<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q SB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended OCTOBER 31, 1996
----------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
--- ---
Commission file number 0-19578
--------
INTERNET COMMUNICATIONS CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-1095516
------------------------------- ---------------------------------
State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
7100 E. BELLEVIEW AVENUE, SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 770-7600
---------------
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. [X] Yes [ ] No
At October 31, 1996, 4,713,727 shares of Common Stock, no par value were
outstanding
Page 1 of 13 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
PAGE
----
Form 10-Q SB Cover Page 1
Index Page 2
Part I Condensed Balance Sheets 3
October 31, 1996 and January 31, 1996
Condensed Statements of Operations 4
Three & nine months ended October 31, 1996 & 1995
Condensed Statements of Cash Flows 5
Nine months ended October 31, 1996 & 1995
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 7 - 10
Condition and Results of Operations
Part II Other Information
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of 11 - 12
Securities Holders
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signature Page 13
2
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEET
October 31,
1996 January 31,
(Unaudited) 1996
------------- -----------
ASSETS
CURRENT ASSETS
Cash $ 573,000 $ 473,000
Receivables:
Trade, net of allowance 8,501,000 2,757,000
Other 116,000 400,000
Inventory 2,078,000 1,398,000
Work in Process 1,321,000
Prepaid Expenses and other 598,000 397,000
----------- -----------
Total current assets 13,187,000 5,425,000
FURNITURE AND EQUIPMENT - NET 2,767,000 1,943,000
OTHER ASSETS
Goodwill 3,278,000
Intangible assets 751,000
Other assets 408,000 82,000
----------- -----------
Total other assets 4,437,000 82,000
TOTAL ASSETS $20,391,000 $ 7,450,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 4,584,000 $1,000,000
Account payable 4,125,000 2,523,000
Unearned Income 993,000 662,000
Current maturities of long term debt 239,000
Accrued expenses and other 989,000 348,000
----------- -----------
Total current liabilities 10,930,000 4,533,000
LONG TERM LIABILITIES 775,000 --
STOCKHOLDERS' EQUITY:
Common stock, no par value 10,813,000 5,202,000
Stockholders' notes (35,000) (35,000)
Retained earnings (2,092,000) (2,250,000)
----------- -----------
Total stockholders' equity 8,686,000 2,917,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $20,391,000 $ 7,450,000
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS.
3
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES
EQUIPMENT $8,790,000 $7,998,000 $5,129,000 $2,386,000
DATA AND VOICE COMMUNICATION SERVICES 9,356,000 6,390,000 4,517,000 2,144,000
---------- ---------- ---------- ----------
18,146,000 14,388,000 9,646,000 4,530,000
COST OF SALES (11,791,000) (10,371,000) (6,206,000) (3,574,000)
---------- ---------- ---------- ----------
GROSS MARGIN 6,355,000 4,017,000 3,440,000 956,000
OPERATING EXPENSES:
SELLING 2,740,000 1,678,000 1,247,000 556,000
GENERAL AND ADMINISTRATIVE 3,457,000 2,986,000 1,956,000 1,197,000
SOFTWARE -- -- -- --
LOSS FROM INVESTMENT IN JOINT VENTURE -- -- -- --
---------- ---------- ---------- ----------
6,197,000 4,664,000 3,203,000 1,753,000
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 158,000 (647,000) 237,000 (797,000)
INCOME TAX (EXPENSE) BENEFIT -- 127,000 -- 127,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 158,000 ($520,000) $ 237,000 ($670,000)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER COMMON SHARE
PRIMARY $0.06 ($0.21) $0.07 ($0.27)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
PRIMARY 2,711,385 2,390,686 3,487,699 2,390,686
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE CONDENSED FINANCIAL STATEMENTS
4
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED OCTOBER 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $158,000 ($520,000)
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 694,000 462,000
Increase in Bad Debt Reserve 47,000 150,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables - Net (1,805,000) (111,000)
Other receivables 195,000 --
Income taxes -- (131,000)
Inventory 435,000 (465,000)
Prepaid expense and other (51,000) 148,000
Work-in-Process (444,000) --
Other non-current assets (90,000) --
Increase (decrease) in:
Accounts payable (890,000) 355,000
Unearned income 166,000 111,000
Accrued expenses 122,000 137,000
---------- ----------
Net cash (used in) provided by operating activities (1,463,000) 656,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs -- (100,000)
Capital expenditures (601,000) (849,000)
Investment in intangible assets (48,000) --
Cash acquired in merger and acquisition -- --
Purchase Joint Venture -- (167,000)
Sales of marketable securities -- 157,000
---------- ----------
Net cash used in investing activities (570,000) (959,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 4,900,000 3,365,000
Repayment of debt (2,788,000) (2,615,000)
Proceeds from notes receivable -- 21,000
Purchase of treasury stock -- (2,000)
Proceeds from sale of stock, net 20,000 10,000
---------- ----------
Net cash provided by (used in) financing activities 2,132,000 779,000
---------- ----------
INCREASE IN CASH 99,000 21,000
CASH, BEGINNING OF PERIOD 474,000 572,000
CASH, END OF PERIOD $ 573,000 $ 593,000
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to these condensed financial statements.
5
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INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The financial statements included herein have been prepared by Internet
Communications Corporation (Internet or the Company), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission and include
all adjustments which are, in the opinion of management, necessary for a fair
presentation. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The Company believes that the disclosures are adequate to make the
information presented not misleading. However, it is suggested that these
financial statements be read in conjunction with the financial statements and
the notes thereto which are incorporated by reference in the Company's Annual
Report on Form 10-K SB for the fiscal year ended January 31, 1996. The
financial data for the interim periods may not necessarily be indicative of
results to be expected for the year.
6
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INTERNET COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying condensed financial
statements.
INTRODUCTION
During the quarter ended October 31, 1996, Internet Communications Corporation
(Company or Internet) merged with Interwest Communications C.S. Corporation
(Interwest Communications) and acquired the assets of Paragon Data Systems
(Paragon). See Item 4. of Part II. The merger with Interwest Communications
C.S. Corporation was effective on September 1, 1996, and therefore this 10-Q
report includes the results from operations of Interwest for two months of the
quarter. Interwest is currently a wholly-owned subsidiary of Internet. The
assets of Paragon Data Systems were acquired effective October 1, 1996. Both
transactions were accounted under purchase accounting rules.
FINANCIAL CONDITION
Internet Communications Corporation's financial condition was effected by the
addition of the net assets of Interwest Communications C.S. Corporation and
Paragon Data Systems. Those net assets are included in Internet Communications
Corporation balance sheet at October 31, 1996. The table set forth selected
assets and liabilities of Internet and Interwest Communications. Paragon
Data Systems assets were considered to be immaterial and are not separately
disclosed but are included with the assets of Internet in the table below.
INTERNET INTERWEST
COMMUNICATIONS COMMUNICATIONS TOTAL
-------------- -------------- ----------
Accounts Receivable-net $4,055,000 $4,446,000 $8,501,000
Inventory 1,256,000 822,000 2,078,000
Work in Process - 1,321,000 1,321,000
Working Capital 636,000 1,621,000 2,257,000
Fixed Assets-net 1,967,000 800,000 2,767,000
Goodwill 288,000 2,990,000 3,278,000
Intangible 15,000 736,000 751,000
Notes Payable $2,640,000 $1,944,000 $4,584,000
Accounts Payable 1,372,000 2,753,000 4,125,000
Accrued Expenses 376,000 613,000 989,000
7
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The current ratio as of October 31, 1996 improved to 1.21 when compared to
January 31, 1996 (1.20), and working capital increased by $1,365,000 for the
period from January 31, 1996 to October 31, 1996. The Company's cash and
cash equivalents at October 31, 1996 were $573,000 compared to $473,000 at
January 31, 1996, a increase of $100,000. Trade accounts receivable
increased by $5,744,000 to $8,501,000 at October 31, 1996, when compared to
January 31, 1996 due to a significant transaction which closed late in the
quarter and the addition of $4,446,000 in accounts receivable from Interwest
Communications. Inventory balances increased $680,000 compared to January 31,
1996. This net increase was attributable to Interwest inventory of $822,000
which offset a reduction of Internet Communication's inventory of $142,000
which was achieved through improved inventory management. Work in Process of
$1,321,000 reflects expenses associated with partial completion of major
contracts with Interwest Communications. Interwest Communications accounts
for major contracts on the percentage of completion bases. The Interwest
Communications As of October 31, 1996, the balance sheet of Internet
Communications reflects fixed assets of $6,140,000 which includes fixed
assets of Interwest of $1,450,000. During the nine months ended Internet
acquired fixed assets of $613,000 (which includes $47,000 from Paragon but
excludes Interwest) used primarily in technology services.
On September 19, 1996, the Company established a new bank line of credit which
it used to payoff the existing lines of credit of Internet Communications and to
pay balances owed by Interwest Communications to its former parent. The new line
of credit is a $6,000,000 multi-year credit facility collateralized by the
accounts receivable, inventory, and the general assets of Internet
Communications and its subsidiaries. In addition to the bank credit facility, at
October 31, 1996, the Company had borrowed $900,000 under a stock exchange
agreement (See comments below). Subsequent to October 31, 1996, the Company has
drawn on its bank line of credit to pay the stock exchange loan of $900,000. It
is management's opinion that the Company has adequate working capital and bank
credit to fund its on-going operations.
On May 29,1996, the Company entered into a stock exchange agreement with
Interwest Group, Inc. (Group), under which the Company proposed to acquire all
of the issued and outstanding common stock of Interwest Communications C. S.
Corporation in exchange for 2,306,541 shares of the Company's common stock. The
share exchange agreement was subject to shareholder approval which was granted
on September 12, 1996. In connection with this agreement, Group advanced the
Company $900,000 in the form of a promissory note due December 31, 1996. If not
paid when due, the Note is convertible into common stock at $3.00 per share.
The promissory notes was paid on December 6, 1996.
On an overall basis, accounts payable increased by $1,602,000 due to the
inclusion of the accounts payable of Interwest Communications. On a standalone
basis, the accounts payable of Internet decreased by $1,151,000 as compared to
January 31, 1996 due to increased use of bank lines of credit and accelerated
cash collections. Current maturities of long term debt and long term debt
increased by $1,014,000 due to the assumption by Internet of debt from
Interwest Communications and Paragon Data Systems. This debt relates to the
acquistion of capital assets. Accrued expenses and other liabilities increased
by $641,000 as compared to January 31, 1996. These liabilities relate to
normal business operations and include such balances as accured payroll and
payroll taxes, accrued interest payable, and sales and employment taxes.
RESULTS OF OPERATIONS:
For the nine and three months ended October 31, 1996, the Company reported
revenues of $18,146,000 and $9,646,000 respectively, resulting in net profits of
$158,000 for the nine months and net profits of $237,000 for the three months
respectively, compared to revenues of
8
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$14,388,000 and $4,530,00 million with net loss of $520,000 and $670,000 for the
nine months and three months ended October 31, 1995, respectively.
The results of operations were affected by the merger with Interwest
Communications and the acquisition of the assets of Paragon. The table below
shows the revenue, cost of goods, and gross margin contributions of Internet and
Interwest Communications during the nine months ended October 31, 1996. Paragon
is included in the Internet Communications column.
INTERNET INTERWEST
COMMUNICATIONS COMMUNICATIONS
(NINE MONTHS) (TWO MONTHS) TOTAL
-------------- -------------- -----------
Revenues $13,240,000 $4,906,000 $18,146,000
Cost of Goods Sold 8,588,000 3,241,000 11,829,000
Gross Margin 4,652,000 1,665,000 6,317,000
Revenues for the third quarter of FY1997 (ended October 31, 1996) increased 113%
over revenues for the third quarter of FY1996 (ended October 31, 1995).
Revenue for the third quarter also increased over revenues of the second quarter
of FY1997 ($4,887,000) by 97%. This increase in revenues is attributable to
the Company's mergers and acquisition activities during the quarter. Revenues
from the nine months ended October 31, 1996 increased by 26% ($3,758,000) over
the same period of FY1995. Gross margin as a percentage of revenues was 35.0%
for the nine months of FY1997, an increase over the gross margin percentage of
27.9% from the prior period. For the third quarter ended October 31, 1996,
gross margin percentage was 35.7% as compared to 21% for the quarter ended
October 31, 1995. The growth in gross margin percentage is attributable to an
improved mix of higher margin revenues in both Internet and Interwest
Communications and the unusually low gross margin experienced in the third
quarter of FY1995. The Company's gross margin percentage can vary from period
to period due to changes in the relative mix of equipment and services sales.
Selling expense as a percentage of revenue increased for all reporting periods.
Selling expense as a percentage of revenues increased (to 12.9%) for the three
months ended October 31, 1996 compared to the same period of the prior year
(12.3%). For the nine months ended October 31, 1996 selling expense as
percentage of revenues increased by 3.7% compared to the nine months ended
October 31, 1995. The increase in selling expense when measured as a percentage
of revenues is attributable to funds invested in the Company's new outsourcing
program and expenses incurred in the merger of the Internet and Interwest
Communications sales organizations.
General and Administrative expenses increased by $471,000 for the nine month
period ending July 31, 1996 when compared to the same period in fiscal year
1996. This increase was due primarily to the Company's merger and acquisition
activities. Expense increases were reported in all areas due to merger-related
employee headcount increases, increased office space, and general activity
levels. Management expects these expenses to decrease as a percentage of
revenue if and when merger synergies are implemented. At the same time it should
be noted that many of these expenses do not vary with revenue levels.
9
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Net income for the three months ended October 31, 1996 was $237,000 compared to
net loss of $670,000 for the same period from the prior year. The net income of
$158,000 for the nine months compares to a loss of $520,000 for the nine months
of the prior year ended October 31, 1995.
10
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INTERNET COMMUNICATIONS CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITIES HOLDERS
On September 12, 1996, a special meeting of the Company's shareholders was held
to vote on proposals contained in a proxy statement mailed to shareholders on
August 12, 1996. The following items were voted upon by shareholders.
Proposal #1 to adopt the 1995 Non-Employee Director Stock Option Plan. This
proposal passed with 1,403,440 votes for, 81,152 votes against, 17,704
abstaining, and 695,737 not voting.
Proposal #2 to adopt the 1996 Incentive Stock Plan. This proposal passed with
1,381,432 votes for, 44,900 votes against, 25,494 abstaining, and 745,747 not
voting.
Proposal #3 to approve the amended and restated acquisition agreement among the
Company, Internet Acquisition One, Inc. ("Merger Sub") and Interwest Group, Inc.
("Group") and certain transactions related thereto pursuant to which Merger Sub
will merge into Interwest Communications C.S. Corporation, ("Interwest") a
wholly-owned subsidiary of Group. As a result of the merger, the Company will
own all the outstanding shares of capital stock of Interwest. Group will
receive a number of shares of the Company's common stock, no par value, that
will in general be equal to 49% of the number of shares of the Company common
stock that will be issued and outstanding after giving effect to the closing of
the merger.
Proposal #4 to amend the articles of incorporation to increase the number of
authorized shares of the Company common stock from 4,500,000 shares to
20,000,000 shares. This proposal passed with 2,137,401 votes for, 40,935 votes
against, 19,477 abstaining, and 220 not voting.
Proposal #5 to amend the articles of incorporation to remove the requirement
that there be at least six directors prior to dividing the board of directors
into three classes, each of which, after
11
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an interim arrangement, will serve for staggered three year terms, and to permit
the removal of directors before expiration of their terms of office only for
cause. This proposal passed with 1,371,163 votes for, 56,041 votes against,
25,082 abstaining, and 745,747 not voting.
Proposal #6 to amend the articles of incorporation to provide for increased
voting requirements for certain corporate actions including the sale of the
Company's assets, mergers, and dissolution and to remove the requirement for
shareholder approval of pledges of assets; and to provide for mandatory
indemnification of directors and officers in every case in which a corporation
is entitled under Colorado law to indemnify directors and officers. This
proposal failed to pass with 1,297,049 votes for, 83,144 votes against,
25,827 abstaining, and 792,013 not voting. A two-thirds majority of all
stockholders was required to approve this proposal.
The following directors were nominated by the Company management and were
elected:
Dale R. Morrison - 2,188,843 votes for and 8,990 votes against.
William J. Maxwell - 2,186,114 votes for and 11,719 votes against.
Arnell J. Galley - 2,186,214 votes for and 12,619 votes against.
Peter A. Guglielmi - 2,186,364 votes for and 11,469 votes against.
Thomas C. Galley - 2,185,314 votes for and 12,519 votes against.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K's were filed on October 4 and December 3, 1996. Both reports dealt
with the merger of the Company and Interwest Communications C. S. Corporation.
See comments under ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITIES
HOLDERS
12
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 COMMUNICATIONS CORPORATION
By: /s/ Thomas C. Galley
-----------------------------------------
Thomas C. Galley, President
Date: October 13, 1996
By: /s/ Benjamin T. Kelly
-----------------------------------------
Benjamin T. Kelly, Chief Financial Officer
and Treasurer
Date: October 13, 1996
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> JAN-31-1996
<PERIOD-END> OCT-31-1997
<CASH> 573,000
<SECURITIES> 0
<RECEIVABLES> 8,818,000
<ALLOWANCES> (318,000)
<INVENTORY> 2,078,000
<CURRENT-ASSETS> 13,187,000
<PP&E> 6,140,415
<DEPRECIATION> (3,374,455)
<TOTAL-ASSETS> 20,391,000
<CURRENT-LIABILITIES> 10,930,000
<BONDS> 0
0
0
<COMMON> 10,813,000
<OTHER-SE> (2,127,000)
<TOTAL-LIABILITY-AND-EQUITY> 20,391,000
<SALES> 18,146,000
<TOTAL-REVENUES> 18,146,000
<CGS> 11,791,000
<TOTAL-COSTS> 6,197,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 47,000
<INTEREST-EXPENSE> 178,000
<INCOME-PRETAX> 158,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 158,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 158,000
<EPS-PRIMARY> $0.06
<EPS-DILUTED> $0.06
</TABLE>
