<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: March 31, 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.)
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: (as of May 12, 2000): 12,206,559
Transitional Small Business Disclosure Format:
Yes No X
---- ----
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
INDEX
PART I-FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets-
March 31, 2000 and December 31, 1999 4
Consolidated Statements of Operations-
three months ended March 31, 2000
and 1999 5
Consolidated Statements of Cash Flow-
three months ended March 31, 2000 and
1999 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 14
</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
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 2000 DECEMBER 31, 1999
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable, net of allowance of $572,000 and
$550,000 at March 31, 2000 and December 31, 1999, respectively $ 4,717,672 $ 5,061,434
Inventories 1,763,385 1,627,597
Prepaid income taxes - 45,147
Prepaid expenses 538,979 383,960
Employee advances 2,132 2,600
------------------- --------------------
Total current assets 7,022,168 7,120,738
Property and equipment, net 1,660,119 1,666,407
Accounts receivable, net 3,939,950 4,121,843
Intangibles and other assets, net 3,886,133 3,824,454
Deferred income taxes 405,467 5,617
------------------- --------------------
Total assets $ 16,913,837 $ 16,739,059
=================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 198,298 $ 259,224
Line of credit 2,428,072 1,868,182
Current portion of long-term debt 1,059,967 1,038,611
Notes Payable 40,000 -
Accounts payable 1,607,248 1,481,996
Accrued payroll and related expenses 199,388 233,067
Accrued commissions and bonus 234,171 296,751
Customer deposits 756,226 364,491
Deferred income taxes 704,898 704,898
Income taxes payable 123,399 123,323
Other accrued expenses 339,886 425,081
Deferred revenue 187,916 101,270
------------------- --------------------
Total current liabilities 7,879,469 6,896,894
Long-term debt, less current portion 5,277,609 5,523,543
Deferred revenue 39,974 41,677
------------------- --------------------
Total liabilities 13,197,052 12,462,114
Stockholders' equity:
Common stock $.01 par value; authorized - 20,000,000 shares; issued
12,700,746 and12,670,746; outstanding 12,171,559 and 12,141,559 at March
31, 2000 and December 31, 1999,
respectively 127,008 126,708
Additional paid-in capital 4,016,147 3,976,947
Treasury stock, 529,187 shares at cost (317,512) (317,512)
(Deficit) Retained Earnings (108,858) 490,802
------------------- --------------------
Total stockholders' equity 3,716,785 4,276,945
------------------- --------------------
Total liabilities and stockholders' equity $ 16,913,837 $ 16,739,059
=================== ====================
</TABLE>
See notes to unaudited consolidated financial statements
4
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TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------ ------------
<S> <C> <C>
Network service revenue $ 1,777,039 $ 2,256,787
Equipment sales and service revenues 1,544,911 1,554,224
Long distance and other revenue 415,576 113,747
------------ ------------
Net revenues 3,737,526 3,924,758
------------ ------------
Commissions, contractor fees and related expenses 201,058 132,493
Equipment sales and service costs 1,581,577 1,507,852
Long distance and other costs 9,664 631
------------ ------------
Net cost of commissions, contractor fees and related expenses 1,792,299 1,640,976
------------ ------------
Selling, general and administrative expenses 2,749,505 2,344,731
Operating (loss) (804,278) (60,949)
Other income (expense):
Gain on disposal of assets - 2,129
Interest expense (195,232) (152,620)
------------ ------------
(195,232) (150,491)
------------ ------------
(Loss) from operations before income tax (benefit) (999,510) (211,440)
Income tax (benefit) (399,850) (84,600)
------------ ------------
Net (loss) $ (599,660) $ (126,840)
============ ============
Net (loss) per common share:
Basic $ (0.05) $ (0.01)
============ ============
Diluted $ (0.05) $ (0.01)
============ ============
Average number of common shares outstanding:
Basic 12,151,229 12,121,559
============ ============
Diluted 12,151,229 12,121,559
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
TELECOMM INDUSTRIES CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (599,660) $ (126,840)
Adjustments to reconcile net (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 198,372 159,405
Deferred revenue (1,703) (12,709)
Deferred income taxes (399,850) (84,600)
Reserve for bad debt 15,000 14,100
(Gain) on sale of property and equipment - (2,129)
Minority interest (117) -
Changes in assets and liabilities:
Accounts receivable, net 364,220 1,143,241
Accounts receivable, net - long-term portion 181,893 (154,721)
Inventories (135,788) (205,104)
Prepaid income taxes 45,147 -
Prepaid expenses (155,019) (4,738)
Employee advances 468 31,264
Accounts payable 114,573 (360,239)
Accrued payroll and related expenses (47,709) 39,474
Accrued commissions and bonus (62,580) (384,778)
Accrued contractor fees - (10,510)
Customer deposits 376,098 182,232
Income taxes payable 76 -
Other accrued expenses (92,337) (244,063)
Deferred revenue 54,904 118,018
---------------- ----------------
Total adjustments 455,648 224,143
---------------- ----------------
Net cash (used in) provided by operating activities (144,012) 97,303
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (119,290) (55,782)
Proceeds from sale of property and equipment - 2,129
Purchase acquisitions, net of cash acquired of $6,062 (2000) and $0 (1999) (58,938) -
Decrease (increase) in other assets 8,354 -
---------------- ----------------
Net cash (used in) investing activities (169,874) (53,653)
---------------- ----------------
Cash flows from financing activities:
Payments on long-term debt (252,108) (153,774)
Proceeds from issuance of long-term debt 27,530 -
Net borrowings under line of credit 559,890 385,638
Cash overdraft (60,926) (275,514)
Proceeds from exercise of stock options 39,500 -
---------------- ----------------
Net cash provided by (used in) financing activities 313,886 (43,650)
---------------- ----------------
Net change in cash - -
Cash at beginning of period - -
---------------- ----------------
Cash at end of period $ - $ -
================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 171,687 $ 143,835
================ ================
Cash paid for income taxes $ 5,059 $ -
================ ================
Non-cash investing and financing activities:
Common stock issued for purchase acquisitions $ - $ -
================ ================
Notes issued for purchase acquisitions $ - $ -
================ ================
</TABLE>
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 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 March 31, 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.
<TABLE>
<CAPTION>
Reconciliation of Numerators and Denominators of the Basic
and Diluted EPS Computations
For the three month period ended March 31, 2000
--------------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- --------------- --------------
<S> <C> <C> <C>
Net loss $ (599,660)
Basic EPS:
Loss available to common stockholders;
weighted average common stock outstanding (599,660) 12,151,229 $ (.05)
---------------- --------------- --------------
Diluted EPS:
Loss available to stockholders of common
shares and common stock equivalents $ (599,660) 12,151,229 $ (.05)
================ =============== ==============
</TABLE>
<TABLE>
<CAPTION>
For the three month period ended March 31, 1999
--------------------------------------------------
Loss Shares Per-Share
(Numerator) (Denominator) Amount
---------------- --------------- --------------
<S> <C> <C> <C>
Net loss $ (126,840)
Basic EPS:
Loss available to common stockholders;
weighted average common stock outstanding (126,840) 12,121,559 $ (.01)
---------------- --------------- --------------
Diluted EPS:
Loss available to stockholders of common
shares and common stock equivalents $ (126,840) 12,121,559 $ (.01)
================ =============== ==============
</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.
<TABLE>
<CAPTION>
The net purchase price was allocated as follows:
<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. SUBSEQUENT EVENTS - On April 15, 2000, the Company entered into a
purchase agreement with PentaStar Communications, Inc. (NASDAQ: PNTA)
and its newly-formed, wholly owned acquisition subsidiary, PentaStar
Corporation. The Agreement provides that the Company will sell
substantially all of the assets of the Company's Network Services
Operation (As referred in the Company's Proxy Statement
incorporated by reference herein) to PentaStar Communications, Inc.
The transaction will close upon approval by the shareholders of the
Company and satisfaction of the other terms of the purchase
agreement.
Consideration paid by PentaStar to the Company in connection with the
transaction includes: cash in the amount of $900,000; a number of
shares of PentaStar Common Stock, which reflects an aggregate fair
market value as of the anticipated closing date of the transaction of
$6,200,000; the assumption of the certain liabilities (as defined in
the purchase agreement) in an approximate amount of $6,500,000; and an
Earn-Out Amount payable pursuant to Section 2.3(b) of the purchase
agreement, which will be valued based upon the Network Operation's
performance from April 1, 2000 through March 31, 2001. The
potential earn-out amount for the entire measurement period is
approximately $9 million, with the entire purchase price not to
exceed $22.5 million in total consideration.
Additionally, on May 4, 2000, the Company announced the nomination of
two additional directors to serve on the Company's Board of Directors.
The individuals would assume their respective duties immediately
following their successful election to the Board of Directors at the
Company's Annual Meeting, currently scheduled for June 30, 2000. The
directors nominated to the Board are: Raymond Sheets, Jr.; Steven W.
Smith; David L. Gruber; Paul J. Satterthwaite; Michael A. Keresman,
III; and E. Allen Schuler. All but Mr. Keresman and Mr. Schuler are
incumbent directors.
The Company hereby incorporates by reference the recently filed
Definitive Proxy Statement on Form 14(a) currently on file with the
Securities and Exchange Commission which provides additional detail
with regard to the described transaction with PentaStar
Communications, and the director nominees.
8
<PAGE>
5. 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 is one of the nation's largest Regional Bell Operating
Company ("RBOC") distributors. The Company sells voice, data, video and
telephone information network solutions to business customers throughout its
five-state region. Ameritech and BellSouth are Telecomm's primary RBOC
partners. In addition, Telecomm represents numerous manufacturers of voice
and data equipment by marketing, installing and maintaining their
telecommunications equipment. Telecomm also operates as a value-added
reseller ("VAR") of data equipment. By definition, a VAR is a company that
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 of 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.
Telecomm operates a full service Internet Service Provider through its
Delaware subsidiary, NetVision.Com Inc. ("NetVision") in the greater Louisville
metropolitan area. NetVision focuses on web hosting, e-commerce and other
business to business applications such as web design and development under the
DigiCove brand name. Additionally, NetVision's ability to provide dedicated
high-speed Internet access to its customer base fits strategically with
Telecomm's ability to provide the necessary circuits and equipment. Currently,
NetVision has a Point of Presence (POP) in Louisville, Kentucky; Jeffersonville,
Indiana; Columbus, Indiana; New Albany, Indiana; and Bloomington, Indiana. An
Indianapolis Point of Presence should be established early in the 2nd quarter of
2000. Telecomm will continue to expand the service area of NetVision and the
equipment installation and service business through internal growth and
acquisitions. These business units provide the perfect platform for the launch
of Internet infrastructure initiatives.
Telecomm derives revenues primarily from RBOC commissions and equipment
and service sales. The diversification process is ongoing. The Company continues
to provide communication solutions to the customer by selling Ameritech products
and services along with voice and data equipment. The Company is currently
focusing on increasing equipment sales along with developing and growing its
newly created subsidiary NetVision in the year 2000. Management continues to
evaluate acquisition candidates that will enable Telecomm to regain its growth
and profitability in the telecommunications marketplace.
On April 15, 2000, the Company entered into a purchase agreement
with PentaStar Communications, Inc. (NASDAQ: PNTA) and its newly-formed,
wholly-owned acquisition subsidiary, PentaStar Corporation. The Agreement
provides that the Company will sell substantially all of the assets of the
Company's Network Services Operation to PentaStar Communications, Inc. The
transaction will close upon approval by the shareholders of the Company and
satisfaction of the other terms of the purchase agreement.
The Company intends to use the proceeds of the sale to expand its
Internet infrastructure business. Telecomm has a significant base of
customers who have purchased telecommunications and data communications
equipment over time. Those customers continue to depend upon the Company for
the maintenance of these systems, and over the next few years, most or all of
these customers will require connectivity of those systems to the Internet.
The Company will be able to provide that connectivity through its subsidiary,
NetVision.
YEAR 2000 TECHNOLOGY
Telecomm incurred no material costs and made no material expenditures
to modify its computer information systems in anticipation of the proper
processing of transactions relating to the year 2000 and beyond. To date, the
Company has experienced no materially significant
9
<PAGE>
problems as a result of the change of the Millennium, but continues to monitor
the systems for any delayed effect.
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
The Company's net revenues decreased 5% to $3.7 million for the three
months ended March 31, 2000 from $3.9 million in the comparable 1999 period. The
decrease is attributable to a $.5 million decrease in network service revenue
offset in part by a $.3 million increase in long distance and other revenue. A
comparison of the periods with respect to allocation of total net revenues is as
follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 2000 March 31, 1999
<S> <C> <C>
Sales of equipment and service revenue 41% 40%
Sales of network services 48% 57%
Long distance and other services 11% 3%
</TABLE>
Net revenues from equipment sales and related services decreased 6% to
$1.5 million during the three months ended March 31, 2000 from $1.6 million in
the three months ended March 31, 1999. The decrease is attributable to the
continued development and training of newly hired sales personnel and factors
relating to the increased competition in the marketplace.
Net revenues from network services sales decreased 18% to $1.8 million
for the three months ended March 31, 2000 from $2.3 million for the three months
ended March 31, 1999. The decrease in network sales was due, in part, by the
continued restructuring and development of the sales department and increase in
the amount of pending orders that had not yet been installed by Ameritech at the
quarter ended March 31, 2000.
Net revenue from long distance and other revenue increased by $.3
million to $.4 million for the three months ended March 31, 2000 from $.1
million in the comparable period for 1999. The 300% increase was due to revenues
derived from the newly acquired subsidiary, NetVision.
Net cost of commissions, contractor fees and related expenses increased
$.2 million to $1.8 million for the three months ended March 31, 2000, a 13%
increase from said expenses of $1.6 million in the comparable period of 1999.
The increase was primarily due to an increase in independent contractor fees for
network service sales and an increase in warranty labor and service charges to
support sales in previous periods. As a percentage of net revenues, these
expenses increased to 49% during the three months ended 2000 from 41% during the
comparable 1999 period.
Selling, general and administrative expenses ("SG&A") increased $.4
million to $2.7 million for the three months-ended March 31, 2000, a 17%
increase from SG&A expenses of $2.3 million in the comparable 1999 period. As a
percentage of net revenues, these expenses increased to 73% for the three months
ended March 31, 2000 from 59% in the comparable 1999 period. The increase is due
to expenses incurred by NetVision, a decrease in sales and the write-off of
prepaid draws of terminated sales personnel.
In the three months ended March 31, 2000, interest expense increased by
$40,000 or 27%, to $190,0000 from $150,000 in the comparable 1999 period. The
increase in interest
10
<PAGE>
expense was primarily a result of increased borrowings under the Company's
credit facility in order to support its working capital needs of equipment sales
and long-term receivables and acquisition related expenses incurred by NetVision
during the end of 1999 and first quarter of 2000.
Net loss from operations before income taxes increased by $.8 million
to $1.0 million for the three months ended March 31, 2000, an increase of 400%
from $.2 million in the comparable 1999 period primarily for the reasons stated
above.
The income tax benefit increased by $.3 million to a benefit of
$.4 million for the three months ended March 31, 2000, compared to $ .1 million
for the comparable 1999 period, due to decreased earnings.
As a result of the foregoing, the net loss for the three months ended
March 31, 2000 was $.6 million, an increase of $.5 million, compared to the net
loss for the three months ended 1999 of $ .1 million.
Telecomm continues its focus on increasing and developing the sales
department for the year 2000. Management believes that while these changes have
negatively impacted the profitability for the period ended March 31, 2000, the
Company will be better positioned to achieve growth and enhanced profitability
in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund the growth of
long-term network services receivables, voice and data hardware sales, the
infrastructure to support and monitor the operations, and new acquisitions.
Net cash used in operating activities was $.1 million for the three
months ended March 31, 2000 compared to net cash provided by operating
activities of $.1 million for the comparable period in 1999. The change was
primarily due to a decrease of $.5 million in accounts receivable for the
three months ended March 31, 2000 compared to a $1.0 million decrease in trade
accounts receivable in the comparable 1999 period, and a $.4 million increase in
customer deposits for the three months ended March 31, 2000 compared to a $.2
million increase in the comparable 1999 period. This was offset by a $.4 million
increase in deferred taxes, a $.1 million increase in inventory, a $.2 million
increase in prepaid expenses, and a $.1 million decrease in accrued expenses for
the three months ended March 31, 2000 compared to a $.1 million increase in
deferred taxes, a $.2 million increase in inventory and a $.6 million decrease
in accrued expenses for the comparable 1999 period. This change is attributable
to the Company's increased emphasis on resolving and collecting the Ameritech
and other trade receivables.
Net cash used in investing activities was $.2 million for the three
months ended March 31, 2000 compared to $54,000 for the comparable 1999 period.
The use of cash for investing activities was primarily attributable to the
purchase of property and equipment of $.1 million, a nominal increase from the
comparable period in 1999, and $59,000 for acquisitions. This is consistent with
1999, except for the cash used for acquisitions in 2000.
Net cash provided by financing activities was $.3 million for the
three months ended March 31, 2000 compared to net cash used in investing
activities of $44,000 in the comparable 1999 period. The cash provided was
primarily attributable to an increase in short-term
11
<PAGE>
borrowings from the line of credit and proceeds from the exercise of options
during the three months ended March 31, 2000. In the comparable 1999 period, net
cash used was attributable to the decrease in long-term debt.
The 1999 Ameritech agreement simplified its payment approach using
standard flat rates on voice and usage products which enhanced working capital
by reducing the delay in collection. The growing annuity stream of the Ameritech
long-term receivables should begin to help offset this situation in future
years, however, management believes cash flow will continue to be affected as
long as the existing Ameritech commission structure remains as indicated above.
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. Merrill Lynch waived
these covenants for the period ending March 31, 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 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.
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 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;
12
<PAGE>
- 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;
- the ability of the Company to secure a reasonably high percentage
of its outstanding accounts receivable;
- the satisfaction of the pre-closing covenants in the Asset
Purchase Agreement effective April 15, 2000 by and between the
Company, PentaStar Corporation and PentaStar Communications,
Inc., including the affirmative vote of a majority of the
shareholders at the Company's annual meeting.
- the ability of the Company to complete the pending transaction
with PentaStar Communications, Inc.
- the ability of the Company to sustain sufficient cash flow to
meet operating needs;
- the ability of the Company to meet future loan covenants or
obtain additional waivers from Lender; 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.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
27. Financial Data Schedule
B. REPORTS ON FORM 8-K
None
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
And:/s/ Mark A.Travi
---------------------------
Mark Travi, Chief Financial and
Accounting Officer
Date: May 15, 2000
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 4,717,672
<ALLOWANCES> 0
<INVENTORY> 1,763,385
<CURRENT-ASSETS> 7,022,168
<PP&E> 3,049,621
<DEPRECIATION> 1,389,502
<TOTAL-ASSETS> 16,913,837
<CURRENT-LIABILITIES> 7,879,469
<BONDS> 5,277,609
0
0
<COMMON> 127,008
<OTHER-SE> 3,589,777
<TOTAL-LIABILITY-AND-EQUITY> 16,913,837
<SALES> 1,544,911
<TOTAL-REVENUES> 3,737,526
<CGS> 1,792,299
<TOTAL-COSTS> 1,792,299
<OTHER-EXPENSES> 2,749,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 195,232
<INCOME-PRETAX> (999,510)
<INCOME-TAX> (399,850)
<INCOME-CONTINUING> (599,660)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (599,660)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
