<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 JULY 31, 1996
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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
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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
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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 July 31, 1996, 2,400,686 shares of Common Stock, no par value were
outstanding
Page 1 of 11 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
July 31, 1996 and January 31, 1996
Condensed Statements of Operations 4
Three & six months ended July 31, 1996 & 1995
Condensed Statements of Cash Flows 5
Six months ended July 31, 1996 & 1995
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 7 - 8
Condition and Results of Operations
Part II Other Information
Item 1 - Legal Proceedings 9
Item 2 - Changes in Securities 9
Item 3 - Defaults upon Senior Securities 9
Item 4 - Submission of Matters to a Vote of 9
Securities Holders
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signature Page 11
2
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEETS
July 31, January 31,
ASSETS 1996 1996
(Unaudited)
CURRENT ASSETS:
Cash $399,000 $473,000
Receivables:
Trade, net of allowance 3,572,000 2,757,000
Other 178,000 400,000
Inventory 1,109,000 1,398,000
Prepaid expenses and other 293,000 397,000
------------ ------------
Total current assets 5,551,000 5,425,000
FURNITURE AND EQUIPMENT - NET 1,818,000 1,943,000
OTHER ASSETS 117,000 82,000
TOTAL ASSETS $7,486,000 $7,450,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $2,200,000 $1,000,000
Accounts payable 1,194,000 2,523,000
Unearned income 752,000 662,000
Accrued expenses and other 496,000 348,000
------------ ------------
Total current liabilities 4,642,000 4,533,000
STOCKHOLDERS' EQUITY:
Common stock, no par value 5,207,000 5,202,000
Stockholders' notes (35,000) (35,000)
Retained earnings (2,328,000) (2,250,000)
------------ ------------
Total stockholders' equity 2,844,000 2,917,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,486,000 $7,450,000
------------ ------------
------------ ------------
See accompanying notes to these condensed financial statements.
3
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the six months ended For the three months ended
July 31, July 31,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES
Equipment $3,661,000 $5,613,000 $2,414,000 $3,006,000
Data communication services 4,839,000 4,239,000 2,473,000 2,129,000
------------ ------------ ------------ ------------
8,500,000 9,852,000 4,887,000 5,135,000
COST OF SALES (6,007,000) (6,827,000) (3,459,000) (3,579,000)
------------ ------------ ------------ ------------
GROSS MARGIN 2,493,000 3,025,000 1,428,000 1,556,000
OPERATING EXPENSES:
Selling 1,062,000 1,112,000 569,000 588,000
General and administrative 1,448,000 1,398,000 714,000 722,000
Software 61,000 304,000 26,000 171,000
Loss from investment in joint venture 0 61,000 0 22,000
------------ ------------ ------------ ------------
2,571,000 2,875,000 1,309,000 1,503,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (78,000) 150,000 119,000 53,000
INCOME TAX (EXPENSE) BENEFIT 0 0 0 0
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($78,000) $150,000 $119,000 $53,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE
Primary ($0.03) $0.06 $0.05 $0.02
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Primary 2,452,288 2,390,686 2,452,288 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 six months ended July 31,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($78,000) $150,000
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 330,000 298,000
Increase in Bad Debt Reserve 25,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables- Net (618,000) (1,326,000)
Inventory 289,000 (785,000)
Investment in sales type leases 34,000 43,000
Prepaid expenses and other 70,000 299,000
Increase (decrease) in:
Accounts payable (1,329,000) 464,000
Unearned income 90,000 87,000
Accrued expenses 148,000 (37,000)
------------ ------------
Net cash (used in) provided by operating activities (1,039,000) (807,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs - (100,000)
Capital expenditures (240,000) (452,000)
Investment in Joint Venture - (83,000)
Purchase Joint Venture - (84,000)
Purchase of Marketable securities 157,000
Sales of marketable securities - -
------------ ------------
Net cash used in investing activities (240,000) (562,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 1,200,000 2,365,000
Repayment of debt - (1,250,000)
Proceeds from notes receivable - 10,000
Purchase of treasury stock - (2,000)
Proceeds from sale of stock, net 5,000 -
------------ ------------
Net cash provided by (used in) financing activities 1,205,000 1,123,000
------------ ------------
DECREASE IN CASH (74,000) (246,000)
CASH, beginning of period 473,000 572,000
------------ ------------
CASH, end of period $399,000 $326,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to these condensed financial statements.
5
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INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JULY 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.
FINANCIAL CONDITION
The current ratio as of July 31, 1996 remained unchanged at 1.20 when compared
to January 31, 1996 (1.20), and working capital increased by $17,000 for the
period from January 31, 1996 to July 31, 1996. The Company's cash and cash
equivalents at July 31, 1996 were $399,000 compared to $473,000 at January 31,
1996, a decrease of $74,000. Trade accounts receivable increased by $815,000 to
$3,572,000 at July 31, 1996, when compared to January 31, 1996 due to higher
revenues in the month of July and slower payments by a number of major accounts.
Inventory balances decreased $289,000 compared to January 31, 1996 due to
management programs leading to increased inventory turns, stock rotation to
vendors, and improved customer delivery time. During the six months ending July
31, 1996 the Company purchased $ 240,000 of capital assets used primarily in
technology services.
The Company increased its borrowings under its bank line of credit to $1,300,000
at July 31, 1996, from $1,000,000 at January 31, 1996. The Company has a credit
facility of $1,750,000 of which $450,000 is held as collateral for a performance
bond on a significant customer contract. As of July 31, 1996, the Company was in
violation of loan agreement covenants. However, the lender has waived those
violations and extended the line of credit to September 12, 1996. In addition
to the bank credit facility, the Company has borrowed $900,000 under a stock
exchange agreement (See comments below). Accounts Payable decreased by
$1,329,000 when compared to January 31, 1996. This decrease resulted primarily
from payments to vendors with funds from operations, the Company's line of
credit, and the stock exchange loan. 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 proposes 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 is subject to shareholder approval. 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.
RESULTS OF OPERATIONS:
For the three and six months ended July 31, 1996, the Company reported revenues
of $4.89 million and $8.50 million respectively, resulting in net profits of
$119,000 for the three months and net losses of $78,000 for the six months
respectively, compared to revenues of $5.14 million and $9.85 million with net
income of $53,000 and $150,000 for the three months and six months ended
July 31, 1995.
7
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Revenues for the second quarter of FY1997 (ended July 31, 1996) increased 35%
over revenues for the first quarter of FY1997. This increase is attributable to
higher sales representative productivity and the establishment of new sales
channels for the Company's service products. When comparing revenues for the
second quarter of FY1997 to the revenues for the same quarter of FY1996 (ended
July 31, 1995), revenues have declined by $248,000 which is attributable to the
recording of sale of $1.6 million to a single customer in the second quarter of
FY1995. For the six months ended July 31, 1996 revenues were $8.50 million
compared to $9.85 million for the same period of the prior year. This decline
in revenue of 13.7% is attributable to the single sale of $1.6 million mentioned
above and unusually low sales in the first quarter of FY1997. Gross margin as
a percentage of revenues was 29.2% for the three months ending July 31, 1996 and
was 29.3% for the six months ended July 31.1996. Gross margin declined by an
average of 1.2% for both periods which is attributable to normal competitive and
price pressures. The Company's gross margin percentage can vary from period to
period due to changes in the relative mix of equipment and service sales.
Selling expense as a percentage of revenue increased for all reporting periods
but actually declined in when measured in dollars. Selling expense as a
percentage of revenues remained stable (11.6%) for the three months ended July
31, 1996 compared to the same period of the prior year (11.4%) but declined by
3.2% in dollars expended. For the six months ended July 31, 1996 selling
expense as percentage of revenues increased by 1.4% compared to the six months
ended July 31, 1995 but declined by 2.7% in terms of expenditures. The
increase in selling expense when measured as a percentage of revenues is
attributable to revenue shortfalls in the first quarter of FY1997. The
decreases in the funds expended is attributable restructuring of the sales
organization during the fourth quarter of FY1995.
General and Administrative expenses increased $50,000 for the six month period
ending July 31, 1996 when compared to the same period in fiscal year 1996.
These expenses include many fixed expenses which do not vary with revenue
levels. The increase for the six months is attributable to increased office
space expenses and general vendor price increases.
Software development & maintenance expenses decreased significantly for all
reported periods. This is attributable to a change in management's long-range
plans and the cancellation of software development programs which was discussed
in detail in the Company's annual report and 10-KSB for the fiscal year ended
January 31, 1996.
Net income for the three months ended July 31, 1996 was $119,000 compared to net
income of $53,000 for the same period from the prior year. The net income of
$119,000 compares to a loss of $197,000 for the three month ended April 30,
1996. The Company reports a net loss for the six months ended July 31, 1996 of
$78,000 compared to net income of $150,000 for the same period from the prior
year.
INTERNET COMMUNICATIONS CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
8
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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. This proposal passed with 1,380,129 votes for, 13,764 votes
against, 12,127 abstaining, and 792,013 not voted.
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 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, which required a two-thirds vote of outstanding shares, failed due to
an insufficient number of shares voting.
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.
9
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ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K's were filed on May 15 and May 29, 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
10
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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: September 12, 1996
By: /s/ Benjamin T. Kelly
-------------------------------------------
Benjamin T. Kelly, Chief Financial Officer
and Treasurer
Date: September 12, 1996
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-END> JUL-31-1996
<CASH> 399,000
<SECURITIES> 0
<RECEIVABLES> 3,908,000
<ALLOWANCES> 158,000
<INVENTORY> 1,109,000
<CURRENT-ASSETS> 5,551,000
<PP&E> 4,317,000
<DEPRECIATION> (2,499,000)
<TOTAL-ASSETS> 7,486,000
<CURRENT-LIABILITIES> 4,642,000
<BONDS> 0
0
0
<COMMON> 5,207,000
<OTHER-SE> 2,363,000
<TOTAL-LIABILITY-AND-EQUITY> 7,486,000
<SALES> 8,500,000
<TOTAL-REVENUES> 8,500,000
<CGS> 6,007,000
<TOTAL-COSTS> 8,578,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 64,000
<INCOME-PRETAX> (78,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (78,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
