FORM 10-QSBA
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________________
Commission file number 000-26011
INTERNET CABLE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA
--------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
87-0540291
------------------------------------
(I.R.S. Employer Identification No.)
1463 DUNWOODY DRIVE, WEST CHESTER, PENNSYLVANIA 19380
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 647-0400
---------------------------------------------------
(Registrant's telephone number, including area code)
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of each of the issuer's classes of common
stock, as of July 31, 2000, was 10,224,594 shares, all of one class (common
stock), par value $.001 per share.
Transitional Small Business Disclosure Format (check one);
Yes No X
--- ---
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNET CABLE CORPORATION
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
June 30, 2000 December 31, 1999
------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets
Cash $ 343,107 $ 1,531,708
Notes receivable -- 40,000
Accounts receivable, net of
allowance of $251,878 and $0 1,563,259 2,385
Unbilled receivables 924,670 --
Inventories 219,147 29,200
Prepaid expenses and other current assets 176,006 --
Deposits on Acquisitions -- 5,652,576
------------ ------------
Total current assets 3,226,189 7,255,869
Property and equipment - at cost,
less accumulated depreciation of
$528,079 and $26,151 1,044,563 52,993
Intangibles, net of accumulated amortization of
$757,804 and $0 6,811,497 --
Other assets 20,106 2,000
------------ ------------
$ 11,102,355 $ 7,310,862
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable, stockholder $ 117,842 $ 130,000
Accounts payable and accrued expenses 1,989,411 623,946
Current portion of capital leases 61,068 --
Notes payable, net of unamortized discount -- 249,864
------------ ------------
Total current liabilities 2,168,321 1,003,810
------------ ------------
Long-term liabilities
Long-term capital leases 74,454 --
------------ ------------
Total liabilities 2,242,775 1,003,810
------------ ------------
Stockholders' equity
Common stock, $.001 par value, 50,000,000 shares authorized,
10,197,757 and 9,270,311 shares issued and outstanding 10,198 9,269
Additional paid-in capital 18,432,428 13,493,287
Accumulated deficit (9,583,046) (7,195,504)
------------ ------------
Total stockholders' equity 8,859,580 6,307,052
------------ ------------
$ 11,102,355 $ 7,310,862
============ ============
The accompanying notes are an integral part of these condensed financial statements
</TABLE>
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Sales and services $ 2,749,372 $ 5,555
Cost of sales
Direct costs 1,229,150 30,197
Indirect costs 718,209 --
Depreciation 36,574 --
------------ ------------
Gross operating margin/(loss) 765,439 (24,642)
Operating costs:
Selling, general and administrative expenses 1,551,206 1,060,696
Depreciation 14,433 (14,752)
(Gain) loss on disposal of assets (250) --
Amortization of intangibles 393,740 --
------------ ------------
1,959,129 1,045,944
------------ ------------
Loss from operations (1,193,690) (1,070,586)
Interest income (expense) 19,561 (10,500)
------------ ------------
Net loss (1,174,129) (1,081,086)
Accumulated deficit, beginning of period (8,408,917) (2,711,063)
------------ ------------
Accumulated deficit, end of period $ (9,583,046) $ (3,792,149)
============ ============
Weighted average common shares
Outstanding 10,188,740 7,703,861
Basic and diluted loss per share $ (.12) $ (.14)
============ ============
The accompanying notes are an integral part of these condensed financial statements.
</TABLE>
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Sales and services $ 5,161,943 $ 21,096
Cost of sales
Direct costs 2,273,720 50,445
Indirect costs 1,369,784 --
Depreciation 70,100 --
------------ ------------
Gross operating margin/(loss) 1,448,339 (29,349)
Operating costs:
Selling, general and administrative expenses 2,800,311 1,204,739
Depreciation 32,710 (5,072)
Loss on disposal of assets 52,743 --
Amortization of intangibles 757,804 --
------------ ------------
3,643,568 1,199,667
------------ ------------
Loss from operations (2,195,229) (1,229,016)
Interest income (expense) 22,968 (12,670)
Other income (expenses) -- (194)
------------ ------------
Pretax loss (2,172,261) (1,241,880)
Income tax benefit 184,855 --
------------ ------------
Net loss before extraordinary item (1,987,406) (1,241,880)
Extraordinary item - charge for early extinguishment of debt 400,136 --
Net loss (2,387,542) (1,241,880)
Accumulated deficit, beginning of period (7,195,504) (2,550,269)
------------ ------------
Accumulated deficit, end of period $ (9,583,046) $ (3,792,149)
============ ============
Weighted average common shares outstanding 10,091,064 7,655,653
Basic and diluted loss per share $ (0.24) $ (0.16)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities $(1,704,835) $ (337,711)
Cash flows from investing activities
Notes receivable 40,000 (25,000)
Release of deposits on acquisitions 5,652,576 --
Acquisition of property and equipment (365,938) (12,213)
Loans receivable, employee (22,941) --
Business acquisitions, net of cash balances acquired (5,469,414) --
Loans receivable, shareholder -- (19,000)
----------- -----------
Net cash used in investing activities (165,717) (56,213)
Cash flows from financing activities
Notes payable stockholder, net (12,158) 46,983
Notes payable, net (650,000) 30,000
Proceeds from issuance of common stock 1,530,000 --
Stock offering costs (153,000) --
Stock subscription receivable -- 109,983
Capital lease payments (32,891) --
----------- -----------
Net cash provided by financing activities 681,951 186,966
----------- -----------
Net increase (decrease) in cash (1,188,601) (206,958)
Cash, beginning of period 1,531,708 257,906
----------- -----------
Cash, end of period $ 343,107 $ 50,948
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
Notes to Financial Statements
Note 1 - Basis of presentation
The consolidated financial statements of Internet Cable Corporation (together
with its subsidiaries, the "Company") presented herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for quarterly reports on Form 10-QSB. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") have been
condensed or omitted pursuant to such rules and regulations. It is suggested
that these financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999.
The financial information in this report reflects, in the opinion of management,
all adjustments of a normal recurring nature necessary to present fairly the
results for the interim period.
Due to the inherent seasonal nature of the businesses, quarterly operating
results may not be indicative of the actual operating results for the full year.
The 1999 financial statements reflect the operations of Internet Cable
Corporation without regard to the activities of the companies acquired in
January 2000. Subsequent to the acquisitions, the Company manages its business
as one segment.
The Company is in the process of reviewing its financial reporting formats. The
presentation of the statement of operations in this filing contains a
re-allocation of costs between direct cost of sales, indirect cost of sales, and
SG&A (selling, general and administrative) expenses. Direct costs of sales
include labor and labor related costs associated with our field technicians,
direct materials, and subcontractors. Indirect costs of sales include field
support services such as project managers, supervision, field offices and field
office support personnel, production travel costs, production vehicles,
communications, equipment leases and equipment depreciation. SG&A expenses
consist primarily of expenses for administration, office operations, marketing
and advertising, finance and general management activities, including legal,
accounting and other professional fees.
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
Note 2 - Recent accounting pronouncements
On April 3, 2000 the Financial Accounting Standards Board issued FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25" which clarifies, among other issues, (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in the Interpretation cover specific events that occur
after December 15, 1998. To the extent that the Interpretation covers events
occurring during the period after December 15, 1998, but before the effective
date of July 1, 2000, the effects of applying the Interpretation are recognized
on a prospective basis from July 1, 2000. Management is currently evaluating the
impact, if any, the Interpretation will have on the Company's financial position
or results of operations.
On June 26, 2000, the SEC issued Staff Accounting Bulletin (SAB) No. 101B which
amends the implementation date of SAB 101, "Revenue Recognition" to the three
month period ending December 31, 2000. SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements.
Management is currently evaluating the impact, if any, the SAB will have on the
Company's financial position or results of operations.
Note 3 - Acquisitions
In January, 2000, the Company completed the acquisitions of Cable Systems
Technical Services, Inc., a corporation formed under the laws of the Province of
Ontario ("Cable TSI"), Cable Systems Technical Services, Inc. Delaware, a
Delaware corporation ("TSI Delaware") and CAD Consultants, Inc., a New Jersey
corporation ("CAD"). All acquisitions are 100% owned, directly or indirectly, by
the Company.
These acquisitions were accounted for using the purchase method of accounting.
As of June 30, 2000, the allocation of the total purchase price to goodwill
amounts to $7,569,301. Goodwill was initially calculated by subtracting the net
assets acquired from the total purchase price of the stock of Cable TSI, TSI
Delaware and CAD. Certain other amounts have been capitalized as required by
GAAP, including but not limited to legal and accounting fees. The final
accounting of costs to be attributed to the acquisitions is being held open as
of the date of this report to allow for the valuation of the underlying assets
and inclusion of any additional expenses attributable to these transactions. As
such, the total amount of goodwill is subject to future change. Goodwill is
being amortized on a straight-line basis over a five-year period.
The unaudited results of operations for the acquired entities for the
quarter ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
3 Months Ended June 30, 2000
-------------------------------------------
Cable TSI CAD
--------- ---
<S> <C> <C>
Net sales $2,340,889 $ 411,736
Direct and indirect cost of sales 1,551,298 406,902
Gross operating margin 789,591 4,834
Net income/(loss) 305,468 (65,954)
</TABLE>
The unaudited results of operations for the acquired entities for the six
months ended June 30, 2000 is as follows:
<TABLE>
<CAPTION>
6 Months Ended June 30, 2000
-------------------------------------------
Cable TSI CAD
--------- ---
<S> <C> <C>
Net sales $4,389,812 $ 743,993
Direct and indirect cost of sales 2,899,357 732,605
Gross operating margin 1,490,455 11,388
Net income/(loss) 491,747 (120,307)
</TABLE>
The pro forma unaudited consolidated results of operations as though both
Cable TSI, TSI Delaware and CAD had been acquired as of the beginning of Fiscal
1999 is as follows:
<TABLE>
<CAPTION>
3 Months 6 Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Net sales $ 1,594,869 $ 2,958,616
Gross operating margin 397,525 785,056
Loss from continuing operations (1,225,496) (1,567,171)
Net loss (1,252,724) (1,610,230)
Loss per share (.12) (.16)
Pro forma shares outstanding 10,146,311 10,146,311
</TABLE>
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the period
presented and is not intended to be a projection of future results. In addition,
due to a reallocation of costs in the current year regarding the identification
of direct and indirect cost of sales versus selling, general & administrative
costs, management has made certain estimates and assumptions of the breakdown of
total costs for the unaudited 1999 pro forma consolidated results of operations
presented above. The allocation of 1999 pro forma costs between direct costs,
indirect costs and general & administrative costs was based on current year
expense relationships.
Note 4 - Executive incentive compensation
During the second quarter of 2000, the Company adopted, and the Board of
Directors approved, an Executive Incentive Compensation Plan (the "EICP"),
retroactive to January 1, 2000. This plan requires that certain financial
performance targets be met in order for the executives in the EICP to earn
additional compensation. Accrued EICP compensation, recorded as a charge to
earnings, amounted to $355,000 as of June 30, 2000. The EICP contains a
provision that any such additional compensation may be paid out in the form of
cash or stock, at the option of the Company.
Note 5 - Commitments and contingencies
The Company is engaged in legal actions arising in the ordinary course of its
business. The Company believes that the ultimate outcome of all such matters
will not have a material adverse effect on the Company's consolidated financial
position. The significance of these matters on the Company's future operating
results and cash flows depends on the level of future results of operations and
cash flows as well as on the timing and amounts, if any, of the ultimate
outcome.
Note 6 - Securities offering
The Company completed an Offering of its securities, in January 2000, realizing
approximately $9,080,000 in gross proceeds during 1999 and the first quarter of
2000 through the sale of stock at $5.00 per share plus warrants for 1/2 share
for each share purchased. These warrants are exercisable over a 5-year term with
a strike price of $10.00 per share. The Company had received $7,550,000 of the
gross proceeds during 1999 with the balance of the proceeds received in the
first quarter of 2000.
Note 7 - Stockholders' equity
In April, 2000, the Company issued a total of 25,000 shares to three former
employees and recorded a charge to earnings of $207,163. The issuance of stock
was made pursuant to certain agreements with those employees to provide services
during the transition and relocation of the headquarters offices from
Charleston, South Carolina to West Chester, Pennsylvania. In May, 2000, the
Company issued 9,871 shares of common stock in consideration for 15,000 stock
warrants in a cashless exercise.
Note 8 - Loss per share
The Company has reported loss per share in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS
128 requires the presentation of basic and diluted earnings per share for
companies with complex capital structures. Basic loss per share is computed by
dividing the net loss by the weighted average number of shares of common stock
outstanding during the period. As of June 30, 2000, certain executives, key
employees and investors have been granted a total of 7,623,643 warrants and
options, 4,333,643 of which are currently vested, to purchase shares of the
Company's common stock. In accordance with SFAS 128, these warrants and options
have been excluded from the calculation of diluted earnings per share for the
three and six months ended June 30, 2000, as the result would be anti-dilutive
since the Company reported losses from operations in both periods.
Note 9 - Revenue recognition
On January 4, 2000, Internet Cable Corp. acquired Cable TSI, a privately-held
Canadian company. In the first and second quarters, as originally filed on Forms
10Q with the SEC, the company recognized revenue based on contractually
permitted billings. In the third quarter, management adopted the policy of
recognizing revenue using either a unit of measure (based on feet) or
contractually permitted hourly fees. This policy has been adopted retroactively
to the acquisition date. In addition to the change in revenue recognition
accounting policy, management reassessed the related opening balance sheet
accounts. As a result, amounts recorded as work-in-process as of January 4, 2000
were revised by $528,055 to reflect unbilled receivables on a fair value basis,
in accordance with APB 16, Accounting for Business Combinations, and the related
revenue recognition policy. As a result of the change in unbilled receivables
and related tax impact recorded in the opening balance sheet, purchased goodwill
was reduced by $343,200, thereby reducing goodwill amortization by $17,160 and
$16,286 in the first and second quarters, respectively. Additionally, given that
the company generated a loss in the first quarter, a related tax benefit in the
amount of $184,855 has been recognized.
As a result of these changes, revenue decreased by $12,003 for the three months
ended March 31, 2000 and increased by $182,243 for the three months ended June
30, 2000. The effect of these changes on net margins for the same periods was a
decrease of $8,357 and an increase of $127,571, respectively. In addition, the
amounts related to unbilled receivables increased by $519,698 and $647,269 at
March 31, 2000 and June 30, 2000 respectively. The full impact of these changes
on the previously reported net losses are a reduction in the net losses of
$193,658 and $143,856 for the three months ended March 31, 2000 and June 30,
2000, respectively.
Due to above changes, the Company has filed this amended Form 10QSBA with the
Securities and Exchange Commission for the three month periods ending June 30,
2000.
Note 10 - Concentration of risk
The Company provides broadband infrastructure engineering services to the major
cable plant operators. As such, and due to the continuing acquisitions and
consolidation in the cable plant industry, the Company has a high concentration
of sales to a select group of customers as follows:
<TABLE>
<CAPTION>
3 Months 6 Months
Ended Ended
June 30, 2000 June 30, 2000
------------------- --------------------
<S> <C> <C> <C> <C>
MediaOne (now part of AT&T) $1,179,481 42.9% $2,679,048 51.9%
Rogers 332,674 12.1 578,138 11.2
Overland Contracting 417,905 15.2 449,089 8.7
Time Warner 186,957 6.8 263,259 5.1
AT&T 85,231 3.1 175,506 3.4
Other 547,124 19.9 1,016,903 19.7
---------- ---- ---------- ----
Total sales $2,749,372 100.0 $5,161,943 100.0
========== ===== ========== =====
</TABLE>
Note 11 - Extraordinary item
From May through November 1999 the Company sold $650,000 of 10% two-year
promissory notes. Investors in these notes also received warrants entitling the
holders to purchase an aggregate of 325,000 shares of Company stock at $3.00
dollars per share. These warrants were redeemable upon issuance and expire in
2004. No warrants have been redeemed to date. The Company valued the warrants at
$496,250, which was recorded as a debt discount, to be amortized over the life
of the notes. On January 4, 2000, the Company retired these promissory notes and
recorded a charge to earnings for the unamortized discount as an extraordinary
item.
Note 12 - Related party transaction
In June 2000, the Chairman of the Board and Chief Executive Officer (the
"Related Party"), loaned the Company $67,842. The terms of the loan include 9%
interest and a repayment requirement upon the receipt of any bank loans, lines
of credit, or other equity or debt financing. Subsequently, in July 2000, the
Related Party loaned the Company an additional $54,485 and exercised certain
stock options, acquiring 10,000 shares of common stock at a strike price of
$4.625 per share. The cost of the stock option exercise was applied against the
previous loans, resulting in a net loan to the Company of $76,077 as of July 31,
2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
This Report contains, in addition to historical information, forward-looking
statements by the Company (or "Internet Cable") with regard to its expectations
as to financial results and other aspects of its business that involve risks and
uncertainties and may constitute forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Words such as "may,"
"should," "anticipate," "believe," "plan," "estimate," "expect" and "intend,"
and other similar expressions are intended to identify forward-looking
statements. These include statements regarding the sufficiency of the Company's
liquidity, including cash resources, the availability of additional equity
funding, utilization of lines of credit or other borrowing facilities or
opportunities, concentration of sales risk, gross margins, current and future
expenses, future revenues and shortfalls in revenues, contract pricing and
pricing uncertainty, growth and expansion plans, sales and marketing plans,
availability of adequate technical personnel, capital expenditures, seasonality,
and operating results. Such statements are based on management's current
expectations and are subject to a number of uncertainties and risks that could
cause actual results to differ materially from those described in any
forward-looking statements. Factors that may cause such a difference include,
but are not limited to, the risks set forth in the Company's filings with the
Securities and Exchange Commission (see the "Risk Factors" section in the
Company's Form 10-KSB for the year ended December 31, 1999). The Company does
not intend to update these cautionary statements or any forward-looking
statements.
General
Internet Cable is one of the leading providers of broadband infrastructure
engineering, testing and certifying services in North America. The Company
provides broadband technology solutions, cable infrastructure services, software
products, wireless broadband solutions, and business-to-business wireless
network solutions. Internet Cable is focused on becoming a leading outsourcing
resource for broadband cable plant upgrades, node certification, maintenance,
expansion and training. Cable operators across the country are focused on
delivering new broadband revenue sources, and Internet Cable is uniquely
qualified to help cable operators establish and maintain the high-quality
service levels required in the delivery of emerging broadband services. The
company has highly skilled, experienced staff and a proven seven-year record of
success in implementing broadband infrastructure and wireless network solutions.
In addition to internal organic growth, our business plan includes aggressive
expansion plans to be executed by acquisition and joint venturing. The current
business plan seeks up to $60 million in equity funding to execute this
strategy.
In June, 2000, the Company applied for a listing on the Nasdaq SmallCap Market.
Management believes that a listing on the Nasdaq SmallCap Market will raise the
Company's visibility among institutional and individual investors as well as
provide improved liquidity for our shareholders, serving to enhance long-term
shareholder value.
Before the end of the year, Cable Systems Technical Services, Inc., a
corporation formed under the laws of the Province of Ontario ("Cable TSI") and
Cable Systems Technical Services, Inc., a Delaware corporation ("TSI Delaware")
expect to achieve their ISO 9002 registration. Management believes this will be
a significant step in our mission to preferentially differentiate ourselves from
our competition and provide our customers with a repeatable level of high
quality service and reliability.
The Company's revenues are subject to certain seasonality on a quarter by
quarter basis due to the nature of the services we provide which are performed
outside. As such, periods of inclement weather associated with certain seasons
in certain geographical areas of North America can impact our ability to
generate revenue.
Acquisitions - pro forma results of operations
In January, 2000, the Company completed the acquisition of Cable TSI, TSI
Delaware, and CAD Consultants, Inc., a New Jersey corporation ("CAD"). (See Note
3 of the June 30, 2000 Financial Statements)
The actual operations of the Company for three and six months ended June 30,
1999 have little bearing on the current operations of the Company. The Company
has focused its efforts during the first half of 2000 on the continued
consolidation of the acquired companies, the development of the businesses of
these operations, and the development of our overall strategic direction.
Management believes that any discussion of the actual operations of through the
first half of 1999 does not reflect the current operations and will devote this
discussion to a pro forma comparison as if the acquisitions had been completed
as of January 1, 1999.
The 1999 pro forma statement of operations (below) combines the Company's
unaudited statement of operations for the three and six months ended June 30,
1999 with the annual historical unaudited statements of operations of Cable TSI
and CAD for the three and six months ended June 30, 1999 as if both acquisitions
had occurred on January 1, 1999. The pro forma financial data is not necessarily
indicative of the actual operating results that would have occurred or the
future operating results that will occur as a consequence of such transactions.
Further, due to a reallocation of costs for the current year regarding the
identification of direct and indirect cost of sales versus general &
administrative costs, management has had to make certain estimates and
assumptions of the breakdown of total costs for the unaudited 1999 pro forma
consolidated results of operations presented below in order to provide
reasonable comparisons. The allocation of 1999 pro forma costs between direct
costs, indirect costs and general & administrative costs was based on current
year expense relationships.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
3 Months 6 Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Sales and services $ 1,594,869 $ 2,958,616
----------- -----------
Costs and expenses
Direct and indirect costs of sales 1,197,344 2,173,560
Selling, general and administrative 1,226,721 1,555,669
Depreciation 2,560 38,754
Amortization of intangibles 393,740 757,804
----------- -----------
2,820,365 4,525,787
----------- -----------
Loss from operations (1,225,496) (1,567,171)
Interest expense 27,228 43,371
Other income -- 312
----------- -----------
Net loss $(1,252,724) $(1,610,230)
=========== ===========
</TABLE>
Sales
Sales for the second quarter of fiscal 2000 were $2,749,372, which was
$1,154,503 or 72% higher than the pro forma sales for the second quarter 1999 of
$1,594,869. For the six months ending June 30, 2000, sales were $5,161,943,
which was $2,203,327 or 74% higher than the pro forma sales for the six months
ending June 30, 1999 of $2,958,616. The increase in sales during 2000 over pro
forma 1999 is the result of not only increased demand in the industry in
general, but more specifically because of our customers response to the
Company's proven ability to meet the higher technical requirements of broadband
technology and the new return path requirements of emerging, higher-value
product offerings by cable plant operators.
Cost of sales
Beginning in the second quarter, management has decided to allocate the costs of
sales into two major categories, direct and indirect. Direct costs, made up
largely of labor and labor related costs, represent those costs that are
directly related to the production of income and, within certain limitations,
should be directly variable in its relationship to sales. Indirect costs are
generally made up of those semi-variable production related overhead costs such
as production supervision wages and benefits, field office administration, field
office rents and supplies, and production vehicle leases and operating costs.
Management believes this new cost breakdown will facilitate improved cost
management, cost containment, and budgeting by providing a clearer relationship
to sales.
Management believes direct costs were negatively impacted during the first and
second quarter of 2000 due to a shortage of qualified technical personnel and
high rate of turnover. Field technicians can take up to 90 days of training
before they are able to generate revenue for the Company. High turnover rates
negatively impact our direct costs due to this need for training. At the
beginning of the second quarter of 2000, the Company addressed this problem by
implementing several initiatives aimed at enhancing our ability to attract and
retain qualified employees. The Company also hired a Director of Human Resources
to formalize our recruiting procedures, criteria and provide a more focused
effort.
Total cost of sales for the second quarter of fiscal 2000 were $1,983,933 versus
$1,197,344 for the pro forma second quarter of fiscal 1999. The increase is a
direct result of higher sales in the second quarter 2000. On a year to date
basis, the same holds true with the first half 2000 cost of sales being
$3,713,604 versus $2,173,560 for the pro forma first half of 1999. As previously
mentioned, due to the reallocation of costs between direct, indirect and SG&A,
management has had to make certain estimates and assumptions to reallocate the
1999 pro forma cost of sales. In doing so, management has made the assumption
that the direct, indirect and SG&A costs for 1999 possess the same relationship
to sales as evidenced by our year 2000 results.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") for the second quarter of
fiscal 2000 were $1,551,206 versus the pro forma second quarter of fiscal 1999
of $1,226,721, for an increase of $324,485, or 26.5%. However, included in the
second quarter 2000 expenses was a non-cash, non-recurring charge for $207,138
relating to stock issued to prior employees for services associated with the
transfer and relocation of the headquarters office from South Carolina to
Pennsylvania (See Note 7 of the June 30, 2000 Financial statements referencing
the event of April 4th, 2000). Also, included in the second quarter 1999 pro
forma SG&A was a non-cash, non-recurring charge for stock issued to employees
for various services rendered, in the amount of $219,213. Excluding these
non-recurring charges, SG&A for the second quarter 2000 were $1,344,068 versus
the pro forma the second quarter 1999 of $1,007,508, for an increase of
$336,560, or 33.4%.
SG&A for the first six months of fiscal 2000, excluding the same aforementioned
non-cash, non-recurring charges, were $2,593,173 versus the pro forma first six
months of fiscal 1999 of $1,336,456, for an increase of $1,256,717, or 94%. The
increases over 1999 are largely the result of increased wages and benefits to
compensate the new management team put in place to manage the affairs of the
Company and improve its strategic and reporting capabilities.
The components of historical SG&A for the three and six months ended June 30,
1999 are largely expenses that relate to compensation of the prior management
team, consulting and other expenses that are not included in our results for the
current year.
Depreciation
The consolidated fixed assets of the Company amount to $1,572,642, with a net
book value of $1,044,563. Over 80% of these assets are held by TSI Canada and
TSI Delaware. The most significant component of the TSI companies fixed assets
are comprised of technical testing equipment used by the technicians in the
field. Current year capital expenditures are generally being depreciated over
five years using the straight-line, half-year convention method. Consolidated
depreciation expense for the three and six months ended June 30, 2000 was
$51,007 and 102,810, respectively. The pro forma depreciation expense for the
three and six months ended June 30, 1999 was $2,560 and $38,754, respectively.
Amortization of intangibles
Intangible amortization expense for the second quarter of fiscal 2000 and pro
forma second quarter 1999 was $393,740. Intangibles, primarily goodwill, of
$7,569,301 has been recorded based on the purchase price paid for the stock of
Cable TSI and CAD and the value of the assets acquired during January 2000. The
final accounting to be attributed to these acquisitions is being held open as of
the date of this report to allow for the valuation of the underlying assets and
inclusion of any additional expenses attributable to these transactions.
Interest
The Company earned net interest income of $19,561 and $22,968 for the three and
six months ended June 30, 2000, respectively. This compares favorably to the net
interest expense incurred by the Company of $27,228 and $43,371 for the pro
forma three and six months ended June 30, 1999, respectively. This improvement
is due to the retirement of debt at Cable TSI and CAD as part of the acquisition
of these companies, in addition to earning finance charges on a few past-due
trade accounts receivable at CAD.
EBITDA&EI
EBITDA&EI is defined as earnings or losses before interest, taxes, depreciation,
amortization, stock-based compensation, other income and extraordinary items.
EBITDA&EI for the three and six months ended June 30, 2000 and the pro forma
three and six months ended June 30, 1999 is present in the table below:
PRO FORMA CONDENSED STATEMENTS OF EBITDA&EI
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
(stated in thousands, except share and per share data)
Unaudited
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales and service $ 2,749 $ 1,595 $ 5,162 $ 2,959
------------ ------------ ------------ ------------
Costs and expenses
Direct and indirect costs of sales 1,947 1,197 3,644 2,174
General and administrative 1,344 1,008 2,646 1,336
------------ ------------ ------------ ------------
EBITDA&EI (542) (610) (1,128) (551)
Stock-based compensation expense 207 219 207 219
Depreciation 51 3 103 39
Amortization 394 394 758 758
Other income (exp) 20 (27) 23 (44)
------------ ------------ ------------ ------------
Pre-tax loss (1,174) (1,253) (2,173) (1,611)
Income tax benefit -- -- 185 --
------------ ------------ ------------ ------------
Net loss before extraordinary items (1,174) (1,253) (1,988) (1,611)
Extraordinary items -
early extinguishments of debt -- -- 400 --
------------ ------------ ------------ ------------
Net loss $ (1,174) $ (1,253) $ (2,388) $ (1,611)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.12) $ (0.12) $ (0.24) $ (0.16)
Shares outstanding - weighed average 10,188,740 10,091,064
Shares outstanding - pro forma 10,146,311 10,146,311
</TABLE>
Net loss before extraordinary items
The net loss before extraordinary items for the three and six months ended June
30, 2000 was ($1,174,129) and ($1,987,406), respectively. The net loss before
extraordinary items for the pro forma three and six months ended June 30, 1999
was ($1,252,724) and ($1,610,230), respectively.
Extraordinary item
From May through November 1999 the Company sold $650,000 of 10% two-year
promissory notes. Investors in these notes also received warrants entitling the
holders to purchase an aggregate of 325,000 shares of Company stock at $3.00
dollars per share. These warrants were redeemable upon issuance and expire in
2004. No warrants have been redeemed to date. The Company valued the warrants at
$496,250, which were recorded as a debt discount, to be amortized over the life
of the notes. On January 4, 2000, the Company retired these promissory notes and
recorded a charge to the first quarter of 2000 for $400,136 for the unamortized
discount as an extraordinary item.
Liquidity and capital resources
Historically, the Company has financed its operations primarily through a
combination of private sales of equity securities and loans from the Company's
executive officers and private investors. At June 30, 2000 the Company had cash
of approximately $343,107. Current assets, totaling $3,226,186, exceeded current
liabilities by $1,057,868. The Company's only long-term debt consists of capital
lease obligations amounting to $74,454.
For the first six months of fiscal 2000, cash flow from operations amounted to a
negative $1,704,835. This amount was derived from the income statement loss of
$2,387,542, adding back certain non-cash expenditures of $1,490,645, subtracting
a net increase in working capital of $807,938, and certain other minor
adjustments. The non-cash expenditures included, among other things, such items
as amortization, depreciation, stock-based compensation and bad debt expense.
The increase in working capital was due an increase in business activity and
resulted in, among other things, increases in accounts receivable, work in
process and inventory.
Investing activities for the first six months of 2000, which amounted to a net
outlay of $165,717, included the release of $5,652,576 that was being held as
deposits on December 31, 1999, pending the completion of certain acquisitions.
These acquisitions were completed in January 2000, resulting in the outlay of
$5,469,414 for these acquisitions, net of the cash acquired. The Company also
completed certain capital expenditures for fixed assets in the amount of
$365,938.
Financing activities for the first six months of 2000, which amounted to a net
inflow of $681,951, was largely comprised of $1,530,000 from the final proceeds
for the private placement of common stock initiated in fiscal 1999, less the pay
out of $153,000 in placement costs related thereto, and the payoff of $650,000
in bridge loans.
The Company incurred development stage losses of $3,792,149 from inception
through June 30, 1999. While no longer considered a development stage company at
December 31, 1999, the Company's accumulated deficit as of that date was
$7,195,504. As of June 30, 2000, the Company's accumulated deficit was
$9,583,043.
In January 2000, the Company completed an offering of its securities, which
commenced during 1999. The Company raised approximately $9,080,000 in gross
proceeds through the sale of stock at $5.00 per share plus warrants for 1/2
share for each share purchased. Of the total raised during this offering,
approximately $7,550,000 was raised and recorded as of December 31, 1999. The
balance raised was completed and recorded in the first quarter of 2000. The
warrants are exercisable over a 5-year term with a strike price of $10.00 per
share. Prior to this, the Company completed a Rule 504 Offering in December of
1998 and raised approximately $847,000 in gross proceeds through the sale of the
Company's common stock at $2.00 per share. From May through November 1999, the
Company engaged an outside agent to sell up to $700,000 of 10% two-year
promissory notes in anticipation of completing an offering of its securities.
These notes were pre-payable out of any public or private financing resulting in
gross proceeds of at least $5,000,000, or if the Company merged with another
company with at least $5,000,000 in cash. The Company raised a total of $650,000
in gross proceeds before closing the private placement. Investors in the
promissory notes also received warrants entitling the holder to purchase an
aggregate of 325,000 shares of common stock at $3.00 per share. These warrants
have a five-year life. The Company repaid the promissory notes from the proceeds
of the private offering completed in January 2000.
During July, 2000, the Company received an offer from a regional bank for an
operating line of credit in the amount of $1,000,000 to be supported by certain
qualified accounts receivable. The tentative terms of this offer, yet to be
finalized, include but are not limited to collateralization against certain
assets including but not limited to accounts receivable, the issuance of stock
warrants to the bank, and an interest rate of prime plus 1%. Negotiations
regarding final terms and conditions are ongoing at this time.
The Company's immediate capital requirements primarily relate to working capital
and capital expenditures such as a new computer system and cable testing
equipment. In addition, the Company is seeking additional capital, up to $60
million, to facilitate the execution of management's business strategy. This
strategy includes organic growth, acquisitions, and is highly focused on the
recurring revenue provided by our cable plant maintenance outsourcing model. The
Company expects to satisfy working capital, capital expenditures and business
strategy requirements from a variety of sources which may include both debt and
equity placements.
However, there can be no assurance that the Company will be able to obtain such
financing on terms acceptable to the Company. The Company believes if it is able
to obtain at least $5 million in financing, it will have the financial resources
necessary to meet its presently anticipated business requirements for the next
12 months. Nonetheless, depending on the market conditions, the Company may seek
to sell additional equity or debt securities or obtain alternative credit
facilities. The sale of additional equity or debt securities may result in
significant dilution to the existing shareholders. There is no assurance that
the Company will be able to raise such capital on terms acceptable to the
Company, if at all.
Year 2000
As of the date of this report, the Company has not experienced any Year 2000
related problems. The Company had a comprehensive program (the "Program") to
address Year 2000 readiness in its systems and with its customers' and
suppliers' systems. The costs incurred related to the Program have not been
material. The total cost estimate did not include potential costs related to any
customer or other claims or the costs of internal software or hardware replaced
in the normal course of business.
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Currently, the Company is not a party to any material Legal Proceedings. The
Company has been served with a complaint from a vendor filed on April 18, 2000
in the Court of Common Pleas, Richland County, South Carolina. The complaint
which demands approximately $18,000 in past due amounts for alleged services.
The Company disputes any services were provided, is investigating the complaint
and has filed an answer and counterclaim. The Company will vigorously pursue its
defense against this claim and its counterclaim.
ITEM 2. CHANGES IN SECURITIES
During the three-month period ended June 30, 2000, there was no modification of
any instruments defining the rights of holders of the Company's common stock and
no limitation or qualification of the rights evidenced by the Company's common
stock as a result of the issuance of any other class of securities or the
modification thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the three month period ended June 30, 2000, the Company was not in
default on any senior securities, including long-term debt instruments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the three month period ended June 30, 2000, the Company did not submit
any matters to a vote of security holders.
ITEM 5. OTHER INFORMATION
The Company does not have any material information to report with respect to the
three-month period ended June 30, 2000. However, in July 2000, subsequent to the
period covered by this filing, two officers of the company executed certain
stock options and acquired, for cash, 22,357 shares in the aggregate. The
appropriate Form 4 s will be filed for these two officers within the guidelines
established by the Security and Exchange Commission.
ITEM 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation, as amended (a) 3.2 Bylaws (a) 2.0 Sale
and Purchase Agreement Cable Systems, TSI (b) 2.1 Sale and Purchase
Agreement CAD Consultants, INC (b) 8.0 Change in Fiscal Year (c) 4.0
Change in Registrant's Certifying Accountant (d) 27. Financial data
schedule (e) 16. Letter on change in certifying accountant (f) 19.
Reports furnished to securityholders (g)
(a) Incorporated by reference to the Company's Form 10G, filed with the
commission on June 8, 1999 and, as amended and filed with Form 8K on June
20, 2000.
(b) Incorporated by reference to the Company's current report on Form 8K as
amended filed with the SEC on January 19, 2000.
(c) Incorporated by reference to the Company's current report on Form 8K as
filed with the SEC on February 7, 2000.
(d) Incorporated by reference to the Company's current report on Form 8K as
amended filed with the SEC on May 1, 2000.
(e) Filed herewith.
(f) Incorporated by reference to the Company's current report on Form 8K as
amended filed with the SEC on May 1, 2000, and as amended on May 9, 2000
(g) Incorporated by reference to the Company's current report on Form 8K as
amended filed with the SEC on June 20, 2000 relating to the addition to the
board of directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Internet Cable Corporation
(Registrant)
Date: November 17, 2000
/s/ Michael F. Mulholland
--------------------------
Michael F. Mulholland, Chief Executive Officer
Date: November 17, 2000
/s/ William F. Walsh
---------------------
William F. Walsh, Chief Financial Officer
