<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
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 AND
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
Commission file number 000-27967
Integrated Communication Networks, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 33-0670130
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
27061 Aliso Creek Road, Suite 100
Aliso Viejo, California 92656
(Address Principal Executive Offices) (Zip Code)
(949) 460-6291
(Registrant's telephone number, including area code)
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 / /
The number of shares of the Registrant's Common Stock outstanding as of
October 31, 2000 was approximately 5,889,231 shares.
<PAGE>
TABLE OF CONTENTS PAGE
------------------------------------------------------------ ----
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements........................................ **
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 1
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 5
PART II-OTHER INFORMATION
Item 1. Legal Proceedings........................................... 6
Signatures ............................................................ 7
PART I-FINANCIAL INFORMATION
ITEM 1.**
Index to Financial Statements:
PAGE
----
Consolidated balance sheets as of September 30, 2000 (unaudited)
and December 31, 1999 F-1
Consolidated statements of operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited) F-2
Statement of Redeemable Convertible Preferred Stock and Stockholders' Equity
from inception (January 16, 1997) through December 31, 1997, Year-ended December
31, 1998 and Consolidated Statement of Redeemable Convertible Preferred Stock
and Stockholders' Equity (Deficit) for the year ended December 31, 1999 and the
nine months ended September 30, 2000 (unaudited) F-3
Consolidated Statements of Cash Flows for the three and nine months
ended September 30, 2000 and 1999 (unaudited) F-4
Notes to Consolidated Financial Statements F-5
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
ASSETS 1999 2000
------------- -------------
(Unaudited)
Current assets:
Cash $ 2,552,113 $ 9,915
Accounts Receivable - 77,115
Receivable from related party (Note 2) 332,006 184,347
Note Receivable - 349,250
Prepaid and other current assets 293,032 86,230
------------- -------------
Total current assets 3,177,151 706,857
------------- -------------
Property and equipment:
Operating equipment 2,825,700 2,149,552
Equipment, furniture and software
under capital leases 549,685 1,208,651
Leasehold improvements 114,490 207,956
Furniture, fixtures and equipment 60,524 424,600
------------- -------------
3,550,399 3,990,759
Less - Accumulated depreciation and amortization (459,428) (883,482)
------------- -------------
3,090,971 3,107,277
------------- -------------
Goodwill, net 8,907,517 8,441,062
Other noncurrent assets 280,377 148,384
------------- -------------
Total noncurrent assets 12,278,865 11,696,723
------------- -------------
$ 15,456,016 $ 12,403,580
============= =============
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 823,860 $ 4,456,026
Accrued expenses 526,074 752,047
Unearned revenue 334,130 80,539
Note payable to shareholder (Note 3) - 210,000
Long-term debt-current portion 82,696 60,724
Capital lease obligations-current portion 114,078 417,347
------------- -------------
Total current liabilities 1,880,838 5,976,683
------------- -------------
Long-term debt, net of current portion (Note 4) 5,034,813 5,028,688
Capital lease obligations, net of current portion 209,836 530,134
Commitments and contingencies (Note 7) - -
Redeemable, convertible preferred stock:
Series A 8% redeemable convertible preferred
stock, $.01 par value per share:
Authorized - 50,000 shares
Issued and outstanding - no shares at
December 31, 1999 and September 30, 2000 - -
Series A-1 12% redeemable convertible preferred
stock, $.01 par value per share:
Authorized - 7,500,000 shares at December 31,
1999 and September 30, 2000
Issued and outstanding-3,167,974 at December 31,
1999 and September 30, 2000 4,847,000 4,847,000
Series A-1 preferred stock subscribed (218,500) -
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized - 250,000,000 shares
Issued and outstanding 5,867,780 and 5,889,231
at December 31, 1999 and
September 30, 2000, respectively 58,677 58,892
Common stock subscribed (105,750) -
Additional paid-in capital 22,858,958 22,925,778
Accumulated deficit (18,996,555) (26,850,294)
Treasury stock (113,301) (113,301)
------------- -------------
Total stockholders' equity (deficit) 3,702,029 (3,978,925)
------------- -------------
$ 15,456,016 $ 12,403,580
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-1
<PAGE>
<TABLE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- ---------------------------
1999 2000 1999 2000
------------- ------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues $ 323,153 $ 1,312,428 $ 624,832 $ 2,708,773
Operating expenses:
Data communications and
telecommunications 842,209 2,306,157 1,305,894 4,856,746
Selling, general & administrative
expenses 3,062,903 1,510,079 4,264,133 4,460,882
Depreciation and amortization 226,648 372,953 483,690 1,099,177
Write-down of impaired assets - - 2,554,819 -
------------- ------------- ------------- -------------
Total operating expenses 4,131,760 4,189,189 8,608,536 10,416,805
------------- ------------- ------------- -------------
Loss from operations (3,808,607) (2,876,761) (7,983,704) (7,708,032)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 0 69 557 9,358
Interest expense (89,451) (196,552) (138,443) (709,991)
Realized gain on sale
of investment - - - 992,329
Gain on casualty loss, net 6,622 - 137,628 -
Loss on sale of assets - - - (346,116)
Write-off of assets 0 - (216,600) -
Minority interest in losses
of subsidiary 570,295 - 570,295 -
Other income (expense), net - (91,670) - (91,287)
------------- ------------- ------------- -------------
487,466 (288,153) 353,437 (145,707)
------------- ------------- ------------- -------------
Net loss $ (3,321,141) $ (3,164,914) $ (7,630,267) $ (7,853,739)
============= ============= ============= =============
Basic and diluted weighted average
common shares outstanding 2,463,975 5,889,231 2,867,199 5,876,079
============= ============= ============= =============
Basic and diluted net loss per
share $ (1.35) $ (0.54) $ (2.66) $ (1.34)
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
</TABLE>
<PAGE>
<TABLE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
FROM YEAR ENDED DECEMBER 31, 1998 THROUGH YEAR ENDED DECEMBER 31, 1999
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (Unaudited)
<CAPTION>
SERIES A 8% REDEEMABLE
CONVERTIBLE SERIES A-1 12% REDEEMABLE
PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
---------------------------- -------------------------------------------
SHARES AMOUNT SHARES AMOUNT SUBSCRIBED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 - - - - -
------------- ------------- ------------- ------------- -------------
Stock to be issued for
assets acquired January
1999 - - - - -
Stock cancelled - - - - -
Stock issued for acquisition
of PhoneXchange, Inc. - - - - -
Common stock issued for
conversion of debt - - - - -
Stock issued for receivable - - - - -
Effective options issued for services - - - - -
Stock issued for cash and
receivable - - 3,267,974 5,000,000 (218,500)
Stock issued to Directors for services - - - - -
Stock issued for services - - - - -
Stock issued for cash - - - - -
Conversion of preferred
stock - - (100,000) (153,000) -
Purchase of common stock - - - - -
Stock issued for additional
shares in phoneXchange, Inc. - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 - $ - 3,167,974 $ 4,847,000 $ (218,500)
============= ============= ============= ============= =============
Proceeds from subscription - - - - 218,500
Stock issued for true-up - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- -------------
Balance, September 30, 2000, (Unaudited) - $ - 3,167,974 $ 4,847,000 $ -
============= ============= ============= ============= =============
(CONTINUED BELOW)
<PAGE>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCK-
------------------------------------------- PAID-IN EARNINGS TREASURY HOLDERS'
SHARES AMOUNT SUBSCRIBED CAPITAL (DEFICIT) STOCK EQUITY
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1998 5,262,206 52,620 - 8,047,480 (8,107,099) - (6,999)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Stock to be issued for
assets acquired 441,600 4,416 - 2,589,984 - - 2,594,400
Stock cancelled (3,475,000) (34,750) - 34,750 - - -
Stock issued for acquisition
of PhoneXchange, Inc. 921,428 9,215 - 6,440,788 - - 6,450,003
Common stock issued for
conversion of debt 25,296 253 - 132,550 - - 132,803
Stock issued for receivable 141,000 1,410 (105,750) 104,340 - - -
Effective options issued
for services - - - 2,250,000 - - 2,250,000
Stock issued for cash and
receivable - - - - - - -
Stock issued to Directors
for services 10,500 105 - 56,164 - - 56,269
Stock issued for services 23,500 235 - 142,528 - - 142,763
Stock issued for cash 1,332,000 13,320 - 985,680 - - 999,000
Conversion of preferred
stock 1,000,000 10,000 - 143,000 - - 153,000
Purchase of common stock - - - - - (113,301) (113,301)
Stock issued for additional
shares in phoneXchange, Inc. 185,250 1,853 - 1,931,694 - - 1,933,547
Net loss - - - - (10,889,456) - (10,889,456)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 5,867,780 $ 58,677 $ (105,750) $ 22,858,958 $(18,996,555) $ (113,301) $ 3,702,029
------------- ------------- ------------- ------------- ------------- ------------- -------------
Proceeds from subscription - - 105,750 - - - 105,750
Stock issued for true-up 21,451 215 - 66,820 - - 67,035
Net loss - - - - (7,853,739) - (7,853,739)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, September 30, 2000,
(Unaudited) 5,889,231 $ 58,892 $ - $ 22,925,778 $(26,850,294) $ (113,301) $ (3,978,925)
============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (3,321,141) $ (3,164,914) $ (7,630,267) $ (7,853,739)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 226,648 372,953 483,690 1,099,177
Write-down of impaired assets - - 2,554,819 -
Write-off assets casualty loss - - 39,581 -
Write-off assets legal settlement - 117,632 - 117,632
Gain on sale of marketable security - - - (992,329)
Loss on sale of equipment - - - 346,116
Compensation expense related to
stock option grant 2,250,000 - 2,250,000 -
Minority interest (570,296) - (570,296) -
Shares issued for services 7,456 - 7,456 67,034
Decrease (increase) in assets:
Accounts receivable 3,778 (47,495) 25,234 (27,362)
Notes receivable (21,319) 174,858 (21,319) 373,186
Prepaid expenses and other
assets (484,731) 73,343 (719,029) 178,561
Increase (decrease) in liabilities:
Accounts payable 311,215 2,118,304 402,570 3,470,169
Accrued expenses 58,679 (59,014) 152,558 381,693
Unearned revenue 247,153 (7,030) 245,983 (261,091)
Customer deposits 20,000 - 21,000 7,500
Other advance - - (317,802) -
Payable to related party (336,001) - (208,296) -
------------- ------------- ------------- -------------
Net cash used in operating
activities (1,608,559) (421,363) (3,284,118) (3,093,453)
------------- ------------- ------------- -------------
Cash Flows From Investing Activities:
Purchases of property and equipment (72,692) - (1,112,153) (384,643)
Proceeds from sale of equipment - - - 50,000
Purchase of investment in marketable
security - - - (1,000,000)
Proceeds from sale of marketable
security - - - 1,525,750
------------- ------------- ------------- -------------
Net (cash used in) provided by
investing activities (72,692) - (1,112,153) 191,107
------------- ------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from issuance of
short-term debt 331,965 210,000 331,965 210,000
Principal payments of capital lease
obligation (12,215) (15,116) (31,135) (138,560)
Proceeds from issuance of
long-term debt 671,790 - 1,573,180 -
Principal payments on long-term debt (18,184) (6,818) (79,209) (35,542)
Proceeds from preferred stock
subscription - - 1,950,000 218,500
Proceeds from issuance of common
stock - - 750,000 105,750
------------- ------------- ------------- -------------
Net cash provided by financing
activities 973,356 188,066 4,494,801 360,148
------------- ------------- ------------- -------------
Increase (decrease) in cash (707,895) (233,297) 98,530 (2,542,198)
------------- ------------- ------------- -------------
Cash at the beginning of the period 806,425 243,212 - 2,552,113
------------- ------------- ------------- -------------
Cash at the end of the period $ 98,530 $ 9,915 $ 98,530 $ 9,915
============= ============= ============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest $ - $ - $ 18,959 $ 38,213
============= ============= ============= =============
Supplemental disclosure of noncash
investing and financing activities:
Equipment and software acquired
under capital lease obligations - - - 755,733
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
</TABLE>
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
(1) GENERAL
The financial statements included herein are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and Securities and Exchange Commission ("SEC") regulations. The
Company's auditors' interim review of this quarterly report and the quarterly
report for the six and three months ended June 30, 2000 have not been completed
as required by Rule 10-01(d) of Regulation S-X. The Company intends to have the
reviews completed as soon as practicable upon the receipt of additional
financing. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In management's opinion, the financial statements reflect all
adjustments (of a normal and recurring nature) which are necessary to present
fairly the financial position, results of operations, stockholders' equity and
cash flows for the interim periods. These financial statements should be read in
conjunction with the audited financial statements for the year ended December
31, 1999, as set forth in the Company's Annual Report on Form 10-K. Certain
prior year balances have been reclassified to conform to the current year
presentation. The results for the three and nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
(a) FORMATION AND DESCRIPTION OF BUSINESS
The Company began operation in February 1999 through the Company's
acquisition of phoneXchange, Inc. phoneXchange is a facilities-based wholesale
carrier that provides switched voice and data services, primarily to U.S.-based
carriers. phoneXchange provides domestic and international long distance service
through foreign interconnection agreements, international gateway switches,
leased and owned transport facilities and resale arrangements with other long
distance providers.
(b) GOING CONCERN
The Company has been engaged in the identification, development, deployment
and operation of domestic and international long distance telephone network
facilities for the purpose of providing domestic and international long distance
telephone service. The Company has incurred substantial losses to date and needs
to obtain additional funding sufficient to operate its long-distance network
facilities and ultimately, achieve a sufficient level of sales and profitability
to support its current and ongoing operations. Management is currently
attempting to obtain financing. However, no assurance can be provided that
management will be able to obtain financing on terms acceptable to the Company,
or at all. If the financing is not obtained by December 1, 2000, the Company
will be unable to continue its operations. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Integrated
Communication Networks, Inc. and its majority-owned subsidiary, phoneXchange,
Inc. and its wholly owned subsidiaries Internet Call Centers, Inc. and C3.Com,
Inc. All significant inter-company transactions and balances have been
eliminated. Minority interest represents the minority shareholders'
proportionate share of the equity or income of the Company's majority-owned
subsidiary phoneXchange, Inc.
(d) CONCENTRATION OF CUSTOMERS
The loss of any significant customer could have a significant negative
impact on our revenues from operations.
(e) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 financial
statements to conform to the September 2000 presentation.
2. RELATED PARTY TRANSACTIONS
David Chadwick and Gary Killoran are executive officers of the Company and
part owners of C/Net: Solutions, Inc., a private company formed on November 1,
1997. From January 1, 2000 through September 30, 2000, the Company advanced
$325,000 to C/Net under an Advance Agreement without interest and payable on
demand at any time. On July 1, 2000, the parties entered into an Asset Purchase
Agreement pursuant to which the Company agreed to accept certain furniture,
fixtures and office equipment in partial satisfaction of the outstanding debt in
the amount of $90,795. Beginning in July 2000, C/Net's subsidiary, Leading Edge
Broadband Services, Inc. began providing telecommunication services and
outsourced technical and administrative support services to the Company. As of
September 30, 2000, the Company had a receivable in the amount of $184,347. As
of November 20, 2000, no amounts were due under the Advance Agreement.
3. SENIOR SECURED NOTE
On July 28, 2000, the Company sold $210,000 principal amount of its 10%
Senior Secured Notes, due November 1, 2000 to a shareholder. The principal and
accrued interest are due on the earlier of (i) November 1, 2000 or (ii) receipt
by the Company of net proceeds of $400,000 from the next financing completed by
the Company. The note is secured by certain assets of the Company. As of
September 30, 2000, the principal amount due under the note was $210,000. The
Company is currently in default upon its 10% Senior Secured Notes, due November
1, 2000.The Company's shareholder has not provided notice of default. The
Company is not able to repay the note a this time.
4. LONG-TERM DEBT
Long-term debt consists of the following:
September 30,
2000
(a) 7.5% note payable to a vendor. Principal and interest -----------
are payable in monthly installments of $6,525, December 2001,
secured by related equipment. $ 50,761
(b) 10% note payable to the Company's landlord. Principal and
interest are payable in monthly installments of $948 through
July 2004, secured by leasehold improvements. 38,651
(c) In November 1999, the Company sold $5.0 million
principal amount of its 4% Convertible Debenture, and received
net proceeds of $4,480,000 on December 2, 1999. The Convertible
Debenture is due on December 2, 2004. 5,000,000
-----------
5,089,412
-----------
Less: Current maturities (60,724)
-----------
$5,028,688
===========
Aggregate maturities of long-term debt over the next five years is as
follows:
Year Ending
September 30: Amount
----------- ----------
2001 $ 60,724
2002 8,987
2003 9,928
2004 5,009,773
2005 -
----------
$5,089,412
==========
5. COMMITMENTS AND CONTINGENCIES
(a) Master Lease
On July 30, 1999, the Company and Lucent Technologies, Inc.
InterNetworking Systems signed a Master Lease Agreement pursuant to which Lucent
agreed to provide the Company $3 million in credit for leasing Lucent equipment.
On February 7, 2000, Lucent amended this agreement to increase the Company's
line of credit to $10 million. As of September 30, 2000, the Company has
received equipment eligible to be financed under the Master Lease Agreement
valued at approximately $4 million but has not completed type testing and
acceptance of the equipment. Upon type testing and acceptance, the equipment
will be placed under operating leases. As of September 30, 2000, the Company had
no outstanding borrowings under the Master Lease Agreement.
(b) Operating Leases
The Company leases office space for its co-location space, dedicated
private telephone lines, equipment and other items under various agreements
expiring through 2005.
Rent expense included in the unaudited consolidated statements of
operations was approximately $73,622 and $111,883 for the three months ended
September 30, 1999 and 2000, respectively and approximately $188,088 and
$305,650 for the nine months ended September 30, 1999 and 2000, respectively.
The Company is currently in default on the lease for its corporate
headquarters and has entered into a stipulated judgment which allows the Company
to retain occupancy until December 1, 2000 at which time $74,485 is due to the
landlord as payment for a portion of the past due amount and monthly payments of
$75,202 are due thereafter starting on January 1, 2001 until the remaining past
due balance has been paid and monthly payments of $19,720 are then due
thereafter. The Company is currently unable to pay the $74,485 and expects to be
ordered to vacate the premises on or about December 5, 2000.
(c) Capital Leases
The Company is obligated under various capital lease agreements for certain
computer software, office furniture, telecommunications switching equipment and
desktop workstations. The Comapny has received notices of default on certain of
its capital leases.
Future minimum lease payments associated with the leases described
herein, including renewal options are as follows:
Dedicated Other
Year Ending Capital Private Operating
September 30: Leases Lines Leases
----------------- ----------- ----------- -----------
2001 $ 627,915 $ 954,784 $ 516,673
2002 364,272 257,925 444,195
2003 147,868 -0- 410,695
2004 53,421 -0- 410,695
2005 19,501 -0- 308,021
Thereafter -0- -0- -0-
----------- ----------- -----------
Total minimum lease payments $1,212,977 $1,212,708 $2,090,278
=========== ===========
Less: amount representing interest (265,497)
Net present value of minimum
lease payments 947,480
-----------
Less: current portion (417,347)
-----------
Long-term capitalized lease obligation $ 530,134
===========
(d) Legal Matters
On August 30, 1999, J&W Ventures, Inc. filed a claim against the
Company in the Superior Court of Los Angeles County, alleging that the Company
is in breach of a contract to purchase telecommunications equipment. The
plaintiff is seeking performance of the contract plus damages. The Company has
filed a cross-complaint seeking rescission and damages, asserting that J&W
Ventures, Inc. breached certain representations and warranties. The Company
intends to vigorously contest the litigation and to pursue its own remedies
fully. While no assurance can be given regarding the outcome of this matter, the
Company believes that the Company has strong and meritorious defenses to the
claims asserted. However, a determination that the Company breached its contract
with J&W Ventures, Inc. would have a material adverse effect on its business,
operating results and financial condition.
Pursuant to the J&W Ventures Asset Purchase Agreement, the Company paid
$300,000 in cash, issued 441,600 shares of common stock and was obligated to
designate and issue 850,000 shares of a new series of preferred stock, $2.50 par
value. Pending the outcome of the litigation between the parties, the Company
has placed a stop transfer order on the common stock issued, and has not
designated or issued any preferred stock to the J&W Ventures sellers. The
Company has not made any reserve on its balance sheet in connection with this
litigation.
6. SUBSEQUENT EVENTS
On October 12, 2000, the Company entered into a Subscription Agreement with
Hitech Resource Corporation for the issuance of 14 million shares of the
Company's restricted $.001 par value common stock at a per share price of $.50
for gross proceeds of $7.0 million. The agreement calls for placement fees of
$280,000 in cash and 560,000 shares of the Company's restricted $.001 par value
common stock for net proceeds to the Company of $6,720,000. Closing is expected
to occur by November 30, 2000. The failure to obtain such capital by December 1,
2000 would have a material adverse effect on the Company's business and its
ability to continue as a going concern.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an emerging multinational carrier focused primarily on
the international long distance market. The Company seeks to offer highly
reliable, low-cost switched voice services on a wholesale basis, primarily to
U.S.-based long distance carriers. The Company provides international long
distance service to various foreign countries through its flexible network
comprised of various foreign termination relationships, international gateway
switches, leased transport lines and resale arrangements with other long
distance providers.
The following discussion should be read in conjunction with the
Company's consolidated audited financial statements and the unaudited September
30, 2000 Financial statements. Integrated Communication Networks, Inc., which
was incorporated on January 16, 1997 began operations through its acquisition of
its majority owned subsidiary phoneXchange, Inc. in February 1999. The Company
began offering long distance services on February 28, 1999 by reselling the
services of other long distance carriers. The Company offers domestic and
international wholesale long distance services, including switched, private
line, special access and prepaid long distance services, to other
telecommunications carriers and agents and brokers of prepaid phone cards. The
Company operates long distance switching centers in Los Angeles, Dallas, Mexico
City and New York. For the year ended December 31, 1998 and for the period from
inception on January 16, 1997 to December 31, 1997, the Company had no revenue
and no material operations. The following is management's discussion and
analysis of financial condition and results of operations for the three and nine
months ended September 30, 1999
and 2000, respectively.
REVENUES. Most of the Company's revenues are generated by the sale of
international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. The Company records revenues from the sale of
long distance services at the time of customer usage. The Company's agreements
with its wholesale customers are short-term in duration and the rates charged to
customers are subject to change from time to time, generally with five days
notice to the customer.
OPERATING EXPENSES. The Company's primary operating expenses include
data communications and telecommunications expenses and selling, general and
administrative expenses. The Company has pursued a strategy of attracting
customers and building calling volume and revenue by offering favorable rates
compared to other long distance providers. The Company attempts to lower its
data communications and telecommunications expenses by (i) expanding the
Company's owned network facilities, (ii)continuing to utilize the Company's
sophisticated information systems to route calls over the most cost-effective
routes and (iii) leveraging the Company's traffic volumes and information
systems to negotiate lower variable usage-based costs with domestic and foreign
interexchange carriers which have interconnection agreements with local exchange
carriers.
Data communications and telecommunications expenses include those costs
associated with the transmission and termination of international long distance
services. Currently, a majority of transmission capacity used by the Company is
obtained on a variable, per minute basis. As a result, some of the Company's
current cost of services is variable. The Company's contracts with its vendors
provide that rates may fluctuate, with rate change notice periods varying from
five days to one year, with certain of the Company's longer term arrangements
requiring the Company to meet minimum usage commitments in order to avoid
penalties. Such variability and the short-term nature of many of the contracts
subject the Company to the possibility of unanticipated cost increases and the
loss of cost-effective routing alternatives. Included in the Company's data
communications and telecommunications expenses are accruals for rate and minute
disputes and unreconciled billing differences between the Company and its
vendors. Each quarter management reviews the data communications and
telecommunications expenses accrual and adjusts the balance for resolved items.
Data communications and telecommunications expenses also includes fixed costs
associated with the leasing of network facilities.
Selling, general and administrative expenses consist primarily of
personnel costs, depreciation and amortization, tradeshow and travel expenses
and commissions and consulting fees. These expenses have been increasing over
the past year, which is consistent with the Company's recent growth, accelerated
expansion into Latin America, and investment in systems and facilities.
Prices in the international long distance market have declined in
recent years and, as competition continues to increase, the Company believes
that prices are likely to continue to decline. Additionally, the Company
believes that the increasing trend of deregulation of international long
distance telecommunications will result in greater competition, which could
adversely affect the Company's revenue per minute and gross margin. The Company
believes, however, that the effect of such decreases in prices will be offset by
increased calling volumes and decreased costs.
FOREIGN EXCHANGE. The Company's cost of long distance services are
sensitive to foreign currency fluctuations. The Company expects that an
increasing portion of the Company's revenues and expenses will be denominated in
currencies other than U.S. dollars, and changes in exchange rates may have a
significant effect on the Company's results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS. The Company's quarterly
operating results are difficult to forecast with any degree of accuracy because
a number of factors subject these results to significant fluctuations. As a
result, the Company believes that period-to-period comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.
The Company's revenues, costs and expenses have fluctuated
significantly in the past and are likely to continue to fluctuate significantly
in the future as a result of numerous factors. The Company's revenues in any
given period can vary due to factors such as call volume fluctuations,
particularly in regions with relatively high per-minute rates, the addition or
loss of major customers, whether through competition, merger, consolidation or
otherwise, the loss of economically beneficial routing options for the
termination of the Company's traffic, financial difficulties of major customers,
pricing pressure resulting from increased competition, and technical
difficulties with or failures of portions of the Company's network that impact
the Company's ability to provide service to or bill its customers. The Company's
cost of services and operating expenses in any given period can vary due to
factors such as fluctuations in rates charged by carriers to terminate the
Company's traffic, the timing of capital expenditures, and other costs
associated with acquiring or obtaining other rights to switching and other
transmission facilities, changes in the Company's sales incentive plans and
costs associated with changes in staffing levels of sales, marketing, technical
support and administrative personnel. In addition, the Company's operating
results can vary due to factors such as changes in routing due to variations in
the quality of vendor transmission capability, loss of favorable routing
options, the amount of, and the accounting policy for, return traffic under
operating agreements, actions by domestic or foreign regulatory entities, the
level, timing and pace of the Company's expansion in international markets and
general domestic and international economic and political conditions. Further, a
substantial portion of transmission capacity used by the Company is obtained on
a variable, per minute and short term basis, subjecting the Company to the
possibility of unanticipated price increases and service cancellations. Since
the Company does not generally have long-term arrangements for the purchase or
resale of long distance services, and since rates fluctuate significantly over
short periods of time, the Company's gross margins are subject to significant
short term fluctuations. The Company's gross margins also may be negatively
impacted in the longer term by competitive pricing pressures.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE: The Company generates the majority of its revenue from the sale of
wholesale long distance voice services, largely to other telecommunications
carriers seeking overflow capacity, and the sale of prepaid long distance voice
services to agents and brokers of prepaid phone cards. Revenue for the three
months ended September 30, 2000 increased $989,276 to $1.3 million from $323,153
for the three months ended September 30, 1999. This increase is due to an
increase in customer traffic. During the past several years, market prices for
telecommunications services have been declining, which is a trend that the
Company believes will likely continue. This decline will have a negative effect
on its revenue and gross margin, which may not be offset completely by savings
from decreases in its cost of services.
OPERATING EXPENSES: The Company's primary operating expense categories
include data communications and telecommunications expenses and selling, general
and administrative expenses. Data and telecommunications include the fixed costs
of leased facilities, leased transport lines and the variable costs of
origination, termination and access services provided through local exchange
carriers and other long distance telecommunications companies. Selling, general
and administrative expenses include all infrastructure costs, such as selling
expenses, customer support, corporate administration, personnel network
maintenance, depreciation and amortization and a write-off of certain assets.
Selling expenses include commissions for its direct sales program. Selling
expenses also include commissions paid to its dealers and agents, which are
based on a fixed percentage of the customers' monthly billings.
Data communication and telecommunication expenses for the three months
ended September 30, 2000 increased $1.5 million to $2.3 million from $842,209
for the three months ended September 30, 1999. The primary increase is due to
the increased termination costs directly related to the increase in customer
traffic. In addition to incurring the costs associated with the origination,
transmission and termination from other carriers, the Company has also incurred
the costs associated with establishing its own transmission network and
termination relationships in the Latin America and Philippine markets. By
establishing its own transmission network and termination relationships, the
Company expects to be able to carry a significant portion of its international
long distance traffic over its own facilities, thereby reducing its costs of
services by decreasing payments to
other carriers for the use of their facilities. The Company has ceased
operations of its facilities located in Dallas and Laredo, Texas, New York, New
York, Mexico City and Manila, Philippines and continues to operate its facility
in Los Angeles, California. The Company has relocated a portion of the equipment
at these locations to its facility in Los Angeles. The Company intends to
re-deploy the equipment to these facilities subject to receipt of additional
financing.
Selling, general and administrative expenses for the three months ended
September 30, 2000 decreased $1.5 million to $1.5 million from $3.0 million for
the three months ended September 30, 1999. The decrease in selling, general and
administrative expenses is largely attributable to reduced investments in human
resources and reduced marketing and sales efforts associated with the Company's
scale back of operations and lay off of the majority of its employees.
Depreciation and amortization is primarily related to switching
equipment, facilities, computer equipment and software and is expected to
increase as the Company incurs substantial capital expenditures to continue the
expansion of its network facilities. Depreciation and amortization also includes
the amortization of goodwill related to its acquisition of phoneXchange, Inc.
and certain telecommunications equipment. Depreciation and amortization expenses
for the three months ended September 30, 2000 increased $146,305 to $372,953
from $226,648 for the three months ended September 30 1999. The increase in
depreciation and amortization is largely attributable to capital expenditures
related to the establishment and expansion of its network operations center and
support infrastructure to accommodate increased traffic volume and expanded
service offerings.
INTEREST INCOME AND INTEREST EXPENSE: Interest expense is primarily
comprised of interest paid on the Company's long-term debt and various capital
leases. Interest expense increased by $107,100 to $196,552 for the three months
ended September 30, 2000 from $89,451 for the three months ended September 30,
1999. This increase was attributable to the new borrowings under certain
long-term notes, the proceeds of which were primarily used for working capital.
Interest income is primarily composed of income earned on cash and cash
equivalents. Interest income increased by $69 to $69 for the three months ended
September 30, 2000 from $-0- for the three months ended September 30, 1999. This
increase was primarily attributable to increased interest earnings on the
Company's cash.
INCOME TAXES: The Company generated a net loss for the three months
ended September 30, 2000 and 1999. Based on the Company's plans to expand
through the construction and expansion of its network, customer base and product
offerings, the Company expects this trend to continue. Given these circumstances
and the level of taxable income expected to be generated from reversing
temporary differences, the Company has established a valuation allowance for the
deferred tax assets associated with these net operating losses.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE: The Company generates the majority of its revenue from the sale of
wholesale long distance voice services, largely to other telecommunications
carriers seeking overflow capacity, and the sale of prepaid long distance voice
services to agents and brokers of prepaid phone cards. Revenue for the nine
months ended September 30, 2000 increased $2.1 million to $2.7 million from
$624,832 for the nine months ended September 30, 1999. This increase is due to
an increase in customer traffic. During the past several years, market prices
for telecommunications services have been declining, which is a trend that the
Company believes will likely continue. This decline will have a negative effect
on its revenue and gross margin, which may not be offset completely by savings
from decreases in its cost of services.
OPERATING EXPENSES: The Company's primary operating expense categories
include data communications and telecommunications expenses and selling, general
and administrative expenses. Data and telecommunications include the fixed costs
of leased facilities, leased transport lines and the variable costs of
origination, termination and access services provided through local exchange
carriers and other long distance telecommunications companies. Selling, general
and administrative expenses include all infrastructure costs, such as selling
expenses, customer support, corporate administration, personnel network
maintenance, depreciation and amortization and a write-off of certain assets.
Selling expenses include commissions for its direct sales program. Selling
expenses also include commissions paid to its dealers and agents, which are
based on a fixed percentage of the customers' monthly billings.
Data communication and telecommunication expenses for the nine months
ended September 30, 2000 increased $1.5 million to $4.8 million from $1.3
million for the nine months ended September 30, 1999. The primary increase is
due to the increased termination costs directly related to the increase in
customer traffic In addition to incurring the costs associated with the
origination, transmission and termination from other carriers, the Company has
also incurred the costs associated with establishing its own transmission
network and termination
relationships in the Latin America and Philippine markets. The Company has
ceased operations of its facilities located in Dallas and Laredo, Texas, New
York, New York, Mexico City and Manila, Philippines and continues to operate its
facility in Los Angeles, California. The Company has relocated a portion of the
equipment at these locations to its facility in Los Angeles. The Company intends
to re-deploy the equipment to these facilities subject to receipt of additional
financing.
Selling, general and administrative expenses for the nine months ended
September 30, 2000 increased $196,749 to $4.5 million from $4.3 million for the
nine months ended September 30, 1999. The increase in selling, general and
administrative expenses is largely attributable to the significant investments
in human resources and increased marketing and sales efforts associated with the
continued expansion of its services for the first half of the year 2000. Since
these investments often occur before the Company realizes significant revenue
from operations, they have the effect of increasing selling, general and
administrative expenses as a percentage of revenue. This has been offset by the
decrease in selling, general and administrative expenses as a result of the
Company's scale back of operations and lay off of the majority of its employees.
Depreciation and amortization is primarily related to switching
equipment, facilities, computer equipment and software and is expected to
increase as the Company incurs substantial capital expenditures to continue the
expansion of its network facilities. Depreciation and amortization also includes
the amortization of goodwill related to its acquisition of phoneXchange, Inc.
and certain telecommunications equipment. Depreciation and amortization expenses
for the nine months ended September 30, 2000 increased $615,487 to $1.1 million
from $483,690 for the nine months ended September 30 1999. The increase in
depreciation and amortization is largely attributable due to capital
expenditures related to the establishment and expansion of its network
operations center and support infrastructure to accommodate increased traffic
volume and expanded service offerings.
IMPAIRMENT OF ASSETS: The Company wrote-down certain switching
equipment previously acquired in the amount of $ 2.5 million in February 1999 as
the result of an impairment of value.
INTEREST INCOME AND INTEREST EXPENSE: Interest expense is primarily
comprised of interest paid on the Company's long-term debt and various capital
leases. Interest expense increased by $571,547 to $709.991 for the nine months
ended September 30, 2000 from $138,443 for the nine months ended September 30,
1999. This increase was attributable to the new borrowings under certain
long-term notes, the proceeds of which were primarily used for working capital.
Interest income is primarily composed of income earned on cash and cash
equivalents. Interest income increased by $8,801 to $9,358 for the nine months
ended September 30, 2000 from $557 for the nine months ended September 30, 1999.
This increase was primarily attributable to increased interest earnings on the
Company's cash.
INCOME TAXES: The Company generated a net loss for the nine months
ended September 30, 2000 and 1999. Based on the Company's plans to expand
through the construction and expansion of its network, customer base and product
offerings, the Company expects this trend to continue. Given these circumstances
and the level of taxable income expected to be generated from reversing
temporary differences, the Company has established a valuation allowance for the
deferred tax assets associated with these net operating losses.
LIQUIDITY AND CAPITAL RESOURCES: The Company's principal capital and
liquidity needs historically have related to the development of its network
infrastructure, its sales and marketing activities and general capital needs.
The Company's capital needs have been met, in large part, from the net proceeds
from borrowings under long-term notes and the sale of its common stock and
preferred stock. As the Company placed greater emphasis on expanding its network
infrastructure, the Company has also sought to meet its capital needs through
vendor leases and other equipment financings.
Cash from operations has not been sufficient to maintain the operation of
the Company's entire network. The Company has terminated certain contracts with
other telecommunication providers for domestic and international long haul
circuits used in its network. As a result, the Company has reduced the monthly
recurring cost of offering its services. The Company has focused on reselling
domestic and international long distance services purchased from other
providers.
The Company has a working capital deficiency of $(5,269,827) as of
September 30, 2000. The Company frequently has been unable to make timely
payments to its trade creditors and telecommunication carriers. As of December
31, 1999, the Company had past due trade payables in the amount of $114,979 and
$1,433,051, respectively. Deferred payment terms have been negotiated with many
trade vendors, however, the majority of trade vendors have ceased providing
services to the Company. The Company has been sued by certain trade vendors in
the aggregate amount of approximately $22,720. As of December 31, 1999, the
Company had past due payables to telecommunication carriers in the amount of
$101,537 and $2,218,469, respectively. Of the past due amounts due to
telecommunication carriers, the Company owed Sprint Telecom $-0- and $1,534,933
as of December 31, 1999 and September 30, 2000, respectively. All
telecommunication carriers with past due amounts have ceased providing services
to the Company. As a result, the Company is limited in its ability to provide
service to its customers. The Company has focused on reselling domestic and
international long distance services to its customers.
The Company is currently in default on the lease for its corporate
headquarters and has entered into a stipulated judgment which allows the Company
to retain occupancy until December 1, 2000 at which time $74,485 is due to the
landlord as payment for a portion of the past due amount and monthly payments of
$75,202 are due thereafter starting on January 1, 2001 until the remaining past
due balance has been paid and monthly payments of $19,720 are then due
thereafter. The Company is currently unable to pay the $74,485 and expects to be
ordered to vacate the premises on or about December 5, 2000.
The Company has laid off the majority of its employees and has entered into
a services agreement to outsource technical, customer support and general and
administrative functions to a related third party.
On October 16, 2000, the Company received a notice of default and
acceleration from the holder of its 4% Convertible Debenture, in the principal
amount of $5,000,000. Pursuant to the placement, the Company entered into a
Registration Rights Agreement whereby the Company was obligated to file a
registration statement by January 5, 2000 and have it declared effective 90 days
thereafter. To date, the registration statement has not been declared effective
and the Company has been incurring a penalty in the amount of $100,000 per month
as liquidated damages. On October 16, 2000, the Company received a notice of
default by the debt-holder alleging, among other things, that the Company has
failed to make payments totaling $793,333.34 (through October 14, 2000) as
required by the Registration Rights Agreement. The debt-holder also demands
payment, in full, of the principal amount of Five Million ($5,000,000), together
with accrued interest and the liquidated damages set forth above. The debenture
is unsecured. The Company is currently unable to pay the amounts demanded and is
attempting to negotiate a settlement with the debt-holder.
The Company is currently in default upon its 10% Senior Secured Notes, due
November 1, 2000. The principle and accrued interest were due on the earlier of
(i) November 1, 2000 or (ii) upon receipt by the Company of net proceeds of
$400,000 from the next financing completed by the Company. The note is secured
by all assets of the Company. The note holder has not provided notice of
default. The Company is unable to repay the note at this time.
The Company has engaged an investment banker and is attempting to raise
capital through the sale of assets and the private placement of debt or equity
securities. There can be no assurance that the Company will be able to continue
operations or reestablish operations upon the successful completion of any of
the aforementioned transactions.
On October 12, 2000, the Company entered into a Subscription Agreement with
Hitech Resource Corporation for the issuance of 14 million shares of the
Company's restricted $.001 par value common stock at a per share price of $.50
for gross proceeds of $7.0 million. The agreement calls for placement fees of
$280,000 in cash and 560,000 shares of the Company's restricted $.001 par value
common stock for net proceeds to the Company of $6,720,000. Closing is expected
to occur by November 30, 2000. The failure to obtain such capital by December 1,
2000 would have a material adverse effect on the Company's business and its
ability to continue as a going concern.
The Company has a note receivable in the amount of $349,250 related to the
sale of its investment in marketable securities. Amounts due under the note are
delinquent and the Company has given notice of default.
Net cash provided by financing activities was $360,148 for the nine months
ended September 30, 2000 and $4,494,801 for the nine months ended September 30,
1999. The September 1999 amount is primarily attributable to the net proceeds
from the issuance of long term notes and the sale its common and preferred
stock. The September 2000 amount is attributable to proceeds from short term
note and proceeds from stock subscriptions offset by debt and capital lease
peyments.
Net cash used in operating activities was $3,093,453 for the nine months
ended September 30, 2000 and $3,284,118 or the nine months ended September 30,
1999. Cash used in operating activities for all periods resulted from net losses
and increases in accounts receivable, deposits and prepaids, which were
partially offset by the write-off of certain assets, increases in accounts
payable and accrued liabilities.
Net cash provided by investing activities was $191,107 for the nine months
ended September 30, 2000 and net cash used by investing activities was
$1,112,153 for the nine months ended September 30, 1999. Cash provided by
investing activites is primarily due to proceeds from the sale of marketable
securites. Cash used in investing activities was primarily related to purchases
and sales of equipment and the purchase and sale of marketable securities.
MASTER LEASE AGREEMENT WITH LUCENT TECHNOLOGIES: On July 30, 1999,
phoneXchange and Lucent Technologies, Inc. InterNetworking Systems signed a
Master Lease Agreement pursuant to which Lucent agreed to provide the Company $3
million in credit for leasing Lucent equipment. On February 7, 2000, Lucent
amended this agreement to increase the Company's line of credit to $10 million.
The Company has received equipment eligible to be financed under the Master
Lease Agreement valued at approximately $4.9 million but has not completed type
testing and acceptance of the equipment. Upon type testing and acceptance, the
equipment will be placed under an operating lease with 36 monthly payments. As
of September 30, 2000, the Company had no outstanding borrowings under the
Master Lease Agreement.
EFFECTS OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 addresses reporting
amounts of other comprehensive income and SFAS No. 131 addresses reporting
segment information. In 1999, the Company implemented SFAS No. 130. There are no
material differences between net income and comprehensive income as defined by
SFAS 130 for the periods presented. SFAS 131 uses a management approach to
report financial and descriptive information about a company's operating
segments. Operating segments are revenue-producing components of the enterprise
for which separate financial information is produced internally for the
company's management. Under this definition, the Company operated as a single
segment for periods presented.
In September 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, SFAS No. 133 was amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133. As a result of this amendment, SFAS No. 133 shall be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. In accordance with SFAS No. 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. The Company does not expect the adoption of this
standard to have a material effect on its consolidated financial position or
results of operations.
On December 3, 1999, the Securities and Exchange Commission staff
issued SAB No. 101, Revenue Recognition in Financial Statements. The SAB spells
out four basic criteria that must be met before companies can record revenue.
These are: (a) persuasive evidence that an arrangement exists; (b) delivery has
occurred or services have been rendered; (c) the seller's price to the buyer is
fixed or determinable; and (d) collectibility is reasonably assured.
Many of the examples in the SAB address situations that give rise to
the potential for recording revenue prematurely. They include transactions
subject to uncertainties regarding customer acceptance, including rights to
refunds and extended payment terms, and require continuing involvement by the
seller.
In March 2000, the SEC issued SAB 101A - Amendment: Revenue Recognition
in Financial Statements, that delays the implementation date of certain
provisions of SAB 101. Under the amendment, the Company is not required to
restate its prior financial statements provided that the Company reports a
change in accounting principle no later than the second fiscal quarter (ending
June 30, 2000) in accordance with FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. In accordance with FAS 3, for companies
that adopt SAB 101 in the second quarter, financial information for the first
quarter would be restated by including a cumulative effect adjustment in that
quarter (i.e., the first quarter). The Company does not believe the adoption of
SAB 101 would have a material impact on its continuing operations.
INFLATION: The Company does not believe inflation has had a significant
impact on its operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, the Company has not entered into any market risk sensitive
instruments or purchased any hedging instruments for trading purposes or
otherwise that would be likely to expose the Company to market risk, whether
interest rate, foreign currency exchange, commodity price or equity price risk.
The Company has not purchased options or entered into swaps of forward or future
contracts. While its global operations currently generate revenues in United
States dollars, the Company is evaluating the impact of foreign currency
exchange risk on its results of operations as the Company continues to expand
globally.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 30, 1999, J&W Ventures, Inc. filed a claim against the
Company in the Superior Court of Los Angeles County, alleging that the Company
is in breach of a contract to purchase telecommunications equipment. The
plaintiff is seeking performance of the contract plus damages. The Company has
filed a cross-complaint seeking rescission and damages, asserting that J&W
Ventures, Inc. breached certain representations and warranties. The Company
intends to vigorously contest the litigation and to pursue its own remedies
fully. While no assurance can be given regarding the outcome of this matter, the
Company believes that the Company has strong and meritorious defenses to the
claims asserted. However, a determination that the Company breached its contract
with J&W Ventures, Inc. could have a material adverse effect on its business,
operating results and financial condition.
Pursuant to the J&W Ventures Asset Purchase Agreement, the Company paid
$300,000 in cash, issued 441,600 shares of common stock and was obligated to
designate and issue 850,000 shares of a new series of preferred stock, $2.50 par
value. Pending the outcome of the litigation between the parties, the Company
has placed a stop transfer order on the common stock issued, and has not
designated or issued any preferred stock to the J&W Ventures sellers. The
Company has not made any reserve on its balance sheet in connection with this
litigation.
<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.
INTEGRATED COMMUNICATION NETWORKS, INC.
Date: November 20, 2000 /S/ DAVID J. CHADWICK
---------------------------------------
David J. Chadwick
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 20, 2000 /S/ GARY L. KILLORAN
---------------------------------------
Gary L. Killoran
Secretary, Treasurer, Chief Financial
Officer (principal accounting officer)
and Director
<PAGE>
EXHIBIT INDEX
27.1 Financial Data Schedule
-----------------------------