FORM 10-QSB
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 September 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
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(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
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(Registrant's telephone number, including area code)
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(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 October 31, 2000, was 10,510,662 shares, all of one class (common
stock), par value $.001 per share.
Transitional Small Business Disclosure Format (check one);
Yes No X
--- ---
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INTERNET CABLE CORPORATION
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
September 30, 2000 December 31, 1999
(Unaudited)
<S> <C> <C>
Current assets
Cash $ 261,085 $ 1,531,708
Notes receivable -- 40,000
Accounts receivable, net of allowance
of $218,994 and $0 2,097,710 2,385
Unbilled receivables 1,293,885 --
Inventories 228,282 29,200
Prepaid expenses and other current assets 159,118 --
Deposits on Acquisitions -- 5,652,576
------------ ------------
Total current assets 4,040,080 7,255,869
Property and equipment - at cost,
less accumulated depreciation of
$584,889 and $26,151 1,070,261 52,993
Intangibles, net of accumulated amortization of $1,136,706 6,441,336 --
Other assets 20,106 2,000
------------ ------------
$ 11,571,783 $ 7,310,862
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Note payable, stockholder $ 86,077 $ 130,000
Accounts payable and accrued expenses 2,144,942 623,946
Current portion of capital leases 59,420 --
Notes payable, net of unamortized discount -- 249,864
Short term financing 450,000 --
Income taxes payable 203,313 --
------------ ------------
Total current liabilities 2,943,752 1,003,810
------------ ------------
Long-term liabilities
Long-term capital leases 59,089 --
------------ ------------
Total liabilities 3,002,841 1,003,810
------------ ------------
Stockholders' equity
Common stock, $.001 par value,
50,000,000 shares authorized,
10,510,662 and 9,270,311 shares
issued and outstanding 10,511 9,269
Additional paid-in capital 18,442,311 13,493,287
Accumulated deficit (9,883,880) (7,195,504)
------------ ------------
Total stockholders' equity 8,568,942 6,307,052
------------ ------------
$ 11,571,783 $ 7,310,862
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Sales and services $ 3,259,723 $ 11,192
Cost of sales
Direct costs 1,129,525 15,650
Indirect costs 828,364 --
Depreciation 43,752 --
------------ ------------
Gross operating margin/(loss) 1,258,082 (4,458)
Operating costs:
Selling, general and administrative expenses 1,158,635 523,709
Depreciation 13,058 3,920
(Gain) loss on disposal of assets (4,319) --
Amortization of intangibles 378,902 --
------------ ------------
1,546,276 527,629
------------ ------------
Loss from operations (288,194) (532,087)
Interest income (expense) (12,640) (53,925)
------------ ------------
Net loss (300,834) (586,012)
Accumulated deficit, beginning of period (9,583,046) (3,792,149)
------------ ------------
Accumulated deficit, end of period $ (9,883,880) $ (4,378,161)
============ ============
Weighted average common shares
Outstanding 10,338,402 7,703,861
Basic and diluted loss per share $ (.03) $ (.08)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Sales and services $ 8,421,666 $ 32,288
Cost of sales
Direct costs 3,403,245 66,095
Indirect costs 2,198,148 --
Depreciation 113,852 --
------------ ------------
Gross operating margin/(loss) 2,706,421 (33,807)
Operating costs:
Selling, general and administrative expenses 3,968,969 1,569,320
Depreciation 35,745 (1,152)
Loss on disposal of assets 48,424 --
Amortization of intangibles 1,136,706 --
------------ ------------
5,189,844 1,568,168
------------ ------------
Loss from operations (2,483,423) (1,601,975)
Interest income (expense) 10,328 (66,595)
Other income (expenses) -- (194)
------------ ------------
Pre-tax loss (2,473,095) (1,668,764)
Income tax benefit 184,855
------------ ------------
Net losses before extraordinary items (2,288,240) (1,668,764)
Extraordinary item
Charge for early extinguishment of debt 400,136 --
------------ ------------
Net loss (2,688,376) (1,668,764)
Accumulated deficit, beginning of period (7,195,504) (2,550,269)
------------ ------------
Accumulated deficit, end of period $ (9,883,880) $ (4,219,033)
============ ============
Weighted average common shares outstanding 10,210,864 7,703,861
Basic and diluted loss per share $ (.26) $ (.22)
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
<PAGE>
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities $(2,204,845) $ (710,239)
Cash flows from investing activities
Notes receivable 40,000 (45,000)
Release of deposits on acquisitions 5,652,576 --
Acquisition of property and equipment (444,127) (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 (252,647) (76,213)
Cash flows from financing activities
Proceeds from line of credit 450,000 --
Notes payable stockholder, net (43,923) 71,983
Notes payable, net (665,365) 30,000
Proceeds from issuance of common stock 1,633,696 --
Stock offering costs (153,000) --
Stock subscription receivable -- 109,983
Bridge loan proceeds -- 400,000
Capital lease payments (34,539) --
----------- -----------
Net cash provided by financing activities 1,186,869 611,966
----------- -----------
Net increase (decrease) in cash (1,270,623) (174,486)
Cash, beginning of period 1,531,708 257,906
----------- -----------
Cash, end of period $ 261,085 $ 83,420
=========== ===========
</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
business, 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.
During the third quarter, management obtained a commitment from a bank for a
line of credit (Note 5), which is used to fund continuing operations.
Furthermore, management is actively seeking additional investments from outside
equity investors. Management believes that cash flows from operations during
2000, combined with the cash from borrowings against the commitment for the
recently negotiated line of credit (Note 5), will be sufficient to meet its cash
requirements for the fourth quarter of 2000. If the expected growth in revenue
does not meet expectations, or if the potential equity being sought is not
obtained, management believes that it can take certain actions such as
undertaking certain expense reductions to mitigate the impact of such potential
events. However, should the potential equity investors not commit to fund the
Company, there can be no assurances that management's actions will be sufficient
to avoid a liquidity shortfall during 2001.
Certain reclassifications have been made to the 1999 financial statements to
conform to the 2000 presentation.
Note 2 - 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 September 30, 2000, the allocation of the total purchase price to goodwill
amounts to $7,578,042. 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 September 30, 2000 are as follows:
<TABLE>
<CAPTION>
3 Months Ended September 30, 2000
-----------------------------------
Cable TSI CAD
--------- ---
<S> <C> <C>
Net sales $2,980,593 $ 248,100
Direct and indirect cost of sales 1,750,390 222,050
Gross operating margin 1,230,203 26,050
Net income/(loss) 467,259 (40,689)
</TABLE>
The numbers presented for Cable TSI reflect the consolidated results of
operations for Cable TSI and TSI Delaware.
The unaudited results of operations for the acquired entities for the nine
months ended September 30, 2000 are as follows:
<TABLE>
<CAPTION>
9 Months Ended September 30, 2000
---------------------------------
Cable TSI CAD
--------- ---
<S> <C> <C>
Net sales $ 7,370,406 $ 992,093
Direct and indirect cost of sales 4,649,748 954,655
Gross operating margin 2,720,658 37,438
Net income/(loss) 959,006 (160,996)
</TABLE>
The pro forma unaudited consolidated results of operations for Internet Cable
Corporation as though Cable TSI, TSI Delaware and CAD had been acquired as of
the beginning of Fiscal 1999 are as follows:
<TABLE>
<CAPTION>
3 Months 9 Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net sales $ 2,469,699 $ 5,428,315
Gross operating margin 991,703 1,776,759
Loss from continuing operations (14,329) (1,581,500)
Net loss (81,932) (1,692,162)
Loss per share (.01) (.17)
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 3 - Cable Systems TSI (Cable TSI) Revenue recognition
On January 4, 2000, Internet Cable Corp. acquired Cable TSI, a privately-held
Canadian company. In the first and second quarters, 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 $17,162 in both the first and second quarters.
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 $12,002 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 $127,570, respectively. In addition, the
amounts related to unbilled receivables increased by $519,699 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
$193,624 and $144,733 for the three months ended March 31, 2000 and June 30,
2000, respectively.
The effect of these changes, on a basic and diluted per share basis, was to
decrease the previously reported losses per share by $0.02 per share in the
three months ended March 31, 2000 and by $0.02 per share in the three months
ended June 30, 2000.
Due to above changes, the Company will be filing amended Forms 10QSB with the
Securities and Exchange Commission for the three month periods ending March 31,
2000 and June 30, 2000.
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 $84,616 and $439,616 for the three and nine months ended
September 30, 2000, respectively. 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 - Line of credit
During the third quarter, the Company secured a $1,000,000 line of credit with a
regional bank in Pennsylvania. The terms include, among other things, a line of
credit based on certain qualified accounts receivable and collateralization
against certain assets including but not limited to all accounts receivable, the
issuance of stock warrants to the bank, and an interest rate of prime plus 1%.
The loan covenants include the Company's maintaining a current ratio of 1.1 to
1.0, and a leverage ratio of 3.0 to 1.0. The Company is in compliance with all
loan covenants. As of September 30, 2000 the Company had drawn $450,000 against
this line of credit, leaving an unused available balance of $550,000. The loan
agreement required the issuance of 32,990 warrants at market price which vested
immediately at a strike price of $6.0625 per share and must be exercised by or
before August 14, 2005. The Black-Scholes model assigns an estimated value of
$17,852 to these warrants.
Note 6 - 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 7 - 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 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. Cumulatively through September 30, 2000, certain
executives, key employees and investors have been granted a total of 7,306,012
warrants and options, 4,391,012 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 nine months ended September 30, 2000, as the result
would be anti-dilutive since the Company reported losses from operations in both
periods.
Note 9 - 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 9 Months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
AT&T (including Media One) $1,836,030 56.3% $4,690,584 55.7%
Rogers 485,903 14.9 1,064,041 12.6
Time Warner 564,384 17.3 827,643 9.8
Other 373,406 11.5 1,839,398 21.8
---------- ----- ---------- -----
Total sales $3,259,723 100.0 $8,421,666 100.0
========== ===== ========== =====
</TABLE>
Note 10 - 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 $400,136 charge to earnings for the unamortized discount as an
extraordinary item.
Note 11 - 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 upon the same terms 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. During the third quarter, the Company repaid
$40,000 of this related party loan, resulting in a loan balance of $36,077 as of
September 30, 2000. Accrued interest on all outstanding related-party loans was
$6,223 as of September 30, 2000.
Note 12 - 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. The adoption of FIN 44 has not had a
material effect 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.
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,
training, 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 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. As of the filing of this report, our application is still
pending.
During the third quarter our Cable Systems Technical Services division, made up
of Cable Systems Technical Services, Inc., a corporation formed under the laws
of the Province of Ontario ("Cable TSI") and Cable Systems TSi, Delaware, a
Delaware corporation ("TSI Delaware") successfully obtained their ISO 9002
certification. 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 September 30, 2000 Financial Statements)
The actual operations of the Company for three and nine months ended September
30, 1999 have little bearing on the current operations of the Company. In the
current year, the Company has focused its efforts on the consolidation and
organization of the acquired companies, the development of the businesses of
these operations, and the creation of our overall strategic direction.
Management believes that any discussion of the actual operations from 1999 would
be irrelevant to the current operations and will therefore devote our
comparative analysis and 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 nine months ended September
30, 1999 with the annual historical unaudited statements of operations for Cable
TSI, TSI Delaware and CAD for the three and nine months ended September 30, 1999
as if these 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 have been estimated
based on current year expense relationships.
PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
3 Months 9 Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Sales and services $ 2,469,699 $ 5,428,315
----------- -----------
Costs and expenses
Direct and indirect costs of sales 1,477,996 3,651,556
Selling, general and administrative 578,357 2,134,026
Depreciation 48,773 87,527
Amortization of intangibles 378,902 1,136,706
----------- -----------
2,484,028 7,009,815
----------- -----------
Loss from operations (14,329) (1,581,500)
Interest expense 67,603 110,974
Other income -- 312
----------- -----------
Net loss $ (81,932) $(1,692,162)
=========== ===========
</TABLE>
Sales
Sales for the third quarter of fiscal 2000 were $3,259,723, which was $790,024
or 32% higher than the pro forma sales for the third quarter 1999. For the nine
months ending September 30, 2000, sales were $8,421,666, which was $2,993,351 or
55% higher than the pro forma sales for the nine-month period ending September
30, 1999. The dramatic sales increase during 2000 over pro forma 1999 is the
result of strong demand in the industry for cable systems upgrades and
certification to allow for the deployment of additional value-added services by
the multiple system operators (MSO's) like AT&T, Comcast and Rogers Cable. Many
of these additional value-added services are interactive services requiring
two-way "return path" communications, such as internet connections, pay-per-view
digital television, telephony, alarm monitoring and smart home appliance
services. Our customers, some of the largest MSO's in North America, have
responded favorably to the Company's proven ability to meet the higher technical
challenges and requirements of broadband technology and the new return path
requirements of emerging, higher-value product offerings.
On January 4, 2000, Internet Cable Corp. acquired Cable Systems Technical
Services Inc. (Cable TSI), a privately-held Canadian company. In the first and
second quarters of 2000, 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. Therefore, all revenue numbers for the three and nine
months ended September 30, 2000 as shown in this report have been calculated in
accordance with this policy.
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 these changes, revenue decreased by $12,002 for the three months
ended March 31, 2000 and increased by $182,243 for the three months ended June
30, 2000.
Due to above changes, the Company will be filing amended Forms 10QSB with the
Securities and Exchange Commission for the three month periods ending March 31,
2000 and June 30, 2000. (See Note 3 to the September 30, 2000 financial
statements)
Cost of sales
Costs of sales are broken down 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 cost breakdown will facilitate
improved cost management, cost containment, and budgeting by providing a clearer
relationship to sales.
Sequentially, the third quarter saw improvement in contribution margin and gross
margin, in both percent and dollars compared to the second quarter of 2000. The
contribution margin (revenues less direct costs of sales) for the third quarter
of $2,130,198, or 65.3% of sales, improved significantly from the $1,520,221, or
55.5% of sales, experienced during the second quarter. This is an indicator of
increased productivity by our technicians as well as improved billing practices.
Sequentially, the gross margin (revenues less direct and indirect cost of sales)
also improved to $1,258,082 or 38.6% of sales, from the $765,438 or 27.9% of
sales, experienced during the second quarter. The improvement in the gross
margin comes from the combined effects of improved contribution margins as well
as the effect of the economies of scale that results from higher sales volumes
to cover the semi-variable indirect costs.
Compared to prior year activities, total cost of sales for the third quarter of
fiscal 2000 were $2,001,641 versus $1,477,966 for the pro forma third quarter of
fiscal 1999. The increase is a direct result of the higher sales volume in the
third quarter of 2000 versus 1999. On a year to date basis, the same holds true
with the cost of sales being $5,715,245 for the first nine months of 2000 versus
$3,651,556 for the pro forma nine months 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.
Due to revisions in the Company's revenue recognition accounting policy, the
direct cost of sales were decreased by $3,646 for the three months ended March
31, 2000 and were increased by $54,673 for the three months ended June 30, 2000.
(See Note 3 to the September 30, 2000 financial statements)
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") for the third quarter of
fiscal 2000 were $1,158,635 versus $578,357 for the pro forma third quarter of
fiscal 1999. The SG&A for the first nine months of fiscal 2000 was $3,968,969
versus $2,134,026 for the pro forma first nine months of fiscal 1999. The
increase in SG&A in the year 2000 over 1999 is largely the result of additions
to SG&A personnel due to revenue growth, the management of international
complexities between the US and Canada, the cost of compliance with SEC
reporting and auditing requirements, the introduction of a substantial investor
relations and marketing program, and increased wages and benefits to compensate
the new management team which was put in place to manage the affairs of the
Company, improve its strategic planning and positioning in the marketplace and
to strengthen the Company's reporting capabilities.
Depreciation
The consolidated fixed assets of the Company amount to $1,655,150, with a net
book value of $1,070,261. 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 nine months ended September 30, 2000 was
$56,810 and $149,597, respectively. The pro forma depreciation expense for the
three and nine months ended September 30, 1999 was $48,773 and $87,527,
respectively.
Amortization of intangibles
Amortization expense for the three months ended September 30, 2000 and the pro
forma three months ended September 30, 1999 was $378,902. For the nine months
ended September 30, 2000 and the pro forma nine months ended September 30, 1999
amortization expense was $1,136,706. Intangibles in the amount of $7,578,042
consist primarily of goodwill and have been recorded based on the purchase price
paid for the stock of Cable TSI and CAD and the value of the assets acquired on
January 4th 2000. Goodwill is being amortized over five years using the
straight-line method of amortization.
During the third quarter, the Company revised the amounts recorded as
work-in-process as of January 4th, 2000 by $528,055 to reflect unbilled
receivables on a fair value basis, in accordance with APB 16, Accounting for
Business Combinations. After consideration of the tax impact of this adjustment,
goodwill was reduced by $343,200. Therefore, goodwill amortization decreased by
$17,162 in both the first and second quarter of 2000. (See Note 3 to the
September 30, 2000 financial statements)
The final accounting to be attributed to these acquisitions is being held open
as of the date of this report to allow for any further changes in the valuation
of the underlying assets.
Interest
The Company incurred net interest expense of $12,640 and net interest income of
$10,328 for the three and nine months ended September 30, 2000, respectively.
This compares favorably to the net interest expense incurred by the Company of
$67,603 and $110,974 for the pro forma three and nine months ended September 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 nine months ended September 30, 2000 and the pro
forma three and nine months ended September 30, 1999 is presented in the table
below:
PRO FORMA CONDENSED STATEMENTS OF EBITDA&EI
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
AND 1999
(stated in thousands, except share and per share data)
Unaudited
<TABLE>
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales and service $ 3,260 $ 2,470 $ 8,422 $ 5,428
------------ ------------ ------------ ------------
Costs and expenses
Direct and indirect costs of sales 1,958 1,478 5,602 3,652
General and administrative 1,155 578 3,811 1,851
------------ ------------ ------------ ------------
EBITDA&EI 147 414 (991) (75)
Stock-based compensation expense -- -- 207 283
Depreciation 57 49 150 88
Amortization 379 379 1,137 1,137
Other income (exp) (12) (68) 12 (109)
------------ ------------ ------------ ------------
Pretax losses (301) (82) (2,473) (1,692)
Tax benefit 185
------------ ------------ ------------ ------------
Net loss before extraordinary items $ (301) $ (82) $ (2,288) $ (1,692)
Extraordinary items -
early extinguishments of debt -- -- 400 --
------------ ------------ ------------ ------------
Net loss $ (301) $ (82) $ (2,688) $ (1,692)
============ ============ ============ ============
Basic and diluted EBITDA&EI per share $ 0.01 $ 0.04 $ (0.10) $ (0.01)
Basic and diluted net loss per share $ (0.03) $ (0.01) $ (0.26) $ (0.17)
Shares outstanding - weighed average 10,338,102 10,210,864
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 nine months ended
September 30, 2000 was ($300,834) and ($2,288,240), respectively. The net loss
before extraordinary items for the pro forma three and nine months ended
September 30, 1999 was ($81,932) and ($1,692,162), 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. During the third quarter of 2000, the
Company secured a line of credit with a regional bank in Pennsylvania, providing
additional working capital secured by certain qualified accounts receivable. On
September 30, 2000 the Company had cash of $261,085 and an unused line of credit
totaling $550,000. Current assets, totaling $4,040,080, exceeded current
liabilities by $1,096,328, providing a current ratio of 1.37 to 1. The Company's
only long-term debt consists of capital lease obligations that amounted to
$59,089 on September 30, 2000.
For the first nine months of fiscal 2000, cash flow from operations amounted to
a negative $2,204,845. This amount was derived from the income statement loss of
$2,688,376, adding back certain non-cash expenditures of $1,829,100, subtracting
a net increase in working capital of $1,007,268, and certain other adjustments.
The non-cash expenditures included, among other things, amortization,
depreciation, stock-based compensation and bad debt expense. The increase in
working capital was due to an increase in business activity. This resulted in,
among other things, increases in accounts receivable, work-in-process and
inventory.
Investing activities for the first nine months of 2000 amounted to a net outlay
of $252,647. This 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 year-to-date
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 $444,127.
Financing activities for the first nine months of 2000, which amounted to a net
inflow of $1,186,869, was largely comprised of $1,633,696 from the issuance of
common stock, $450,000 drawn from our line of credit, less the pay out of
$153,000 in common stock placement costs and the payoff of $655,365 in notes and
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
after that date, the Company's accumulated deficit was $7,195,504 as of December
30, 1999 and $9,883,880 as of September 30, 2000.
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 the third quarter, the Company successfully closed on a $1,000,000 line
of credit from a regional bank in Pennsylvania. The terms include, but are not
limited to, a line of credit based on certain qualified accounts receivable and
collateralization against certain assets including but not limited to all
accounts receivable, the issuance of stock warrants to the bank, and an interest
rate of prime plus 1%. The loan covenants include the Company's maintaining a
current ratio of 1.1 to 1.0, and a leverage ratio of 3.0 to 1.0. The Company is
in compliance with all loan covenants. As of September 30, 2000 the Company had
drawn $450,000 against this line of credit, leaving an unused available balance
of $550,000. The loan agreement required the issuance of 32,990 warrants at
market price which vested immediately at a strike price of $6.0625 per share and
must be exercised by or before August 14, 2005. The Black-Scholes model assigns
an estimated value of $17,852 to these warrants.
The Company's immediate capital requirements primarily relate to funding
operating losses, working capital needs and capital expenditures such as a new
web-based computer system and cable testing equipment. The Company is currently
seeking up to $5 million to fund these needs for the next twelve months. 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, the development of a sales force, the
development of our training programs, 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
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 September 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 September 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 September 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 September 30, 2000.
ITEM 6. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation, as amended (a)
3.2 Bylaws (b)
2.0 Sale and Purchase Agreement Cable Systems, TSI (c)
2.1 Sale and Purchase Agreement CAD Consultants, INC (c)
19. Reports furnished to securityholders (d)
27. Financial data schedule (e)
(a) Incorporated by reference to the Company's Form 10G, filed with the
commission on June 8, 1999.
(b) 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.
(c) Incorporated by reference to the Company's current report on Form 8K as
amended filed with the SEC on January 19, 2000.
(d) 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.
(e) Filed herewith.
<PAGE>
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 14, 2000
/s/ Michael F. Mulholland
-----------------------------------------------------
Michael F. Mulholland, Chief Executive Officer
Date: November 14, 2000
/s/ William F. Walsh
-----------------------------------------------------
William F. Walsh, Chief Financial Officer
