<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, 2000
{ } 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 34-1765902
(State of Incorporation) (I.R.S. Employer Identification No.)
8450 WESTFIELD BLVD
INDIANAPOLIS, INDIANA 46240-2368
(Address of principal executive offices)
317-202-3000
(Issuer's telephone number, including area code)
FORMER ADDRESS:
(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:(AS OF NOVEMBER 13, 2000):12,206,559
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I-FINANCIAL INFORMATION
<S> <C>
ITEM 1.
Consolidated Financial Statements .......................... 3
Consolidated Balance Sheets-
September 30, 2000 (unaudited) and
December 31, 1999........................................... 4
Consolidated Statements of Operations-
three and nine months ended September 30, 2000
and 1999 (unaudited)........................................ 5
Consolidated Statements of Cash Flow-
nine months ended September 30, 2000 and
1999 (unaudited)............................................ 6
Notes to Consolidated Financial Statements.................. 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 9
PART II-OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................... 13
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
The Registrant's Consolidated Financial Statements follow this page.
3
<PAGE>
Telecomm Industries, Corp. and Subsidiary
Consolidated Balance Sheets
September 30, 2000 (unaudited) and December 31, 1999
<TABLE>
<CAPTION>
September 30, 2000 Dec. 31, 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Accounts receivable, net of allowance of $146,751 and
$550,000 at September 30, 2000 and December 31, 1999, respectively $ 979,115 $ 5,061,434
Inventories 1,650,004 1,627,597
Contract costs in excess of billings 4,333 -
Prepaid income taxes - 45,147
Prepaid expenses 88,202 383,960
Employee advances (959) 2,600
Total current assets 2,720,695 7,120,738
Property and equipment, net 1,183,324 1,666,407
Accounts receivable, net 0 4,121,843
Intangibles and other assets, net 655,161 3,824,454
Investment in Marketable securities 6,461,082 0
Deferred income taxes 0 5,617
Total assets $ 11,020,262 $ 16,739,059
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 157,151 $ 259,224
Line of credit 368,547 1,868,182
Current portion of long-term debt 300,369 1,038,611
Notes Payable 1,300,000 -
Accounts payable 1,071,098 1,481,996
Accrued payroll and related expenses 243,078 233,067
Accrued commissions and bonus 0 296,751
Customer deposits 437,954 364,491
Deferred income taxes 0 704,898
Income taxes payable 124,010 123,323
Other accrued expenses 229,056 425,081
Deferred revenue 105,015 101,270
Total current liabilities 4,336,278 6,896,894
Long-term debt, less current portion 1,448,157 5,523,543
Deferred Income Taxes 274,425 0
Deferred revenue 32,077 41,677
Total liabilities 6,090,937 12,462,114
Stockholders' equity:
Common stock $.01 par value; authorized - 20,000,000 shares;
issued 12,705,746 and12,670,746; outstanding 12,206,559
and 12,141,559 at September 30, 2000 and December 31, 1999,
respectively 129,397 126,708
Additional paid-in capital 4,050,705 3,976,947
Treasury stock, 499,187 shares at cost (299,512) (317,512)
(Deficit) Retained Earnings 1,048,735 490,802
Total stockholders' equity 4,929,325 4,276,945
Total liabilities
and stockholders' equity $ 11,020,262 $ 16,739,059
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
Telecomm Industries, Corp. and Subsidiary
Consolidated Statement of Operations (unaudited)
For the three and nine months ended September 30, 2000
<TABLE>
<CAPTION>
Three Months ended Three Months ended Nine Months ended Nine Months ended
September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Network service revenue $ - $ 2,160,234 $ 1,823,651 $ 7,129,945
Equipment sales and service revenues 1,424,061 3,161,863 5,221,967 6,636,173
Long distance and other revenue 5,101 142,769 48,403 330,785
Internet service revenue 434,353 1,185,624
------------------ ------------------- ------------------ ------------------
Net revenues 1,863,515 5,464,866 8,279,645 14,096,903
------------------ ------------------- ------------------ ------------------
Commissions, Contractors fees, and related
expenses 1,765 2,779 203,306 8,126
Equipment sales and service costs 1,165,595 2,331,538 4,172,499 5,661,568
Long distance and other costs - 246 - 1,152
Internet service labor and related expenses 291,313 941,474
------------------ ------------------- ------------------ ------------------
Net cost of services sold 1,458,673 2,334,563 5,317,279 5,670,846
------------------ ------------------- ------------------ ------------------
Selling, general and administrative expenses 784,867 2,403,121 4,897,342 7,311,176
------------------ ------------------- ------------------ ------------------
Operating income (380,025) 727,182 (1,934,979) 1,114,881
Other income (expense)
Gain on disposal of assets 644 (2,107) 2,129
Interest expense (100,618) (176,471) (290,526) (495,247)
Income from operations before Income tax expense and
Disposition of network service segment (479,999) 550,711 (2,227,612) 621,763
Gain (loss) on disposition of network service
segment 621,340 2,363,619
Income from operations before income tax expense 141,341 550,711 136,007 621,763
Income tax (benefit) expense (66,307) 220,300 (464,066) 248,700
------------------ ------------------- ------------------ ------------------
Net income 207,648 330,411 600,073 373,063
================== =================== ================== ==================
Net income per common share
Basic 0.02 $ 0.03 0.05 $ 0.03
================== =================== ================== ==================
Diluted 0.02 $ 0.03 0.05 $ 0.03
================== =================== ================== ==================
Average number of common shares outstanding
Basic 12,206,559 12,128,624 12,206,559 12,123,940
================== =================== ================== ==================
Diluted 12,206,559 12,743,624 12,206,559 12,738,940
================== =================== ================== ==================
</TABLE>
5
<PAGE>
Telecomm Industries Corp. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss )income $ 600,073 $ 373,063
Adjustments to reconcile net income to net cash provided by (used)
in operating activities:
Depreciation and amortization: 583,870 484,553
Deferred revenue (9600) (214,232)
Deferred income taxes 253,516 248,700
Reserve for bad debts 50,000 45,,060
Minority Interest (117)
(Gain) loss on sale of fixed assets 2,107 (2,129)
Changes in assets and liabilities:
Accounts receivable- trade (234,352) 228,927
Accounts receivable- long term portion (305,947)
Inventories (22,407) (264,482)
Contract billings in excess of costs (4,333)
Prepaid expenses 72,270 (299,285)
Prepaid income taxes 45,147 -
Employee advances 3,560 46,319
Accounts payable- trade (306,362) (310,328)
Accrued payroll and related expenses 167,545 42,535
Accrued commissions and bonus (175,354) (465,312)
Accrued contractor fees (91,173)
Customer deposits 73,463 370,560
Accrued taxes payable 17,141
Deferred income taxes -
Income taxes payable (2,424) -
Other accrued expenses (187,689) (212,598)
Deferred revenue
3,745 349,576
--------------- ---------------
Total adjustments 308,729 (349,256)
--------------- ---------------
Net cash provided by (used in) operating activities 908,802 23,807
--------------- ---------------
Cash flows from investing activities:
Purchases of property and equipment (379,283) (76,499)
Proceeds from sale of property and equipment (2,107) 2,129
Purchase acquisitions, net of cash acquired of $6062 (2000) and $0 1999) (245,874)
Decrease (increase) in other assets (74,563)
Proceeds from sale of network service segment (930,979)
--------------- ---------------
Net cash used in investing activities (1,632,806) (74,370)
--------------- ---------------
Cash flows from financing activities:
Payments on long-term debt (970,622) (583,564)
Net (payments) borrowings under line of credit 1,702,253 844,999
Cash overdraft (102,073) (220,247)
Proceeds from the exercise of stock options 94,447 9,375
--------------- ---------------
Net cash used in financing activities 724,005 50,563
--------------- ---------------
Net increase in cash 0 -
Cash and cash equivalents at beginning of period -
--------------- ---------------
Cash and cash equivalents at end of period $ - $ -
================================
Supplemental disclosures of cash flow information:
--------------- --------------
Cash paid for interest $ 290,526 $ 462,254
================================
Cash paid for income taxes $ 7,759 $ -
================================
</TABLE>
6
<PAGE>
TELECOMM INDUSTRIES, CORP. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. MANAGEMENT REPRESENTATION - The accompanying 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 for a fair statement of
financial position of the Company as of September 30, 2000, 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, 1999.
2. OTHER ACCOUNTING PRONOUNCEMENTS - 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
Company is currently evaluating the applicability and therefore, the
impact, if any, that SAB No. 101 may have on its current revenue
recognition policies. Although the Company 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 requires implementation of any
changes resulting from SAB No. 101 (as amended by SAB 101A) to be reflected
in the Company's second quarter 2000 financial statements. 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
Company's previously reported financial position or cash flows.
3. 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"). The Company was required to adopt
the provisions of SFAS No. 128 beginning with the year ended December 31,
1997. All prior and interim period earnings per share amounts have been
restated accordingly. All securities that have an anti-dilutive effect on
earnings per share have been excluded from such computations.
Reconciliation of Numerators and Denominators of the Basic
and Diluted EPS Computations
<TABLE>
<CAPTION>
For the nine month period ended September 30, 2000
---------------------------------------------------
Gain Shares Per-Share
(Numerator) (Denominator) Amount
----------------- --------------- --------------
<S> <C> <C> <C>
Net Income $ 600,073
Basic EPS:
Gain available to common stockholders;
weighted average common stock
outstanding 600,073 12,206,559 $ .05
----------------- --------------- --------------
Diluted EPS:
Gain available to stockholders of common
shares and common stock equivalents $ 600,073 12,206,559 $ .05
================= =============== ==============
</TABLE>
<TABLE>
<CAPTION>
For the nine month period ended September 30, 1999
---------------------------------------------------
Gain Shares Per-Share
(Numerator) (Denominator) Amount
----------------- --------------- --------------
<S> <C> <C> <C>
Net Income $ 373,063
Basic EPS:
Gain available to common stockholders;
weighted average common stock
outstanding 373,063 12,091,833 $ .04
----------------- --------------- --------------
Diluted EPS:
Gain available to stockholders of common
shares and common stock equivalents $ 373,063 13,131,833 $ .03
================= =============== ==============
</TABLE>
7
<PAGE>
4. ACQUISITIONS - On January 28, 2000, the Company's subsidiary,
NetVision.Com, Inc. ("NetVision") acquired Global Marketing Concepts, Inc.
Under the terms of the agreement, the Company issued 117,000 shares of
NetVision common stock valued at $117, paid $65,000 in cash, and assumed
approximately $119,230 of Global Marketing Concepts, Inc. liabilities in
exchange for all of their outstanding common stock.
5. DISPOSITION OF ASSETS - On July 19, 2000, the Company announced that it
completed the sale of its network services operation pursuant to a
previously announced definitive Purchase Agreement (the "Agreement"). The
Agreement was executed by and among PentaStar Communications, Inc.,
PentaStar Corporation, Inc. and the Company, and was effective April 15,
2000. In addition, pursuant to an earn-out provision set forth in section
2.3(b) of the Agreement, Telecomm could potentially earn up to $8.9 million
in additional compensation based on financial results for the period of
April 1, 2000 through March 31, 2001, bringing the total potential value of
the deal to approximately $22 million. The entire Agreement is attached as
an exhibit to the Company's annual Proxy report for fiscal 1999 on Form
14(a). The Company hereby incorporates by reference the Definitive Proxy
Statement on Form 14(a) filed on May 4, 2000 with the Securities and
Exchange Commission which provides additional detail with regard to the
described transaction with PentaStar Communications, and the director
nominees.
6. RECLASSIFICATION - Certain reclassifications have been made to the 1999
consolidated financial statements to conform to the 2000 method of
presentation.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Telecomm Industries is an interconnect company, a Value Added Reseller
(VAR) and an Internet Enterprise Solution Provider (IESP). As an interconnect
company, Telecomm markets, installs and maintains telecommunications equipment
for its business customers. The Company represents numerous globally recognized
manufacturers of telecommunications equipment including Nortel (Northern
Telecom), Lucent, Toshiba, NEC and Comdial.
As a VAR, Telecomm purchases data equipment from a manufacturer, adds value
to the equipment through technical expertise and additional software, and then
resells these solutions to their customers. Telecomm's value added services
include network consultation, design, installation, maintenance and product
repair for various manufacturers, including Microsoft, Ascend, Intel, Adtran,
Cisco and Citrix. These manufacturers are generally recognized throughout the
industry for providing high quality technology and innovative software.
Also, through its subsidiary NetVision.Com Inc., dba DigiCove ("DigiCove"),
Telecomm operates a full service Internet Enterprise Service Provider (IESP). An
IESP combines the Internet access products of an Internet Service Provider (ISP)
and the applications products of a Applications Service Provider (ASP). As an
IESP, NetVision not only delivers high speed Internet access to its business
customers, but also focuses on business-to-business electronic commerce, web
design and development and the web based delivery of software applications.
On July 19, 2000, the Company announced the completion of the sale of the
assets associated with the Ameritech distributor or Network Services portion of
its business to PentaStar Communications, Inc., through a wholly owned
subsidiary thereof, PentaStar Corporation. The sale is a two-phase transaction
providing both initial consideration and an opportunity for Telecomm to earn
additional consideration based upon the performance of the Network Service group
during a measurement period ending March 31, 2001.
Under the terms of the transaction, the initial consideration was
approximately $6.8 million in cash and PentaStar common stock, the assumption of
approximately $5.7 million in debt and the assumption of certain operating
liabilities. In addition, under an earn-out provision in the agreement, Telecomm
could potentially earn up to $8.9 million in additional compensation based on
financial results for the period of April 1, 2000, through March 31, 2001,
bringing the total potential value of the deal to approximately $22 million.
The Company will now focus on the telecommunications and data
communications equipment and Internet infrastructure business units. Many of the
Company's customers continue to depend on Telecomm to deliver the expertise to
support their mission-critical systems.
The Company's customers can be found in virtually all industries,
particularly mid-size business enterprises, state and municipal governments,
financial institutions, manufacturing companies and public school systems. The
telecommunication equipment customers' systems range in size from 2 to 7,600
telephone lines and in sophistication from basic telephone operations to
extensive communications networks that include voice messaging, automatic call
distribution and multi-location networks.
The Company's data equipment customers are typically multi-location
businesses, which use the equipment provided by the Company to provide
connectivity between locations. The applications and protocols supported by
Telecomm are as varied as our customers' requirements ranging from the simple
LAN interconnection to voice over Internet Protocol applications running on
Frame Relay networks.
DigiCove's customers include business and professional subscribers who
access their ISP through a dedicated circuit. The term "dedicated" refers to the
fact that these accounts access the ISP via a "dedicated" high-bandwidth
telecommunications facility. These facilities provide an Internet connection
with higher speed and more reliability than a traditional dial-up connection.
This specific subset of Internet subscribers has demonstrated the "willingness
to pay" higher monthly service fees for faster more reliable Internet services.
Along with their rate insensitivity, they are less likely to move their service
to another ISP.
Customers who understand and appreciate the value of dedicated access are
also more likely to purchase other services such as web hosting, software
solutions, transaction processing and other electronic commerce services. These
customers are utilizing dedicated accounts almost exclusively for business
purposes. The most common business applications today are electronic mail,
research and file transfer capabilities. The inevitable migration towards the
use of the Internet as a platform to provide more sophisticated applications
should produce dramatic growth in this subscriber segment.
9
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 VS. THREE MONTHS ENDED SEPTEMBER 30, 1999
The Company's net revenues decreased 43% to $2.7 million for the three
months ended September 30, 2000 from $4.7 million in the comparable 1999 period.
The decrease is attributable to the sale of the network services division to
PentaStar Communications. A comparison of the periods with respect to allocation
of total net revenues is as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 2000 September 30, 1999
<S> <C> <C>
Sales of equipment and service revenue 76% 58%
Sales of network services Less than 1% 39%
Other revenue Less than 1% 2%
Internet Services Revenue 23% 0%
</TABLE>
Net revenues from equipment sales and related services decreased 55% to
$1.4 million during the three months ended September 30, 2000 from $3.2 million
in the three months ended September 30, 1999. Sales of data equipment decreased
$.1 million, voice equipment decreased $.7 million, and service sales
decreased $.1 million. These decreases are due primarily to the continued
rebuilding of the Company's sales force following the sale of the network
services operation to PentaStar Communications and the corresponding transfer of
the majority of the sales force to PentaStar.
Net revenues from network services sales decreased $2.2 million to $0 for
the three months ended September 30, 2000 from $2.2 million for the three months
ended September 30, 1999. The decrease is attributable to the sale of the
network services operation to PentaStar Communications.
Net revenues from long distance and other revenue decreased $.1 million to
$5,000 for the three months ended September 30, 2000 from $142,000 in the
comparable period for 1999. The decrease is attributable to the sale of the
network services operation to PentaStar Communications.
Net revenue from Internet Services Revenue was $.4 million for the three
months ended September 30, 2000. The Company had no Internet Services Revenue in
the comparable period for 1999.
Net cost of commissions, contractor fees and related expenses decreased
$1,000 for the three months ended September 30, 2000, from expenses of $3,000 in
the comparable period of 1999. The decrease is attributable to the sale of the
network services operation to PentaStar Communications.
Equipment sales and service costs decreased $1.2 million for the three
months ended September 30, 2000 from expenses of $2.3million in the comparable
period of 1999. These costs increased 11% as a percentage of sales from 74% in
the three months ended September 30, 1999 to 82% for the comparable period in
2000. This increase is primarily attributable to the decrease in service
revenue, reflecting the fixed cost nature of the labor force.
Selling, general and administrative expenses ("SG&A") decreased $1.7
million to $.8 million for the three months ended September 30, 2000, a 50%
decrease from SG&A expenses of $2.4 million in the comparable 1999 period. As a
percentage of net revenues, these expenses decreased to 42% for the three months
ended September 30, 2000 from 43% in the comparable 1999 period. The decrease is
primarily attributable to reduced selling expenses due to the sale of the
network services operation to PentaStar Communications.
In the three months ended September 30, 2000, interest expense decreased by
$76,000 to $100,000 from $176,000 in the comparable 1999 period. The decrease in
interest expense was the result of the terms of the sale of the network services
operation to PentaStar Communications under which PentaStar assumed the majority
of the Company's interest bearing debt and increased interest expense from the
build-up of ISP equipment, primarily financed through capitalized leases.
Net Income from operations before income taxes, including the gain on the
disposition of the network services operation, decreased by $.4 million to $.1
million for the three months ended, September 30 2000. This decrease of 400%
from $.6 million in the comparable 1999 period resulted primarily for the
reasons stated above.
The income tax expense decreased by $.3 million to a benefit of $.1
million for the three months ended September 30, 2000, compared to an expense
of $.2 million for the comparable 1999 period. As the Company re-builds its
equipment and service revenue stream, coupled with building an internet
service revenue stream, operational losses are offsetting gains incurred
10
<PAGE>
on the disposition of the network service segment. The resulting income tax
effect is creating a temporary benefit to the Company.
As a result of the foregoing, net income for the three months ended
September 30, 2000 was $.2 million, a decrease of $.1 million, compared to the
net income for the three months ended September 30, 1999 of $ .3 million.
NINE MONTHS ENDED SEPTEMBER 30, 2000 VS. NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company's net revenues decreased 41% to $8.3 million for the nine
months ending September 30, 2000 from $14.1 million in the comparable 1999
period. Net revenues from equipment sales and related services decreased 21% to
$5.2 million for the nine months ending September 30, 2000 from $6.6 million for
the nine months ended September 30, 1999. Net revenues from network services
sales decreased 100% to $0 for the nine months ending September 30, 2000. These
decreases are due primarily to the continued rebuilding of the Company's sales
force following the sale of the network services operation to PentaStar
Communications and the corresponding transfer of the majority of the sales force
to PentaStar.
A comparison of the periods with respect to allocation of total net
revenues is as follows:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 2000 September 30,1999
<S> <C> <C>
Sales of equipment and related services 63% 47%
Sales of network services 22% 51%
Long distance and other services Less than 1% 2%
Internet Service Revenue 14% --
</TABLE>
Net cost of commissions, contractor fees and related expenses increased
$195,000 to $203,000 for the nine months ended September 30, 2000, from such
expenses of $8,000 in the comparable period of 1999. The increase was primarily
due to an increase in independent contractor fees for network sales. As a
percentage of net revenues, these expenses increased to 2% during the nine
months ended September 30, 2000 from less than 1% during the comparable period
of 1999.
Equipment sales and service costs decreased by $1.5 million to $4.2
million for the nine months ended September 30, 2000, a 26% decrease from
equipment sales and service costs of $5.7 million in the comparable period of
1999. As a percentage of equipment sales, these costs decreased 5 % from 85% for
the nine months ended September 30 1999 to 80% for the comparable period in
2000. The decrease was primarily due to increased efficiency in the purchasing
and operations departments, and fewer sales of data equipment at lower margins.
Selling, general and administrative expenses ("SG&A") decreased $2.4
million to $4.9 million for the nine months ended September 30, 2000, a 33%
decrease from SG&A expenses of $7.3 million in the comparable 1999 period. As a
percentage of net revenues, these expenses increased to 59% during the nine
months ended September 30, 2000, from 52% during the nine months ended September
30, 1999. The increase is related to a combination of decreased revenue and
non-recurring costs associated with the sale of the network services operation
to PentaStar Communications, Inc.
In the nine months ended September 30, 2000, interest expense decreased
by $201,000, or 41%, to $290,000 from $495,000 in the comparable 1999 period,
primarily because the majority of the Company's interest bearing debt was
assumed by PentaStar in connection with the sale of the network services
operation.
Net Income from operations before income taxes, including the gain on the
disposition of the network services operation decreased by $486,000 to a net
income of $136,000 for the nine months ended September, 2000, a decrease of 78%
from $621,000 in the comparable 1999 period, primarily for the reasons stated
above.
The net income tax benefit increased by $.7 million to a tax benefit of $.5
million for the nine months ended September 30, 2000, compared to an income tax
expense of $.2 million for the comparable 1999 period. This increased benefit is
attributable to the net effect of the operating losses of the Company assessed
at a tax rate of 40% and the gain on the disposal of the network services
operation assessed at a tax rate of 20% producing a net tax benefit.
11
<PAGE>
As a result of the foregoing, net income for the nine months ended
September 30, 2000 was $.6 million, an increase of $.2 million from the net
income for the nine months ended September 30, 1999 of $.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the growth of its
Internet infrastructure business and voice and data hardware sales, and also to
support and monitor its operations.
Net cash provided by operating activities was $.9 million for the nine
months ended September 30, 2000 compared to net cash used in operating
activities of $.2 million for the comparable period in 1999. The change was
primarily due a $.8million increase in operating income and deferred taxes for
the nine months ended, September 30, 2000 compared to the comparable 1999
period.
Net cash used in investing activities was $ 1.6 million for the nine months
ended September 30, 2000 compared to $.1 million for the comparable 1999 period.
The use of cash for investing activities was primarily attributable to the
proceeds of the sale of the network services operation and the acquisition of
Global Marketing Concepts, Inc. During the nine moths ended September 30, 2000,
the majority of the $.3 million of capital expenditures for equipment were
utilized in the build-up of the Internet infrastructure business.
Net cash provided by financing activities was $.7 million for the nine
months ended September 30, 2000 compared to net cash used in financing
activities of $.2 million in the comparable 1999 period. The cash provided was
primarily attributable to an increase in short-term borrowings from the line of
credit and proceeds from the exercise of options during the nine months ended
September 30, 2000.
On September 11, 2000, the Company entered into a bridge financing
arrangement with First Merit Bank, N.A. ("First Merit"). The bridge financing
was entered until such time as the Company and First Merit could agree on a
longer-term facility. This temporary financing is comprised of two parts. First
Merit assumed the remainder of the Merrill Lynch debt, as evidenced by a
promissory note in the amount of $1.3 million which becomes due and payable on
December 15, 2000. First Merit also granted the Company a working line of credit
in the amount of $500,000 to support the company's short-term cash flow needs.
The Company and First Merit continue to work together to finalize a longer-term
facility.
Because of the Company's renewed 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.
The Company will 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.
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 effects of the recently completed acquisition of Ameritech by SBC;
- changes in Ameritech's Distributor Agreement and it's effect on the
Company regarding the earn-out period in connection with the sale of
the network services operation to PentaStar Communications;
- 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 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, particularly in light of the increased competition in the
telecommunication and Internet markets in which Telecomm operates;
- the loss or inability to attract key personnel;
- the ability of the Company to secure a reasonably high percentage of
its outstanding accounts receivable;
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- the ability of the Company to sustain sufficient cash flow to meet
operating needs;
- the ability of the Company to perform pursuant to the Asset Purchase
Agreement by and among Telecomm, PentaStar Communications, Inc. and
PentaStar Corporation;
- PentaStar's performance pursuant to the Asset Purchase Agreement by
and among Telecomm, PentaStar Communications, Inc. and PentaStar
Corporation;
- The ability of the Company to secure an acceptable financing facility
with First Merit Bank, NA., or other suitable lender, prior to
December 15, 2000;
- 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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27. Financial Data Schedule
B. REPORTS ON FORM 8-K
Form 8-K filed September 22, 2000
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/ Raymond W. Sheets, Jr.
------------------------------
Raymond W. Sheets, JR.,
Chairman and Acting CEO
Date: November 14, 2000
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