<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: June 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: 1743 W. Quincy Ave., Suite 143 Naperville, IL 60540
(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 July 15, 2000):12,206,559
Transitional Small Business Disclosure Format:
Yes No X
--- ---
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PART I-FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS................ 3
CONSOLIDATED BALANCE SHEETS-
JUNE 30, 2000 (UNAUDITED) AND
DECEMBER 31, 1999 ............................... 4
CONSOLIDATED STATEMENTS OF OPERATIONS-
THREE AND SIX MONTHS ENDED JUNE 30, 2000
AND 1999 (UNAUDITED) ........................... 5
CONSOLIDATED STATEMENTS OF CASH FLOW-
SIX MONTHS ENDED JUNE 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 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS............................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................. 15
</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
June 30, 2000 (unaudited) and December 31, 1999
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Accounts receivable, net of allowance of
$83,132 and $550,000 at June 30, 2000 and
December 31, 1999, respectively $ 1,293,587 $ 5,061,434
Inventories 1,545,160 1,627,597
Contract costs in excess of billings 17,223 -
Prepaid income taxes - 45,147
Prepaid expenses 116,478 383,960
Employee advances (1,843) 2,600
------------------ --------------------
Total current assets 2,970,605 7,120,738
Property and equipment, net 1,199,007 1,666,407
Accounts receivable, net 0 4,121,843
Intangibles and other assets, net 591,538 3,824,454
Investment in Marketable securities 6,461,082 0
Deferred income taxes 0 5,617
------------------ --------------------
Total assets $ 11,222,232 $ 16,739,059
------------------ --------------------
------------------ --------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 213,946 $ 259,224
Line of credit 0 1,868,182
Current portion of long-term debt 300,399 1,038,611
Notes Payable 1,300,000 -
Accounts payable 1,257,871 1,481,996
Accrued payroll and related expenses 267,683 233,067
Accrued commissions and bonus 0 296,751
Customer deposits 646,246 364,491
Deferred income taxes 0 704,898
Income taxes payable 120,899 123,323
Other accrued expenses 381,770 425,081
Deferred revenue 127,897 101,270
------------------ --------------------
Total current liabilities 4,616,711 6,896,894
Long-term debt, less current portion 1,493,153 5,523,543
Deferred Income Taxes 301,522 0
Deferred revenue 47,263 41,677
------------------ --------------------
Total liabilities 6,458,649 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 June 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 882,993 490,802
------------------ --------------------
Total stockholders' equity 4,763,583 4,276,945
------------------ --------------------
Total liabilities and stockholders' equity $ 11,222,232 $ 16,739,059
------------------ --------------------
------------------ --------------------
</TABLE>
4
<PAGE>
Telecomm Industries, Corp. and Subsidiary
Consolidated Statement of Operations (unaudited)
For the three and six months ended June 30, 2000
<TABLE>
<CAPTION>
Three Months ended Three Months ended Six Months ended Six Months ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Network service revenue $ 46,612 $ 2,712,924 $ 1,823,651 $ 4,969,711
Equipment sales and service revenues 2,252,995 1,920,086 3,797,906 3,474,310
Long distance and other revenue (31,411) 74,269 43,302 188,016
Internet service revenue 410,408 751,271
------------------- ----------------- ---------------- ---------------
Net revenues 2,678,604 4,707,279 6,416,130 8,632,037
------------------- ----------------- ---------------- ---------------
Commissions, Contractors fees, and related
expenses 483 3,049 201,541 5,347
Equipment sales and service costs 1,730,321 1,691,983 3,006,904 3,330,030
Long distance and other costs (9,664) 275 - 906
Internet service labor and related expenses 345,167 650,161
------------------- ----------------- ---------------- ---------------
Net cost of services sold 2,066,307 1,695,307 3,858,606 3,336,283
------------------- ----------------- ---------------- ---------------
Selling, general and administrative expenses 1,362,973 2,563,324 4,112,478 4,908,055
------------------- ----------------- ---------------- ---------------
Operating income (750,676) 448,648 (1,554,954) 387,699
Other income (expense)
Gain on disposal of assets (2,751) 0 (2,751) 2,129
Interest expense 5,324 (166,156) (189,908) (318,776)
Income from operations before Income tax
expense and disposition of network
service segment (748,103) 282,492 (1,747,613) 71,052
Gain (loss) on disposition of network
service segment 1,742,279 0 1,742,279
Income from operations before income
tax expense 994,176 282,492 (5,334) 71,052
Income tax (benefit) expense 2,091 113,000 (397,759) 28,400
------------------- ----------------- ---------------- ---------------
Net income 992,085 169,492 392,425 42,652
------------------- ----------------- ---------------- ---------------
------------------- ----------------- ---------------- ---------------
Net income per common share
Basic 0.08 $ 0.01 0.03 $ -
------------------- ----------------- ---------------- ---------------
------------------- ----------------- ---------------- ---------------
Diluted 0.08 $ 0.01 0.03 $ -
------------------- ----------------- ---------------- ---------------
------------------- ----------------- ---------------- ---------------
Average number of common shares outstanding
Basic 12,206,559 12,121,559 12,206,559 12,121,229
------------------- ----------------- ---------------- ---------------
------------------- ----------------- ---------------- ---------------
Diluted 12,206,559 12,771,559 12,206,559 13,141,833
------------------- ----------------- ---------------- ---------------
------------------- ----------------- ---------------- ---------------
</TABLE>
5
<PAGE>
Telecomm Industries, Corp. and Subsidiary
Consolidated Statement of Cash Flows (unaudited)
For the six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
-------------------------------
Cash flows from operating activities:
Net (loss )income $ 392,425 $ 42,652
Adjustments to reconcile net income to net cash provided by (used)
in operating activities:
Depreciation and amortization: 407,348 321,979
Deferred revenue 5,587 (82,522)
Deferred income taxes (587,467) 28,400
Reserve for bad debts 30,000 30,000
Minority Interest (117)
(Gain) loss on sale of fixed assets 2,751 (2,129)
Changes in assets and liabilities:
Accounts receivable- trade 543,667 1,359,270
Accounts receivable- long term portion (382,032) (415,181)
Inventories 82,437 (473,050)
Contract billings in excess of costs (17,223)
Prepaid expenses 43,995 (40,440)
Prepaid income taxes 45,147 -
Employee advances 4,443 53,169
Accounts payable- trade (125,999) (661,386)
Accrued payroll and related expenses 184,929 (80,400)
Accrued commissions and bonus (169,422) (527,062)
Accrued contractor fees (22,454)
Customer deposits 281,755 373,178
Accrued taxes payable 49,327
Deferred income taxes -
Income taxes payable (2,424) -
Other accrued expenses (82,982) (325,855)
Deferred revenue 26,627 253,118
-------------- ----------------
Total adjustments 340,347 (211,365)
-------------- ----------------
Net cash provided by (used in) operating activities 732,772 (168,713)
-------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (238,988) (76,731)
Proceeds from sale of property and equipment (2,751) 2,129
Purchase acquisitions, net of cash acquired of $6062 (2000)
and $0 (1999) (245,874)
Decrease (increase) in other assets 5,617
Proceeds from sale of network service segment (830,581)
-------------- ----------------
Net cash used in investing activities (1,312,577) (74,602)
-------------- ----------------
Cash flows from financing activities:
Payments on long-term debt (389,816) (368,544)
Net (payments) borrowings under line of credit 920,452 714,368
Cash overdraft (45,278) (102,509)
Proceeds from the exercise of stock options 94,447
-------------- ----------------
Net cash used in financing activities 579,806 243,315
-------------- ----------------
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 $ 189,908 $ 318,776
-------------------------------
-------------------------------
Cash paid for income taxes $ 5,059 $ -
-------------------------------
-------------------------------
</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 June 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.
7
<PAGE>
Reconciliation of Numerators and Denominators of the Basic
and Diluted EPS Computations
<TABLE>
<CAPTION>
For the three month period ended June 30, 2000
---------------------------------------------------
Gain Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------- --------------
<S> <C> <C> <C>
Net Income $ 392,425
Basic EPS:
Gain available to common stockholders;
weighted average common stock
outstanding 392,425 12,206,559 $ .08
---------------- -------------- --------------
Diluted EPS:
Gain available to stockholders of common
shares and common stock equivalents $ 392,425 12,206,559 $ .08
---------------- -------------- --------------
---------------- -------------- --------------
<CAPTION>
For the six month period ended June 30, 1999
---------------------------------------------------
Gain Shares Per-Share
(Numerator) (Denominator) Amount
---------------- -------------- --------------
<S> <C> <C> <C>
Net Income $ 42,652
Basic EPS:
Gain available to common stockholders;
weighted average common stock
outstanding 42,652 12,121,559 $ .00
---------------- -------------- --------------
Diluted EPS:
Gain available to stockholders of common
shares and common stock equivalents $ 42,652 12,121,559 $ .00
---------------- -------------- --------------
---------------- -------------- --------------
</TABLE>
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.
The net purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 41,520
Property and equipment 12,099
Goodwill 130,728
Liabilities assumed (119,230)
------------------
Net purchase price 65,117
Less: NetVision common stock issued 117
------------------
Cash paid for acquisition $ 65,000
------------------
------------------
</TABLE>
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.
The net disposition was allocated as follows:
<TABLE>
<S> <C>
CONSIDERATION PAID OR TO BE RECEIVED FROM PENTASTAR:
------------------------------------------------------------
PentaStar Stock (PNTA)
279,000 Shares @ 23.158 per share $ 6,461,082
Cash to be received 302,145
------------
6,763,227
------------
Assumption of long-term debt and line of credit from
Merrill Lynch, net of loan acquisition cost of $122,528 5,744,893
Assumption of current liabilities 385,424
------------
TOTAL CONSIDERATION RECEIVED 12,893,544
------------
LESS ASSETS SOLD OR TRANSFERRED
------------------------------------------------------------
Current Network service accounts receivable net of allowances for
uncollectible services of $250,000 3,496,325
Long-term Network service accounts receivable 4,503,875
Fixed assets (net of accumulated depreciation of $552,445.) 419,539
Other current assets 223,488
------------
TOTAL ASSETS TRANSFERRED 8,643,227
------------
NET CONSIDERATION: 4,250,317
REDUCTION IN INTANGIBLE ASSETS:
------------------------------------------------------------
Goodwill net of accumulated amortization of $566,337 3,110,529
Network accounting software development costs 125,350
------------
NET INCREASE IN ASSET VALUE 1,014,438
------------
------------
</TABLE>
<TABLE>
<CAPTION>
The effect of the disposition on earnings was allocated as follows:
For the threes For the six
months ended months ended
June 30, 2000 June 30, 2000
--------------- ---------------
<S> <C> <C>
Income from continuing operations before income taxes $ (750,676) $ (1,747,613)
Benefit (provision) for income taxes 300,000 697,277
Income from continuing operations (450,676) (1,050,336)
DISCONTINUED OPERATIONS:
Income (loss) from operations of discontinued Network service
segment (less applicable income taxes of $299,518) 1,442,761 1,442,761
Loss on disposal of Network service segment, including provision
of $0 for operating loss during phase-out period 0
----------- -------------
Net income: $ 992,085 $ 392,425
=========== =============
NET INCOME PER COMMON SHARE-BASIC AND DILUTED:
Income from continuing operation $ (0.04) $ (0.09)
=========== =============
Income from discontinued operation $ 0.12 $ 0.12
=========== =============
Net income: $ 0.08 $ 0.03
=========== =============
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 12,206,559 12,206,559
=========== =============
Diluted 12,206,559 12,206,559
=========== =============
</TABLE>
8
<PAGE>
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 June 30, 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. SUBSEQUENT EVENTS - 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. On August 3, 2000, the Company filed an 8-K and
included the July 19, 2000 press release as an exhibit thereto.
7. Reclassification - Certain reclassifications have been made to the
1999 consolidated financial statements to conform to the 2000 method
of presentation.
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
9
<PAGE>
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.
THREE MONTHS ENDED JUNE 30, 2000 VS. THREE MONTHS ENDED JUNE 30, 1999
The Company's net revenues decreased 43% to $2.7 million for the three
months ended June 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:
10
<PAGE>
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
<S> <C> <C>
Sales of equipment and service revenue 84% 41%
Sales of network services < 1% 57%
Other revenue < 1% 2%
Internet Services Revenue 15% 0%
</TABLE>
Net revenues from equipment sales and related services increased 17% to
$2.3 million during the three months ended June 30, 2000 from $1.9 million in
the three months ended June 30, 1999. The increase is related to an increased
emphasis on equipment sales and service following the sale of the network
services operation.
Net revenues from network services sales decreased $2.7 million to
$46,612 for the three months ended June 30, 2000 from $2.7 million for the three
months ended June 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 $105,000 to
($31,000) for the three months ended June 30, 2000 from $74,000 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 June 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
$2,500 for the three months ended June 30, 2000, from expenses of $3,000 in the
comparable period of 1999. The decrease was primarily due to a decrease in
independent contractor fees for network service sales. The decrease is
attributable to the sale of the network services operation to PentaStar
Communications.
Equipment sales and service costs remained consistent at $1.7 million
for the three months ended June 30, 2000 and in the comparable period of 1999.
Selling, general and administrative expenses ("SG&A") decreased
$1.2 million to $1.4 million for the three months ended June 30, 2000, a 46%
decrease from SG&A expenses of $2.6 million in the comparable 1999 period. As
a percentage of net revenues, these expenses decreased to 50% for the three
months ended June 30, 2000 from 64% 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 June 30, 2000, interest expense decreased by
$171,000 to ($5,324) from $166,156 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.
Net Income from operations before income taxes, including the gain
on the disposition of the network services operation, increased by $.7
million to $1.0 million for the three months ended,
11
<PAGE>
June 30 2000, an increase of 400% from $.2 million in the comparable 1999
period primarily for the reasons stated above.
The income tax expense decreased by $111,000 to an expense of $2,000
for the three months ended June 30, 2000, compared to $113,000 for the
comparable 1999 period, due to the sale of the network services operation to
PentaStar Communications.
As a result of the foregoing, net income for the three months ended
June 30, 2000 was $1.0 million, an increase of $.8 million, compared to the net
income for the three months ended June 30, 1999 of $ .2 million.
SIX MONTHS ENDED JUNE 30, 2000 VS. SIX MONTHS ENDED JUNE 30, 1999
The Company's net revenues decreased 26% to $6.4 million for the six
months ending June 30, 2000 from $8.6 million in the comparable 1999 period. Net
revenues from equipment sales and related services increased 9% to $3.8 million
for the six months ending June 30, 2000 from $3.5 million for the six months
ended June 30, 1999. Net revenues from network services sales decreased 63% to
$1.8 million for the six months ending June 30, 2000.
A comparison of the periods with respect to allocation of total net
revenues is as follows:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30,1999
<S> <C> <C>
Sales of equipment and related services 60% 40%
Sales of network services 28% 58%
Long distance and other services < 1% 1%
Internet Service Revenue 11% --
</TABLE>
Net cost of commissions, contractor fees and related expenses increased
$195,000 to $200,000 for the six months ended June 30, 2000, from such expenses
of $5,000 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 3% during the six months ended June
30, 2000 from less than 1% during the comparable period of 1999.
Equipment sales and service costs decreased by $.3 million to $3
million for the six months ended June 30, 2000, a 10% decrease from equipment
sales and service costs of $3.3 million in the comparable period of 1999. The
decrease was primarily due to increased efficiency in the purchasing and
operations departments.
Selling, general and administrative expenses ("SG&A") decreased $.8
million to $4.1 million for the six months ended June 30, 2000, a 16% decrease
from SG&A expenses of $4.9 million in the comparable 1999 period. As a
percentage of net revenues, these expenses increased to 64% during the six
months ended June 30, 2000, from 57% during the six months ended June 30, 1999,
primarily as a result of the sale of the network services operation to PentaStar
Communications, Inc.
12
<PAGE>
In the six months ended June 30, 2000, interest expense decreased by
$129,000, or 40%, to $190,000 from $319,000 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 $76,000 to
a net loss of $5,000 for the six months ended June 30, 2000, a decrease of
108% from $71,000 in the comparable 1999 period, primarily for the reasons
stated above.
The net income tax benefit increased by $426,000 to $398,000 for the
six months ended June 30, 2000, compared to an income tax expense of $28,400 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.
As a result of the foregoing, net income for the six months ended June
30, 2000 was $392,425, an increase of $349,773 from the net income for the six
months ended June 30, 1999 of $42,700.
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 $.7 million for the
six months ended June 30, 2000 compared to net cash used in operating
activities of $.2 million for the comparable period in 1999. The change was
primarily due to a decrease of $.9 million in accounts receivable and
customer deposits for the six months ended June 30, 2000 compared to a
decrease of $1.8 million in accounts receivable and customer deposits for the
six months ended June 30, 1999. This was offset by a $.6 million increase in
deferred taxes, a $.1 million decrease in inventory, a $.1 million increase
in prepaid expenses, a $.1 million decrease in accrued expenses, and a $.4
million increase in operating income for the six months ended, June 30, 2000
compared to a $1.4 million increase in accrued and trade payables in the
comparable 1999 period.
Net cash used in investing activities was $ 1.4 million for the six
months ended June 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.
Net cash provided by financing activities was $.6 million for the
six months ended June 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 six months ended June 30, 2000.
As of December 31, 1999, the Company was not in compliance with the
established year-end loan covenants for the credit facilities provided by
Merrill Lynch Business Financial Services. The two covenants involve Minimum Net
Cash Flow and Total Liabilities to EBITDA. These covenants were set based upon
the use of a revolving credit line of $3,800,000, which expired in 1999, to
complete three specific acquisitions that did not occur. The majority of the
Company's debt with Merrill Lynch was assumed by PentaStar in connection with
the sale
13
<PAGE>
of the network services operation. The balance of the Merrill Lynch debt of
$1.3 million is due and payable September 30, 2000.
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 commission payment plan and/or its
billing and record system, adversely affecting the Company's
working capital and long-term accounts receivable;
- changes in Ameritech's Distributor Agreement;
- 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;
- 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;
- general economic conditions, and other risk factors discussed
herein.
14
<PAGE>
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of Stockholders of the Company was held on June 30,
2000.
1. The stockholders voted to elect six Class I Directors to serve for a
one-year term expiring at the Annual Meeting of Stockholders in 2001,
with the following vote:
<TABLE>
<CAPTION>
Name For Abstain
---- --- ---------
<S> <C> <C>
Steven W. Smith 11,440,570 184,776
Raymond W. Sheets, Jr. 11,510,570 114,776
Paul J. Satterthwaite 11,351,370 273,976
David L. Gruber 10,877,735 747,611
Michael A. Keresman, III 11,357,670 267,676
E. Allen Schuler 11,510,570 114,776
</TABLE>
2. The Stockholders also voted to approve the sale of the network services
operation with the following vote:
<TABLE>
<CAPTION>
Shares
For Against Abstain Non-Voted
--- ------- ------- ---------
<S> <C> <C> <C>
7,295,998 116,376 20,635 4,192,337
</TABLE>
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 June 24, 2000
Form 8-K filed August 3, 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/ Paul J. Satterthwaite
----------------------------
Paul J. Satterthwaite, President and CEO
Date: August 14, 2000
15
