132,068) (34,113) (201,526) (62,725)
----------- ------------ ------------ ------------
Income from operations before income tax expense 142,239 265,300 507,028 467,839
Income tax expense 55,814 106,120 201,660 187,136
----------- ----------- ------------ ------------
Net income $ 86,425 $ 159,180 $ 305,368 $ 280,703
============ ============ ============ ============
Net Income per common share:
Basic $ 0.01 $ 0.02 $ 0.03 $ 0.03
=========== =========== ============ ============
Diluted $ 0.01 $ 0.02 $ 0.02 $ 0.03
=========== =========== ============ ============
Average number of common shares outstanding:
Basic 12,091,833 10,200,746 12,091,833 10,200,746
============ ============ ============ ============
Diluted 13,141,833 10,500,746 13,141,833 10,500,746
============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
<TABLE>
<CAPTION>
Telecomm Industries Corp. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
for the six month periods ended June 30, 1998 and 1997
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 305,368 $ 280,703
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 307,596 144,553
Deferred revenue 574 -
Deferred income taxes 197,900 188,559
Reserve for bad debts (17,156) -
Gain on sale of fixed assets 1,642 -
Changes in assets and liabilities:
Accounts receivable - trade (647,216) 1,296,038
Accounts receivable - long term portion (1,121,229) (201,237)
Inventories (729,484) 127,567
Prepaid income taxes (3,588) (7,205)
Prepaid expenses 8,653 16,797
Employee advances 43,785 (173,864)
Accounts payable - trade 1,115,248 (511,033)
Accrued payroll and related expenses (88,240) (437)
Accrued bonus (257,798) (499,900)
Accrued commissions and contractor fees (66,635) (94,333)
Customer deposits 57,240 (48,519)
Income taxes payable 370 9,033)
Other accrued expenses (67,954) (157,076)
------------ ------------
Total adjustments (1,266,292) 70,877
------------ ------------
Net cash (used in) provided by operating activities (960,924) 351,580
Cash flows from investing activities:
Purchases of property and equipment (284,458) (133,781)
Purchase acquisitions, net of cash acquired (10,000) (368,233)
Proceeds from stockholders receivables 18,878 1,571
------------ ------------
Net cash (used in) provided by investing activities (275,580) (500,443)
------------ ------------
Cash flows from financing activities:
Payments on long-term debt (230,440) (142,818)
Proceeds from issuance of long-term debt 1,019,140 226,486
Proceeds from common stock purchased by employees - 45,000
Notes receivable - related parties - 400,000
Net borrowings under line of credit 436,316 43,536
------------ ------------
Net cash provided by in financing activities 1,225,016 572,204
------------ ------------
Net (decrease) increase in cash (11,488) 423,341
Cash at beginning of period 97,779 238,312
------------ ------------
Cash at end of period $ 86,291 $ 661,653
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 157,380 $ 65,417
============ ============
Cash paid for income taxes $ 7,500 $ -
============ ============
Non-cash investing and financing activities:
Common stock issued for purchase acquisitions $ 420,000 $ 423,325
============ ============
Notes issued for purchase acquisitions $ 20,000 $ 200,000
============ ============
See notes to unaudited consolidated financial statements
6<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. MANAGEMENT REPRESENTATION - The accompanying unaudited
consolidated interim financial statements of Telecomm Industries
Corp. ("Telecomm" or the "Company") have been prepared without
audit and do not include all of the information and note
disclosures required by generally accepted accounting principles.
The statements reflect all adjustments that are, in the opinion
of management, necessary to present fairly the financial position
of the Company as of June 30, 1998 and the results of its
operations for the quarter then ended. These adjustments are of
a normal and recurring nature. Therefore, the accompanying
consolidated interim financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto included in the Form 10-KSB of the Company for the year
ended December 31, 1997.
2. EARNINGS PER SHARE - Computations of basic and diluted earnings
per share of common stock have been made in accordance with the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No.
128"). 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>
<TABLE>
<CAPTION>
For the six month period ended June 30, 1998
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Net income $ 305,368
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 305,368 12,091,833 $ .03
Effect of dilutive securities options 1,640,000
------------ ------------ -------
Diluted EPS: $ 305,368 13,731,833 $ .02
Income available to stockholders of common ============ ============ =======
shares and common stock equivalents
For the six month period ended June 30, 1997
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 280,703
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 280,703 10,200,746 $ .03
Effect of dilutive securities options 300,000
------------ ------------ -------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 280,703 10,500,746 $ .03
============ ============ =======
7
<PAGE>
For the three month period ended June 30, 1998
-----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Net income $ 86,425
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 86,425 12,091,833 $ .01
Effect of dilutive securities options 1,640,000
------------ ------------ -------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 86,425 13,731,833 $ .01
============ ============ =======
For the three month period ended June 30, 1997
----------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 159,180
Basic EPS:
Income available to common stockholders;
weighted average common stock outstanding 159,180 10,200,746 $ .02
Effect of dilutive securities options 300,000
------------ ------------ -------
Diluted EPS:
Income available to stockholders of common
shares and common stock equivalents $ 159,180 10,500,746 $ .02
============ ============ ========
</TABLE>
Options to purchase 300,000 shares of common stock at $3.00 to $10.00
per share were outstanding during the quarter, 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 during
the period.
3. ACQUISITIONS - On February 20, 1998, the Company acquired
Division-Tel Communications, Inc. ("Division-Tel") under the
provisions of an Asset Purchase Agreement. Under the terms of
this agreement, the Company issued 350,000 shares of its common
stock valued at $420,000, paid $10,000 in cash, issued a $20,000
promissory note, due August 1998 (bearing interest at a fixed
rate of 9%), and assumed approximately $370,000 of Division-Tel's
liabilities in exchange for all of the outstanding common stock
of Division-Tel.
The net purchase price was allocated as follows:
Current assets $ 245,876
Property and equipment 80,599
Other assets 6,900
Goodwill 487,105
Liabilities assumed (370,480)
----------
Net purchase price 450,000
Less: common stock issued 420,000
Non-cash note payable 20,000
----------
Cash paid for acquisition $ 10,000
==========
8
<PAGE>
4. SUBSEQUENT EVENTS - On July 7, 1998, the Company's primary lender
extended a new term note for $1,150,000 and increased the
existing line of credit by $500,000. The proceeds of the term
note were used to retire $1,000,000 of the two 90 day notes,
which were classified as long-term in the consolidated financial
statements as of June 30, 1998, and the remainder reduced the line
of credit. The term note of $1,150,000 is due July 31, 2003 and
payable in 60 monthly installments of $23,732.81, including annual
interest of 8.75%.
5. RECLASSIFICATION - Certain reclassifications have been made to
the 1997 consolidated financial statements to conform to the 1998
method of presentation.
6. STOCK OPTIONS - In June 1998, the Company granted stock options
representing 680,000 shares of common stock of the Company to
an exercise price of $1.18 per share to various executives. In
addition, the Company granted stock options representing 160,000
shares of common stock of the Company at an exercise of $1.06
per share to an executive in consideration for the assumption
of additional duties in conjunction with her promotion to
Executive Vice-President of Sales. All of these options were
issued pursuant to the 1997 Employee Stock Ownership Plan that
calls for an exercise price equal to the fair market value of
the shares on the date of issuance and equal vesting over a
period of four years.
7. LOAN COVENANTS - As of June 30, 1998, the Company was in
violation of its loan covenants to its primary lender.
Management has requested a waiver of this violation from the
lender, and the lender has indicated that a waiver likely would
be forthcoming, but the Company had not received a written
waiver at the date of filing.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Telecomm is one of the nation's largest Regional Bell Operating
Company ("RBOC") distributors. As such, Telecomm sells voice, data,
cellular, video and telephone information network solutions to
business customers throughout its five-state region. Telecomm has
sales personnel in Illinois, Indiana, Wisconsin, Ohio and Kentucky.
Ameritech and BellSouth are Telecomm's primary RBOC partners. The
voice services offered by these RBOCs include Centrex, Centrex-ISDN,
Multiserve, Intra-LATA usage plans, audio-conferencing and voice mail.
Data services include DS0, DS1, DS3, Synchronet, Frame Relay, Sonet,
ATM and ISDN Prime.
In addition to RBOC services, Telecomm represents numerous
manufacturers of voice and data equipment. Telecomm markets, installs
and maintains telecommunications equipment manufactured by such
globally recognized companies as Nortel (Northern Telecom), NEC,
Lucent, Toshiba and Comdial.
9
<PAGE>
Companies who purchase data equipment from a manufacturer, add
value to the equipment through technical expertise and additional
software and then resell these solutions to their customers are
called Value Added Resellers (VARs). Telecomm was identified as one
of the 500 largest VARs in the country in VAR Business Magazine's 1998
annual industry report. The original manufacturers in Telecomm's
product line include Microsoft, Ascend, Intel, Adtran, Cisco, Amdahl
and Citrix. These manufacturers are recognized throughout the industry
for providing high quality products and innovative software.
Telecomm's value added services include network consultation, design,
installation, maintenance and repair services.
All of Telecomm's product lines are complementary. The
traditional separation of voice and data communications and
transmission is no longer valid. Much of the voice transmitted over
public and private networks is now dispatched as digital packets
utilizing the same protocols as data communications. In fact, several
of the products Telecomm markets will switch both voice and data.
Although Telecomm has and will strive toward continued internal
growth, the Company is committed to its continued growth through
acquisitions. On July 10, 1998, Telecomm announced that its Board of
Directors had approved an acquisition plan for the remainder of 1998.
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. However, Telecomm continues to evaluate whether
additional corrective action will be necessary. Telecomm made no
material expenditures in the first quarter of 1998 relating to year
2000 technology.
SECOND QUARTER OF 1998 VS. SECOND QUARTER OF 1997
The Company's net revenues increased 112% to $6.7 million for the
three months ended June 30, 1998 from $3.1 million in the comparable
1997 period. $2.1 million of this increase was due to sales generated
by Unitel, Inc. ("Unitel"), which was acquired by the Company in
August 1997. The remaining increase was attributable to increased
commissions from network services sales and equipment sales and
related services generated by Telecomm's other operations. Net
revenues from equipment sales and related services increased 199% to
$3.8 million in the three months ended June 30, 1998 (of which $1.9
million related to voice equipment and $1.9 million related to data
equipment), from $1.3 million in the three months ended June 30,
1997, including $1.2 million in Unitel sales in the 1998 period.
Net revenues from network services sales increased 44% to $2.6 million
in the three months ended June 30, 1998 (of which $2.0 million related
to voice network services and $.6 million related to data network
services), from $1.8 million in the comparable 1997 period, including
$.8 million from Unitel sales in the 1998 period. For the three
months ended June 30, 1998, sales of equipment and related services
represented 57% of net revenues, sales of network services represented
10
<PAGE>
40% of net revenues and long-distance and other services represented
3% of net revenue compared to 41%, 58% and 1%, respectively for the
three months ended June 30, 1997. The change in product mix is
primarily due to the Company's increased focus on equipment sales.
Commissions, contractor fees and related expenses increased $2.2
million to $3.3 million in the three months ended June 30, 1998, a
197% increase from such expenses of $1.1 million in the comparable
1997 period. The increase was due primarily to increased costs of
labor and equipment to support equipment sales generated in the three
months ended June 30, 1998. As a percentage of net revenues, these
expenses increased to 50% during the three months ended June 30, 1998
from 36% during the comparable 1997 period. This increase was due
primarily to costs associated with the Company's increased focus on
equipment sales and the related expenses for equipment sales which are
higher as a percentage of the Company's revenues than the Company's
other sales and services.
Selling, general and administrative expenses ("SG&A") increased
$1.3 million to $3.1 million in the three months ended June 30, 1998,
a 78% increase from SG&A expenses of $1.7 million in the comparable
1997 period. As a percentage of net revenues, these expenses
decreased to 46% during the three months ended June 30, 1998, from 55%
during the three months ended June 30, 1997, primarily as a result of
increased net revenues of the Company without a corresponding increase
in the costs necessary to support the additional sales.
In the three months ended June 30, 1998, interest expense
increased by $98,800, or 290%, to $133,000 from $34,000 in the
comparable 1997 period, primarily because of increased borrowings by
the Company under its line of credit facility and the long-term debt
issued in connection with the increased focus on acquisitions and
selling more equipment which requires additional working capital to
support the increase in related receivables and inventory.
Income from continuing operations before income taxes decreased
by $123,000 to $142,000 in the three months ended June 30, 1998, a
decrease of 46% from $265,000 in the comparable 1997 period, primarily
for the reasons stated above.
The provision for income taxes decreased by $50,000 to $56,000 in
the three months ended June 30, 1998, compared to $106,000 in the
three months June 30, 1997, due to decreased earnings.
As a result of the foregoing, net income for the three months
ended June 30, 1998 was $86,000, a decrease of 46%, from the net
income for the three months ended June 30, 1997 of $159,000.
SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS ENDED JUNE 30, 1997
The Company's net revenues increased 112% to $12.2 million for
the six months ended June 30, 1998 from $5.7 million in the comparable
1997 period. $4.1 million of this increase was due to sales generated
by Unitel, which was acquired by the Company in August 1997. The
remaining increase was attributable to increased commissions from
network services sales and equipment sales and related services
generated by Telecomm's other operations. Net revenues from equipment
11<PAGE>
sales and related services increased 176% to $6.6 million for the six
months ended June 30, 1998 (of which $3.8 million related to voice
equipment and $2.7 million related to data equipment), from $2.4
million for the six months ended June 30, 1997, including $2.3 million
related to Unitel in the 1998 period. Net revenues from network
services sales increased 61% to $5.3 million for the six months ended
June 30, 1998 (of which $3.9 million related to voice network services
and $1.3 million related to data network services), from $3.3 million
in the comparable period for 1997, including $1.4 million relating to
Unitel in the 1998 period. For the six months ended June 30, 1998,
sales of equipment and related services represented 54% of net
revenues, sales of network services represented 43% of net revenues
and long-distance and other services represented 3% of net revenue
compared to 41%, 57% and 2%, respectively for the six months ended
June 30, 1997. The change in product mix is primarily due to the
Company's increased focus on equipment sales.
Commissions, contractor fees and related expenses increased $3.8
million to $5.7 million for the six months ended June 30, 1998, a 193%
increase from such expenses of $1.9 million in the comparable 1997
period. The increase was due primarily to increased costs of labor and
equipment to support equipment sales generated in the six months ended
June 30, 1998. As a percentage of net revenues, these expenses
increased to 47% during the six months ended June 30, 1998 from 34%
during the comparable 1997 period. This increase was due primarily to
costs associated the Company's increased focus on equipment sales and
the related expenses for equipment sales which are higher as a
percentage of the Company's revenues than the Company's other sales
and services.
SG&A increased $2.5 million to $5.8 million for the six months
ended June 30, 1998, a 76% increase from SG&A expenses of $3.2 million
in the comparable 1997 period. As a percentage of net revenues, these
expenses decreased to 47% during the six months ended June 30, 1998,
from 57% during the six months ended June 30, 1997, primarily as a
result of increased net revenues of the Company without a
corresponding increase in the costs necessary to support the
additional sales.
In the six months ended June 30, 1998, interest expense increased
by $137,800, or 211%, to $203,000 from $65,000 in the comparable 1997
period, primarily because of increased borrowings by the Company under
its line of credit facility and the long-term debt issued in
connection with the increased focus on acquisitions and selling more
equipment which requires additional working capital to support the
increase in related receivables and inventory.
Income from continuing operations before income taxes increased
by $39,000 to $507,000 for the six months ended June 30, 1998, an
increase of 8% from $468,000 in the comparable 1997 period, primarily
for the reasons stated above.
The provision for income taxes increased by $15,000 to $202,000
for the six months ended June 30, 1998, compared to $187,000 for the
comparable 1997 period, due to increased earnings.
12<PAGE>
As a result of the foregoing, net income for the six months ended
June 30, 1998 was $305,000, an increase of 9%, from the net income for
the six months ended June 30, 1997 of $281,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the
internal growth of network service sales, network service receivables
(which are classified as the long-term accounts receivables), voice
and date hardware sales, the infrastructure to support and monitor the
increased sales volume and new acquisitions.
Net cash used in operating activities was $1.0 million for the
six months ended June 30, 1998 compared to net cash provided in
operating activities of $.4 million for the comparable period in 1997.
The change was due primarily to a $1.1 million increase in long term
accounts receivable for the six months ended June 30, 1998 compared to
a $.2 million increase for the six months ended June 30, 1997, a $.6
million increase in trade accounts receivable in the six months ended
June 30, 1998 compared to a $1.3 million decrease in the comparable
1997 period, and a $.7 million increase in inventory for the six
months ended June 30, 1998 compared to a $.1 million decrease in the
comparable 1997 period. These changes were offset by an increase in
accounts payable of $1.1 million in the six months ended June 30,1998
compared to a decrease of $.5 million for the comparable 1997 period
and combined decreases of $.3 million in accrued bonuses and
commissions for the six months ended June 30, 1998 compared to $.5
million for the comparable period in 1997.
Net cash used in investing activities was $.3 million for the six
months ended June 30, 1998 compared to $.5 million for the six months
ended June 30, 1997. This decrease was attributable primarily to the
use of cash in the acquisitions of Northeastern Communications, Inc.
and Long-Tell Communications, Inc. in the first quarter of 1997, while
only $10,000 was used for the acquisition of Division-Tel in February
1998.
Net cash provided by financing activities was $1.2 million for
the six months ended June 30, 1998 compared to $.6 million in the
comparable 1997 period. This fluctuation was attributable primarily to
the proceeds of $.4 million short term borrowings under the Company s
line of credit in 1998, plus a net increase of long term debt of $.8
million. In the six months ended June 30, 1997, cash provided by
financing activities consisted primarily of the collection of a note
receivable of $.4 million and a net increase in long term debt (due to
acquisitions) of $.1 million.
The change in the commission payment structure by Ameritech,
which was implemented in June 1996, and Ameritech's continuing
implementation of a new billing and customer record system continues
to lengthen the collection period of receivables adversely affecting
the Company's working capital and cash flow. Management believes cash
flow will continue to be affected similarly as long as the existing
Ameritech commission structure remains.
13<PAGE>
Because of the Company's recent increased emphasis on equipment
sales and related services, an increase in inventory and trade credit
is expected. Trade credit arises from the willingness of the
Company's creditors to grant payment terms for inventory purchases.
Although the Company has obtained favorable payment terms on its trade
credit from its vendors, there is no assurance that the Company will
be able to obtain such terms in the future.
Approximately $0.5 million unused borrowing availability exists
under the credit line of the Company's credit facility at June 30,
1998. On July 7, 1998, the Company's primary lender increased the
existing line of credit by $.5 million and extended a new term note of
$1.15 million. The term note of $1,150,000 is due July 31, 2003 and
payable in 60 monthly installments of $23,732.81, including annual
interest of 8.75%. The Company believes that funds generated by
operations and the additional borrowings available under the increased
credit facilities will be sufficient to meet working capital needs for
the foreseeable future.
The Company may also seek to obtain additional sources of
funding, including additional debt or equity financing, as the Company
continues to grow. There is no assurance that the Company will obtain
such additional funds or, that if obtained, such financing will be on
terms favorable to the Company.
As of June 30, 1998, the Company was in violation of its loan
covenants to its primary lender. Management has requested a waiver of
this violation from the lender, and the lender has indicated that a
waiver likely would be forthcoming, but the Company had not received a
written waiver at the date of filing.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report that are not
historical facts are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to
differ materially from those set forth in the forward-looking
statements. These risks and uncertainties include, but are not
limited to:
* the dependence of the Company on one principal supplier,
Ameritech, for a significant portion of its revenues;
* the effects of the proposed acquisition of Ameritech by SBC
Communications announced on May 11, 1998.
* changes in Ameritech's commission payment plan and its
billing and record system, adversely affecting the Company's
working capital and long-term accounts receivable;
* fluctuations in quarterly revenues and earnings of the
Company depending on when Ameritech bonus acceleration
targets are met;
14<PAGE>
* 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
recent acquisitions into the Company;
* the availability of other acquisitions and the integration
of the operations of those acquisitions, if completed, into
the Company, and the availability of financing for such
acquisitions;
* the ability of 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;
* the loss or inability to attract key personnel; 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.
15<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Non-Exclusive Authorized Distributor Agreement Between
Ameritech and Telecomm effective June 1, 1998
27 Financial Data Schedule
B. REPORTS ON FORM 8-K
None
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELECOMM INDUSTRIES CORP.
By: /s/ James M. Lowery
------------------------------------
James M. Lowery, Chairman
And: /s/ Mark Travi
-----------------------------------
Mark Travi, Chief Financial and
Accounting Officer
Date: August 19, 1998
17
EXHIBIT 10.1
------------
April 30, 1998
Mr. James Lowery
Telecomm Industries, Inc.
1743 West Quincy Suite 143
Naperville, IL 60540
Dear Mr. Lowery,
Re: NON-EXCLUSIVE AUTHORIZED DISTRIBUTOR AGREEMENT BETWEEN
AMERITECH SERVICES, INC. ("AMERITECH") AND TELECOMM
INDUSTRIES, INC. ("AD") EFFECTIVE JUNE 1, 1998
(HEREAFTER REFERRED TO AS THE "AGREEMENT").
This acknowledges that under the now-in-effect Authorized
Distributor Agreement no extension of our product distribution
arrangement is allowed without the signing of a new agreement. The
purpose of this letter is twofold: i) to set forth our mutual
understanding and agreement regarding the continuation of the
distribution relationship; and, ii) for the parties to execute this
letter as the binding Non-Exclusive Authorized Distributor Agreement
between the parties from June 1, 1998 through December 31, 1998. For
purposes of identification, this letter of agreement shall be referred
to as it is referenced above, in short referred to as the "Agreement".
1. Ameritech and AD intend to continue their relationship under
which AD is granted specific non-exclusive authority to
represent Ameritech and certain Ameritech products in a
specified Territory, and AD is awarded commissions for sales
of said products. Each party agrees that the term of this
letter of Agreement is June 1, 1998 through December 31,
1998, provided Ameritech received this letter of Agreement,
originally signed by the AD, at the address designated by
Ameritech, no later than close of business on May 31, 1998.
2. Ameritech and AD agree that the rights and obligations of
each party which were set forth in the now-in-effect
Authorized Distribution Agreement between the parties, dated
June 1, 1996 as amended March 2, 1998, accurately describes
and sets forth the rights and obligations of each party, and
the terms and conditions set forth in that contract shall
govern the parties' relationship from June 1, 1998 through
December 31, 1998. All terms and conditions of the Non-
Exclusive Authorized Distributor Agreement dated June 1,
1996, as amended March 2, 1998 are incorporated by reference
as if originally set forth herein, except as follows:
<PAGE>
a) SECTION 4.0, "Term" is deleted in its entirety and
replaced with the following:
"4.0 Term
This Agreement shall commence on June 1, 1998 and shall
continue through December 31, 1998 unless sooner
terminated as provided for elsewhere in this Agreement.
b) SECTION 5.1(b) is modified and shall hereafter read:
"(b) Unless otherwise provided elsewhere in this
Agreement, Ameritech may terminate this Agreement in
whole or in part upon fifteen (15) days written notice
in the event AD fails to perform or commits a breach of
any term or condition of this Agreement. The parties
agree this shall be deemed termination for cause.
c) SECTION 6.9.
AD agrees that it shall be responsible (through written
agreement or otherwise) for ensuring that every seller
who promotes or sells Ameritech products or services on
behalf of AD in the Territory is in compliance with the
terms and conditions of this Agreement which relate to
sales practices and limitation, including, without
limitation, compliance with the Section 6.4 and Section
3.0 of this Agreement. AD shall furnish to Ameritech
such materials and documentation reasonably requested
by Ameritech related to this duty."
My signature below, and AD's countersignature is evidence of our
intending to be bound, and we hereby warrant and attest to our
authority to bind our respective companies to the foregoing.
AMERITECH TELECOMM INDUSTRIES
/s/ Rhonda Stenulson /s/ James M. Lowery
-------------------------- ----------------------------
Rhonda Stenulson James M. Lowery
Director Chairman/CEO
-------------------------- ----------------------------
TITLE TITLE
6-1-98 May 21, 1998
-------------------------- ----------------------------
DATE DATE
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 86,291
<SECURITIES> 0
<RECEIVABLES> 4,138,580
<ALLOWANCES> 0
<INVENTORY> 2,162,417
<CURRENT-ASSETS> 6,686,462
<PP&E> 2,211,660
<DEPRECIATION> 660,614
<TOTAL-ASSETS> 16,437,246
<CURRENT-LIABILITIES> 5,801,439
<BONDS> 0
<COMMON> 123,008
0
0
<OTHER-SE> 5,356,436
<TOTAL-LIABILITY-AND-EQUITY> 16,437,246
<SALES> 0
<TOTAL-REVENUES> 12,168,175
<CGS> 0
<TOTAL-COSTS> 5,701,925
<OTHER-EXPENSES> 5,757,696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,168
<INCOME-PRETAX> 507,028
<INCOME-TAX> 201,660
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,368
<EPS-PRIMARY> .03
<EPS-DILUTED> .02
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