<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
INTERNET COMMUNICATIONS CORPORATION
- - - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
Pursuant to Exchange Act Rule 0-11(c)(1), a fee of $2,739.25 is being
paid, representing 1/50th of one percent of the value of the
Registrant's securities being transferred to the sole shareholder of the
company being acquired by the Registrant.
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction: $13,196,240
------------------------------------------------------------------------
5) Total fee paid: $2,739.25
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
AMENDMENT NO. 1 TO PRELIMINARY COPY
INTERNET COMMUNICATIONS CORPORATION
7100 EAST BELLEVIEW AVENUE, SUITE 201
GREENWOOD VILLAGE, COLORADO 80111
TELEPHONE - (303) 770-7600
- - - - --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1996
- - - - --------------------------------------------------------------------------------
TO THE SHAREHOLDERS OF INTERNET COMMUNICATIONS CORPORATION:
A Special Meeting of Shareholders of Internet Communications Corporation, a
Colorado corporation (the "Company"), will be held at the Company's offices at
7100 East Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111, on
September , 1996 at 1:00 p.m., Denver Time, to consider and take action on:
1. A proposal to adopt the 1995 Non-Employee Director Stock Option Plan.
2. A proposal to adopt the 1996 Incentive Stock Plan.
3. A proposal to approve the Amended and Restated Acquisition
Agreement (the "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
(the "Merger") 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 and Group
will receive a number of shares of the Company's common stock, no par value
("Company Common Stock"), that will in general be equal to 49% of the number
of shares of Company Common Stock that will be issued and outstanding after
giving effect to the closing of the Merger.
4. A proposal 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.
5. A proposal 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 removal of directors
before expiration of their terms of office only for cause.
6. A proposal 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.
<PAGE>
7. A proposal to elect five Directors.
8. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The discussion of the proposals of the Board of Directors set forth above
is intended only as a summary, and is qualified in its entirety by the
information relating to the proposals set forth in the accompanying Proxy
Statement.
Only shareholders of record at the close of business on August 5, 1996,
will be entitled to notice of and to vote at this special meeting, or any
adjournment or adjournments thereof.
Date: August , 1996 By Order of the Board of Directors:
Thomas C. Galley, President
YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT YOU ATTEND THE
MEETING.
YOUR VOTE IS IMPORTANT
-4-
<PAGE>
AMENDMENT NO. 1 TO PRELIMINARY COPY
INTERNET COMMUNICATIONS CORPORATION
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1996
THIS PROXY STATEMENT IS FURNISHED IN CONNECTION WITH A SOLICITATION OF
PROXIES (IN THE FORM ENCLOSED) BY THE BOARD OF DIRECTORS OF INTERNET
COMMUNICATIONS CORPORATION (THE "COMPANY") TO BE USED AT THE SPECIAL MEETING
OF SHAREHOLDERS (THE "SPECIAL MEETING") AT 1:00 P.M. (DENVER TIME), ON
SEPTEMBER , 1996 AT THE COMPANY'S OFFICES AT 7100 E. BELLEVIEW AVE., SUITE
201, GREENWOOD VILLAGE, COLORADO 80111. THE PROXY AND PROXY STATEMENT WILL
BE MAILED TO SHAREHOLDERS ON OR ABOUT AUGUST , 1996. THE SPECIAL MEETING
WILL BE HELD IN LIEU OF THE ANNUAL MEETING NORMALLY HELD IN MAY OF EACH YEAR.
REVOCABILITY OF PROXY
If the enclosed Proxy is executed and returned, it will be voted on the
proposals as indicated by the shareholder. The Proxy may be revoked by the
shareholder at any time prior to its use by notice in writing to the Secretary
of the Company, by executing a later dated proxy and delivering it to the
Company prior to the meeting or by voting in person at the meeting.
SOLICITATION
The cost of preparing, assembling and mailing the Notice of Meeting, Proxy
Statement and Proxy (the "Proxy Materials"), miscellaneous costs with respect to
the Proxy Materials and solicitation of the Proxies will be paid by the Company.
The Company also may use the services of its directors, officers and employees
to solicit Proxies, personally or by telephone and telegraph, but at no
additional salary or compensation. The Company intends to request banks,
brokerage houses and other custodians, nominees and fiduciaries to forward
copies of the Proxy Materials to those persons for whom they hold such shares
and request authority for the execution of the Proxies. The Company will
reimburse them for the reasonable out-of-pocket expenses incurred by them in so
doing.
-5-
<PAGE>
TABLE OF CONTENTS
PAGE
----
Revocability of Proxy................................................. 5
Solicitation.......................................................... 5
Cautionary Statement Pursuant to Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995.............. 7
Voting Securities and Principal Shareholders.......................... 7
Directors and Executive Officers of the Company....................... 13
Directors Meetings and Standing Committees............................ 15
Compliance with Section 16(a) of the Securities Exchange
Act of 1934.......................................................... 15
Price Range of the Company Common Stock............................... 16
Executive Compensation................................................ 16
Proposal One, A Proposal to Approve the 1995 Non-employee
Director Stock Option Plan........................................... 18
Proposal Two, A Proposal to Approve the 1996 Incentive
Stock Plan........................................................... 19
Proposal Three, A Proposal to Approve the Amended and
Restated Acquisition Agreement and Related Transactions.............. 22
Proposal Four, A Proposal to Amend the Articles of Incorporation to
Increase the Number of Authorized Shares of Company Common Stock
to 20,000,000 Shares ................................................ 43
Proposal Five, A Proposal to Amend the Articles of Incorporation
Concerning Classification of Directors and Election for
Staggered Terms...................................................... 47
Proposal Six, A Proposal to Amend the Articles of Incorporation to
Increase the Voting Requirement by the Company's Shareholders in
Certain Corporate Actions and to Provide for Mandatory
Indemnification of Directors and Officers............................ 49
Proposal Seven, A Proposal to Elect Five Directors.................... 52
Company's Relationship With Independent Certified Public Accountants.. 53
Financial Information................................................. 54
Other Matters......................................................... 54
Shareholder Proposals................................................. 54
Appendices:
A -- 1995 Option Plan
B -- 1996 Option Plan
C -- Amended and Restated Acquisition Agreement
D -- Index to Financial Statements
E -- Form 10-KSB
F -- Form 10-QSB
-6-
<PAGE>
CAUTIONARY STATEMENT PURSUANT TO
SAFE HARBOR PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Proxy Statement contains "forward-looking statements" within the
meaning of the federal securities laws. These forward-looking statements
include statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that
are not historical facts. The forward-looking statements in this Proxy
Statement are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in or implied by the
statements.
With regard to the Company, the most important factors include, but are
not limited to the following:
- Changing technololgy
- Competition
- Companies of varying sizes similar to the Company
- Manufacturers' direct sales forces
- Telecom/Cable Providers
- Consulting companies
- Possible future government regulation
- Competition for talented employees
- The Company's ability to finance its growth
With regard to Interwest, the most important factors include, but are
not limited to the matters discussed under "Interwest - Risks Relating to
Interwest's Business."
VOTING SECURITIES
Shareholders of record at the close of business on August 5, 1996 will
be entitled to vote on all matters. On the record date the Company had
2,400,686 shares of Company Common Stock outstanding. The holders of the
Company Common Stock are entitled to one vote per share. The Company has no
class of voting securities outstanding other than the Company Common Stock.
One third of the issued and outstanding shares of the Company Common Stock
entitled to vote, represented in person or by proxy, constitutes a quorum at
any shareholders' meeting. Adoption of Proposals One and Two will require
that the votes cast favoring the action must exceed the votes cast opposing
the action. Adoption of Proposals Three, Four and Five will require the
affirmative vote of the holders of a majority of the shares outstanding.
Adoption of Proposal Six will require the affirmative vote of the holders of
two-thirds of the shares outstanding. In the election of directors (Proposal
Seven), that number of candidates equaling the number of directors to be
elected, having the highest number of votes cast in favor of their election,
are elected to the board of directors. The failure to return a properly
executed proxy card or to vote in person ("abstention") at the Special
Meeting will have the same effect as a vote against proposals Three, Four,
Five and Six. Similarly, "broker non-votes" (referring to instances where a
broker or other nominee physically indicates on the proxy that, because it
has not received instructions from beneficial owners, it does not have
discretionary authority as to certain shares of Company Common Stock to vote
on the proposal) will have the same effect as a vote against Proposals Three,
Four, Five and Six. Abstentions and broker non-votes will have no effect on
Proposals One, Two and Seven. The proxies named in the enclosed proxy card
may, at the direction of the Board, vote to adjourn or
-7-
<PAGE>
postpone the Special Meeting to another time or place for the purpose of
soliciting additional proxies necessary for approval of a proposal or
otherwise.
-8-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 5, 1996
with respect to each Officer and Director and each person known by the
Company to be the beneficial owner of more than five percent of the Company
Common Stock. The table also sets forth such information on a pro forma
basis (i) assuming consummation of the Merger and (ii) assuming conversion of
the Note after the Merger. Messrs. Couzens, Smith and Slater are expected to
be designated as directors by Group upon consummation of the Merger.
<TABLE>
POST MERGER/NOTE
PRE-MERGER OWNERSHIP POST-MERGER OWNERSHIP CONVERSION OWNERSHIP
----------------------- ----------------------- -----------------------
AMOUNT OF AMOUNT OF AMOUNT OF
NAME AND ADDRESS BENEFICIAL PERCENT BENEFICIAL PERCENT BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS OWNERSHIP OF CLASS OWNERSHIP OF CLASS
- - - - ------------------- ----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Galley 677,178(1) 26.4% 677,178(1) 14.4% 677,178 13.5%
7100 E. Belleview Ave.
Suite 201
Greenwood Village, Colorado 80111
Arnell J. Galley 677,178(2) 26.4% 677,178(2) 14.4% 677,178 13.5%
7100 E. Belleview Ave.
Suite 201
Greenwood Village, Colorado 80111
Dale R. Morrison 118,000 4.6% 118,000 2.5% 118,000 2.4%
7100 E. Belleview Ave.
Suite 201
Greenwood Village, Colorado 80111
Peter A. Guglielmi 3,333(3) * 3,333(3) * 3,333 0.0%
4951 Indiana Avenue
</TABLE>
-9-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Lisle, Illinois 60532
William J. Maxwell - * - * - *
9605 East Maroon Circle
Suite 100
Englewood, CO 80112
Benjamin T. Kelly 7,500(4) * 7,500(4) * 7,500 *
7100 E. Belleview Avenue
Suite 201
Greenwood Village, CO 80111
John M. Couzens (5)
Robert L. Smith(5)
Craig D. Slater(5)
Interwest Group, Inc. - - 2,306,541 49.0% 2,606,541 52.1%
All Directors and Officers
as a Group(6) 806,011 31.4% 3,112,552 66.1% 3,412,552 68.2%
Total Shares Outstanding 2,400,686 4,707,227 5,007,227
</TABLE>
___________________
* Less than one percent.
(1) Includes 476,320 shares of Company Common Stock owned beneficially and of
record, 132,358 shares owned beneficially by virtue of his wife's ownership
of said shares, 29,000 shares owned beneficially and of record in joint
tenancy with his wife, presently exercisable options to purchase 25,000
shares owned beneficially and of record and options to purchase 14,500
shares owned beneficially by virtue of wife's ownership of said options.
These do not include 75,000 options owned beneficially and of record and
43,500 options owned beneficially by virtue of his wife's ownership, which
will vest over the next three years.
(2) Includes 132,358 shares of Company Common Stock owned beneficially and of
record, 476,320 shares owned beneficially by virtue of her husband's
ownership of said shares, 29,000 shares owned beneficially and of record in
joint tenancy with her husband, presently exercisable options to purchase
14,500 shares owned beneficially and of record and options to purchase
25,000 shares owned beneficially by virtue of her husband's ownership of
said options. These do not include 43,500 options owned beneficially and
of record and 75,000 options owned beneficially by virtue of her husband's
ownership, which will vest over the next three years.
(3) Mr. Guglielmi has an option to purchase 10,000 shares of which 3,333 will
be exercisable in July 1996, 1997 and 1998.
-10-
<PAGE>
(4) Includes options presently exercisable to purchase 7,500 shares. Excludes
22,500 options which will vest over the next three years.
(5) Messrs. Couzens, Smith and Slater are expected to be designated as
directors by Group upon consummation of the Merger. Each of them disclaims
beneficial ownership of these shares.
(6) Five persons as of August 5, 1996; eight persons assuming consummation of
the Merger and the election to the Board of Messrs. Couzens, Smith and
Slater.
-11-
<PAGE>
-12-
<PAGE>
Except with respect to the Merger described in Proposal Three below,
there is no arrangement, known to the Company, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and Executive Officers of the Company are as follows:
NAME AGE POSITIONS AND OFFICES HELD
- - - - ---- --- --------------------------
Thomas C. Galley 40 President, Chief Executive Officer and Director
Arnell J. Galley 40 Secretary, Director of Corporate Services and Director
Peter A. Guglielmi 53 Director
Dale R. Morrison 40 Director
William J. Maxwell 54 Director
Benjamin T. Kelly 49 Treasurer and Chief Financial Officer
The following sets forth biographical information as to the business
experience of each Officer and Director of the Company for at least the past
five years.
THOMAS C. GALLEY - PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR. In
1986, Mr. Galley co-founded Internet Datacomm, Inc., which was subsequently
acquired and merged into the Company, and since February 1990, has served as the
Company's President, Chief Executive Officer and member of its Board of
Directors.
ARNELL J. GALLEY - SECRETARY, DIRECTOR OF CORPORATE SERVICES AND DIRECTOR.
Ms. Galley co-founded Internet Datacomm, Inc. in 1986 which was subsequently
acquired and merged into the Company. Since February 1990, Ms. Galley has
served as the Company's Secretary and a member of its Board of Directors, and
previously held the positions of Secretary, Treasurer and Vice President of IDI.
She currently holds the position of Director of Corporate Services.
PETER A. GUGLIELMI - DIRECTOR. Mr. Guglielmi was appointed to the
Company's Board of Directors on July 24, 1995. Currently and for the past five
years, Mr. Guglielmi has served as President of Tellabs International, Inc., a
major supplier of hardware products to the telecommunications industry.
Previously, he was Executive Vice President of Finance and Operations for
Tellabs International.
DALE R. MORRISON - DIRECTOR. Mr. Morrison became associated with Internet
DataComm, Inc. in July 1986 in the position of Vice President. Since February
1990, Mr. Morrison has served as a director. From February 1990 until his
resignation on June 30, 1994, he served as the Company's vice president. Since
that time, he has devoted his efforts primarily to managing his personal
investment portfolio and
-13-
<PAGE>
serving as a frequent advisor to the Company's senior management. Mr. Morrison
holds a Bachelor of Science Degree in Business Management from the University of
Northern Colorado.
WILLIAM J. MAXWELL - DIRECTOR. Mr. Maxwell was elected to the Company's
Board of Directors on June 12, 1996. Mr. Maxwell is an executive vice president
of IntelCom Group and president and chief executive officer of ICG Telecom
Group, Inc., which is one of the country's leading competitive local exchange
carriers. Prior to joining ICG in December 1992, Mr. Maxwell was senior
marketing executive of WilTel Inc. in Tulsa, Oklahoma (now a subsidiary of
WorldCom, Inc.), a full-service telecommunications company providing voice,
video and data products and services nationwide.
BENJAMIN T. KELLY - TREASURER AND CHIEF FINANCIAL OFFICER. Mr. Kelly
became associated with the Company in August, 1995 in the position of Chief
Financial Officer and on September 16, 1995, was appointed the Company's
Treasurer. Prior to joining the Company, Mr. Kelly was president of BenchMark
Consulting Group from May, 1992 to August, 1995. During that period, he served
as consulting chief financial officer and as a general management consultant to
a number of computer software firms. Prior to founding BenchMark Consulting
Group, Mr. Kelly served from 1983 to 1992 as controller, chief financial
officer, and then executive vice president of Precision Visuals, Inc., a
developer and marketer of visual data analysis software. He holds a Bachelor of
Science in Business Administration from Creighton University and a MBA from the
University of Denver. He is also licensed as a Certified Public Accountant in
the State of Colorado.
If Proposals Three, Four and Five described below in this Proxy
Statement are approved by the Company's Shareholders at the Special Meeting
and the other conditions specified in the Acquisition Agreement are
satisfied, the Company expects to close the Merger promptly thereafter, as
the result of which Interwest would become a wholly-owned subsidiary of the
Company. The Board of Directors would then increase the number of directors
from five directors to eight directors and fill the vacancies created thereby
by electing three persons designated by Group, which is the sole shareholder
of Interwest as of the date of this Proxy Statement. Group has advised the
Company that Group currently expects to designate for election John M.
Couzens, Robert L. Smith and Craig D. Slater. See "Interwest - Management of
Interwest" for information regarding Messrs. Couzens, Smith and Slater.
DIRECTOR COMPENSATION. The members of the Board of Directors do not
receive compensation for serving as members of the Board except that Messrs.
Guglielmi and Maxwell each receive $6,000 per year and $1,500 per meeting.
-14-
<PAGE>
DIRECTORS' MEETINGS AND STANDING COMMITTEES
During 1996, four meetings of the Board of Directors were held. With the
exception of Mr. Morrison, all Directors attended 100% of the meetings of the
Board. The Company currently has no audit, nominating or compensation
committees.
EMPLOYMENT AGREEMENTS
On May 1, 1994, the Company entered into an employment agreement with its
president, Thomas C. Galley, which extends until January 31, 1999. Under the
agreement, Mr. Galley is to receive a base salary of $180,000 which increases by
15% per year on February 1st of each subsequent year. Mr. Galley is also to
receive a bonus of between 4% to 6% of earnings before taxes and bonus based on
the following:
Before Tax Net Profit Bonus Percentage of
as Percentage of Sales Before Tax Net Profits
---------------------- ----------------------
3% or less of gross sales 4% of before tax net profit
More than 3% but less than 5% of gross sales 5% of before tax net profit
More than 5% of gross sales 6% of before tax net profit
The agreement is cancelable for cause, and may be terminated by the Company
for reasons other than cause. Should either of these events occur, Mr. Galley
will receive as his severance compensation an amount equal to his annual base
salary payable over thirty-six months.
Each of the other executive officers has signed a non-compete agreement
with the Company. There are non-compete and confidentiality agreements with
sales account executives and engineers. Such agreements generally provide that
in the event of the employee's termination the employee will not (i) compete
with the Company for a period of two years after the termination of employment
within a radius of 100 miles of any office of the Company or any subsidiary of
the Company; (ii) solicit, directly or indirectly, any customer of the Company
or any subsidiary of the Company for a period of three years; (iii) release
Company trade secrets and proprietary information; and (iv) if terminated by the
Company, without cause, the employee is entitled to 10 days' severance
compensation. Executive compensation for officers other than the President, is
determined on an annual basis by the Board of Directors and is based upon
operating results and department budgets for the upcoming fiscal year.
Thomas C. Galley and Arnell J. Galley are husband and wife. There are no
other family relationships between any Director or Executive Officer of the
Company.
Officers of the Company are currently elected annually by, and serve at the
discretion of, the Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity
securities, if any, to file with the Securities and Exchange Commission
("SEC") initial
-15-
<PAGE>
reports of ownership and reports of changes in ownership of equity securities
of the Company. Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, all of the Company's Officers and Directors
have complied with all applicable Section 16(a) filing requirements. This
statement is based solely on a review of the copies of such reports furnished to
the Company by its Officers and Directors and their written representations that
such reports accurately reflect all reportable transactions and holdings.
PRICE RANGE OF THE COMPANY COMMON STOCK
The Company Common Stock is traded on the NASDAQ Small-Cap Market under
the symbol "INCC." In the previous years and prior to June 13, 1994,
Warrants to purchase Company Common Stock were traded under the symbol,
"INCCW." All Warrants not exercised by June 13, 1994 expired under their own
terms on that date.
The following table represents the range of high and low bid prices in
dollars for the Company Common Stock and Warrants for the eight fiscal
quarters ended January 31, 1996:
<TABLE>
Quarter Ended
--------------------------------------------------------------------
Apr. 30, 94 Jul. 31, 94 Oct. 31, 94 Jan. 31, 95
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Security High Low High Low High Low High Low
Common 9.88 5.63 6.00 3.13 6.3 3.88 8.25 3.63
Warrants 4.13 .44 .63 .03 N/A N/A N/A N/A
Quarter Ended
--------------------------------------------------------------------
Apr. 30, 95 Jul. 31, 95 Oct. 31, 95 Jan. 31, 96
----------- ----------- ----------- -----------
Security High Low High Low High Low High Low
Common 6.75 4.25 6.50 3.90 7.75 4.12 6.50 3.50
Warrants N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the total remuneration paid during the
Company's last fiscal year ended January 31, 1996 and the prior two years to
the Chief Executive Officer, the only executive officer whose total cash and
non-cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
Annual Compensation Long Term Compensation Awards
---------------------------------------------------------------------------------------------------------------
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year (1) ($) ($) ($) ($) (#)(2) ($) ($)(3)
- - - - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas C. Galley, 1996 $156,000 $ 0 $ 0 N/A None N/A $9,000
President 1995 $175,816 $ 0 $ 0 - None - $9,000
1994 $145,000 $25,460 $ 0 - 50,000 - $9,000
- - - - --------------------
</TABLE>
-16-
<PAGE>
(1) Periods presented are for the years ended January 31.
(2) Number of shares of Company Common Stock subject to options granted
during the year indicated.
(3) Represents personal use of company car and other benefits valued at
$750 per month (1996, 1995 and 1994) per month.
STOCK OPTION GRANTS IN FISCAL YEAR ENDED JANUARY 31, 1996.
In April 1996, the Board of Directors authorized the exchange of the
Company's then outstanding non-qualified options for new options, which are
proposed to be approved as incentive stock options. The old options were to
expire at the end of April 1996. The new options will expire in April 2006.
In connection with this exchange, Mr. Galley exchanged 50,000 options, which
were fully vested and exercisable at $2.00 per share, for 100,000 options
exercisable at $4.125 (110% of the market price of unrestricted Company
Common Stock on the date of grant), of which 25% were immediately vested and
25% will become vested in each of the next three years. The Board of
Directors granted the new options as the prior granted options were to expire
and to provide all employees the benefits of an incentive stock option plan.
However, if the incentive stock option plan is not approved, the new options
will remain outstanding as non-qualified stock options.
AGGREGATE OPTIONS EXERCISED DURING 1995 AND OPTION VALUES AT JANUARY 31, 1996
The following table sets forth certain information regarding options to
purchase shares of Company Common Stock exercised during the Company's fiscal
year ended January 31, 1996 and the number and value of exercisable and
unexercisable options to purchase shares of Company Common Stock held as of
the end of the Company's fiscal year by the Executive Officer of the Company
named in the Summary Compensation Table:
AGGREGATE OPTIONS EXERCISED DURING 1995 AND OPTION VALUES AT JANUARY 31, 1996
- - - - --------------------------------------------------------------------------------
<TABLE>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Shares 1/31/96 1/31/96
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable(1)(2)
---- ----------- -------- ------------- -------------------
<S> <C> <C> <C> <C>
Thomas C. Galley None -- 50,000/50,000 $75,000/$75,000
- - - - ------------------
</TABLE>
(1) Value of exercisable/unexercisable in-the-money options is equal to the
difference between the fair market value per share of Company Common Stock
of $3.50 at January 31, 1996, and the option exercise price per share
multiplied by the number of shares subject to options.
(2) On April 17, 1996, the Company initiated a program under which all
employees holding unexercised non-qualified stock options would allow the
unexercised non-qualified stock
-17-
<PAGE>
options to expire and would be issued new incentive stock options at fair
market value in accordance with the incentive stock plan to be submitted
for shareholder approval. Under this program, Mr. Galley surrendered 50,000
non-qualified stock options, which were exercisable at $2.00 per share and
was issued 100,000 shares of incentive stock options at 110% of the fair
market value, or $4.125 per share.
PROPOSAL ONE
A PROPOSAL TO APPROVE THE 1995 NON-EMPLOYEE
DIRECTOR STOCK OPTION PLAN
The Board of Directors intends to present at the Special Meeting a
proposal to approve the adoption of the Company's 1995 Non-Employee Director
Stock Option Plan (the "1995 Plan") and to reserve an aggregate of 40,000
shares of Company Common Stock for future issuance thereunder to non-employee
Directors of the Company who are newly elected on or after July 24, 1995.
Messrs. Guglielmi and Maxwell are currently eligible to participate in the
1995 Plan. After consummation of the Merger, Mr. Slater will be eligible to
participate in the 1995 Plan.
The Board of Directors adopted the 1995 Plan on July 24, 1995, subject to
its approval by the shareholders of the Company at the Annual or a Special
Meeting. A copy of the 1995 Plan is attached as Appendix A to this Proxy
Statement.
The 1995 Plan is intended to provide incentives to non-employee Directors
who contribute to the success of the Company by offering them the opportunity to
acquire an ownership interest in the Company. The Board of Directors believes
that this will help to align the interests of the Company's Directors with the
interests of the Company's Shareholders. Only non-employee Directors of the
Company are eligible to receive options under the 1995 Plan. An option under
which a total of 10,000 shares of Company Common Stock may be purchased shall be
automatically granted to each non-employee Director upon his or her election to
the Board, subject to the following vesting schedule:
Board Membership
Years After Grant Date Exercisable Percentage of Shares
---------------------- --------------------------------
One Year 33 1/3%
Two Years 66 2/3%
Three Years 100%
On each anniversary of the date a non-employee director was elected to
the Board, the Director will be granted a fully vested option to purchase
2,000 shares so long as the Director is still serving on the Board on such
anniversary date as a non-employee Director. The exercise price is the
closing bid price for the Stock as reported on NASDAQ on the date of grant.
Options granted under the 1995 Plan are not transferable (except by the
laws of descent and distribution) and, with certain exceptions, may be exercised
by the optionee only during the period of his or her tenure as a Director or
within three months after termination of service on the Board of Directors. Any
shares subject to options that expire or otherwise terminate without having been
exercised in full are available for future grant under the 1995 Plan. An option
is exercised by written notice to the Company specifying the number of shares as
to which the option is exercised and payment of the exercise price in cash or by
surrendering shares of Company Common Stock with a fair market value equal to
the exercise price.
-18-
<PAGE>
ADMINISTRATION OF THE PLAN. The 1995 Plan is administered by the Board
of Directors. The Board also has the power to interpret the 1995 Plan and
the provisions in the instruments evidencing grants made under the 1995 Plan,
and is empowered to make all other determinations deemed necessary or
advisable for the administration of the 1995 Plan. Unless sooner terminated
by the Company, the 1995 Plan will terminate on July 24, 2005. No options
can be granted after that date, although options granted before the 1995 Plan
terminates will expire in accordance with their terms, even if after the 1995
Plan termination date.
ADJUSTMENT. In the event a change, such as a stock split, is made in
the Company's capitalization which results in an exchange or other adjustment
of each share of Company Common Stock for or into a greater or lesser number
of shares, appropriate adjustments will be made to unexercised options and in
the exercise price and in the number of shares subject to each outstanding
option. The Board of Directors also may make provisions for adjusting the
number of underlying outstanding options in the event the Company effects one
or more reorganizations, recapitalizations, right offerings, or other
increases or reductions of shares of the Company's outstanding Company Common
Stock. Options may provide that in the event of the dissolution or
liquidation of the Company, a corporate separation or division or the merger
or consolidation of the Company, the holder may exercise the option on such
terms as it may have been exercised immediately prior to such dissolution,
corporate separation or division or merger or consolidation. The 1995 Plan
also provides that in the event of a tender offer or exchange offer for the
Company, certain mergers or consolidations, or certain changes in control of
the Company or of its Board of Directors, outstanding options previously
subject to vesting provisions will vest immediately.
TAX MATTERS. The Company believes that, under the applicable provisions
of the Internal Revenue Code, as amended and the regulations of the United
States Treasury Department currently in effect, all grants to non-employee
Directors will be considered non-qualified stock options and therefore, the
recipients are subject to United States Federal income tax upon the exercise
of an option. The Company may deduct for tax reporting purposes the
difference between the fair market value and the exercise price of the option
on the date of exercise.
CURRENT MARKET VALUE OF SECURITIES UNDERLYING OPTIONS UNDER GRANT. The
current market value of securities underlying the options outstanding as of
July 29, 1996 under the Non-Employee Director Stock Option Plan was $18,331
based on the average of the bid and asked prices as reported on NASDAQ.
BOARD RECOMMENDATION TO SHAREHOLDERS AND VOTE REQUIRED. The Board of
Directors recommends that the 1995 Plan be approved and adopted. To approve the
1995 Plan, the votes cast favoring the action must exceed the votes cast
opposing the action. The Officers and Directors of the Company have advised the
Company that they plan to vote their shares of Company Common Stock in favor of
Proposal One.
PROPOSAL TWO
A PROPOSAL TO APPROVE THE 1996 INCENTIVE STOCK PLAN
The Board of Directors intends to present at the Special Meeting a proposal
to approve the adoption of the Company's 1996 Incentive Stock Plan (the "1996
Plan") and to reserve up to 625,000 shares of Company Common Stock for issuance
thereunder to employees and consultants with continuous status as an employee
or consultant of the Company. The 1996 Plan allows for the issuance of
incentive stock
-19-
<PAGE>
options, non-qualified stock options, and stock purchase rights. Approximately
80 individuals are eligible to participate in the 1996 plan.
The following table indicates the number of options granted under the
1996 Plan to the persons and groups indicated:
Thomas C. Galley 100,000
Executive Officers as a Group (3 persons) 138,000
All employees as a group (80 persons) 495,844
The Board of Directors adopted the 1996 Plan on March 18, 1996, subject to
its approval by the shareholders of the Company at the Annual or a Special
Meeting. A copy of the 1996 Plan is attached as Appendix B to this Proxy
Statement.
The 1996 Plan is intended to provide incentives to Officers, employee
Directors, key employees and other persons who contribute to the success of the
Company by offering them the opportunity to acquire an ownership interest in the
Company. The Board of Directors believes that this will help to align the
interests of the Company's employees and management with the interests of the
Company's shareholders. Only employees and consultants of the Company are
eligible to receive options or stock purchase rights under the 1996 Plan.
Options and stock purchase rights may be subject to vesting at the discretion
of the Committee. The options granted to date under the 1996 Plan are subject
to the following vesting:
Employment After Grant Date Exercisable Percentage of Shares
--------------------------- --------------------------------
At Grant Date 25%
One Year 25%
Two Years 25%
Three Years 25%
Some options granted under the 1996 Plan may be intended to qualify as
"incentive stock options" within the meaning of the Code. Incentive stock
options may be granted only to employees. The exercise price of such options
may not be less than 100% of the fair market value of the Company Common
Stock on the date of the grant and the term of any such option may not exceed
10 years. Fair market value is the closing bid price for the Company's
shares of Company Common Stock as reported by the NASDAQ or such national
stock exchange on which the stock may then be traded. Some options granted
under the 1996 Plan may be intended to be treated as "nonqualified options."
Nonqualified options may be granted to both employees and consultants. The
Board of Directors determines the exercise price per share for nonqualified
options. However, if the exercise price is less than fair market value on the
date the option is granted, the discount is treated as a charge to earnings
on the Company's financial statements.
The Board may offer an employee or consultant the right to purchase
Company Common Stock (other than pursuant to an option) on terms and
conditions and subject to such restrictions as the Board determines. Options
and stock purchase rights granted under the 1996 Plan are not transferable
(except by the laws of descent and distribution) and, with certain
exceptions, may be exercised by the optionee only during the period of his or
her employment or within three months after termination of employment. Any
shares subject to options that expire or otherwise terminate without having
been exercised in full are available for future grant under the 1996 Plan.
An option or stock purchase right may be exercised by written notice to
the Company specifying the number of shares as to which the option is exercised.
The exercise price may be paid in cash or by surrendering shares of Company
Common Stock having a fair
-20-
<PAGE>
market value equal to the exercise price. The exercise price for a stock
purchase right may also be paid with a promissory note; however the Company
Common Stock is not issued until the note is paid in full.
The maximum number of shares that may be subject to options or stock
purchase rights granted to any individual during the term of the 1996 Plan is
500,000.
ADMINISTRATION OF THE PLAN. The 1996 Plan is administered by a
committee appointed by the Board of Directors. The committee will be
constituted to comply with Code section 162(m) and Securities and Exchange
Commission Rule 16b-3. The Committee also has the power to interpret the
1996 Plan and the provisions in the instruments evidencing grants made under
the 1996 Plan, and is empowered to make all other determinations deemed
necessary or advisable for the administration of the 1996 Plan. Unless
sooner terminated by the Company, the 1996 Plan will terminate on July 1,
2005.
CHANGE IN CONTROL. If the Company's assets or 50% of the oustanding
Company Common Stock is sold, the outstanding options and stock purchase
rights shall become fully vested and immediately exercisable.
ADJUSTMENT. In the event a change, such as a stock split, is made in
the Company's capitalization which results in an exchange or other adjustment
of each share of Company Common Stock for or into a greater or lesser number
of shares, appropriate adjustments will be made to unexercised options and
stock purchase rights and in the exercise price and in the number of shares
subject to each outstanding option. The Board of Directors also may make
provisions for adjusting the number of underlying outstanding options in the
event the Company effects one or more reorganizations, recapitalizations,
right offerings, or other increases or reductions of shares of the
outstanding Company Common Stock. Options and stock purchase right may
provide that in the event of the dissolution or liquidation of the Company, a
corporate separation or division or the merger or consolidation of the
Company, the holder may exercise the option or stock purchase right on such
terms as it may have been exercised immediately prior to such dissolution,
corporate separation or division or merger or consolidation.
TAX MATTERS. The Company believes that, under the applicable provisions
of Section 422 of the Code and the regulations of the United States Treasury
Department currently in effect, a grantee will not incur any United States
Federal income tax upon the grant or exercise of an employee option which is
an incentive stock option. Generally, there are no tax consequences to the
Company for grants or exercises of incentive stock options. However, if the
grantee sells Company Common Stock acquired through exercise of an incentive
stock option within two years of the date the incentive option was granted
and one year after the date the incentive option was exercised, the grantee
will have compensation equal to the sales price (or, if less, the Common
Stock's fair market value at the date of exercise) minus the exercise price
and the Company will have a corresponding deduction. However, at the time
the incentive stock options described below under "Options Currently
Outstanding" were granted, the 1996 Plan did not satisfy all of the
requirements of Code section 162(m). As a result, if Mr. Galley makes a
disqualifying disposition the Company may be precluded from deducting any
compensation (including income from the disqualifying disposition) with
respect to Mr. Galley for the year of the disqualifying disposition that
exceeds $1 million.
-21-
<PAGE>
Upon exercise of a nonqualified option, for federal income tax purposes,
the Company will be entitled to a deduction and the grantee will recognize
ordinary income subject to withholding. The amount of the income and the
deduction is equal to the amount by which the fair market value of the
Company Common Stock on the date the option is exercised exceeds the exercise
price.
Upon exercise of a stock purchase right, for federal income tax
purposes, the Company will be entitled to a deduction and the grantee will
recognize ordinary income in an amount equal to the amount by which fair
market vlaue of the Company Common Stock on the date the restricted stock
right is exercised exceeds the exercise price.
OPTIONS CURRENTLY OUTSTANDING. As of the date hereof, the Board of
Directors has authorized the issuance of 495,844 options to be granted as
incentive stock options under the 1996 Plan. These options were granted at
the market price on the date of grant of $3.75, except for 158,000 options to
certain 10% shareholders, which were granted at $4.125 (110% of the market
price). If the 1996 Plan is not approved, these options will remain
outstanding as non-qualified stock options. Because the 1996 Plan did not
meet all of the requirements of Code section 162(m) when these options were
granted, if these options are treated as non-qualified options, the Company
will not be entitled to a compensation deduction with respect to the options
granted to Mr. Galley to the extent the total of his compensation (including
compensation from the option exercise) for the year of exercise exceeds $1
million.
CURRENT MARKET VALUE OF SECURITIES UNDERLYING OPTIONS UNDER GRANT. The
current market value of securities underlying the options outstanding as of
July 27, 1996 under the 1996 Plan was $2,727,142, based on the average of
the bid and asked prices as reported on NASDAQ.
BOARD RECOMMENDATION TO SHAREHOLDERS AND VOTE REQUIRED. The Board of
Directors recommends that the 1996 Plan be approved and adopted. To approve
the 1996 Plan, the votes cast favoring the action must exceed the votes cast
opposing the action. The Officers and Directors of the Company have advised
the Company that they plan to vote their shares of Company Common Stock in
favor of Proposal Two.
PROPOSAL THREE
A PROPOSAL TO APPROVE THE AMENDED AND RESTATED ACQUISITION
AGREEMENT AND RELATED TRANSACTIONS
THE ACQUISITION AGREEMENT.
Pursuant to the Acquisition Agreement, (i) Merger Sub, a wholly-owned
subsidiary of the Company, would merge into Interwest, a wholly-owned
subsidiary of Group, (ii) Interwest would become a wholly-owned subsidiary of
the Company, and (iii) Group would receive a number of shares of Company
Common Stock that would in general be equal to 49% of the number of shares of
Company Common Stock that would be issued and outstanding after giving effect
to the closing of the Merger. The Board of Directors intends to present at
the Special Meeting a proposal to approve the Acquisition
-22-
<PAGE>
Agreement and the transactions (including the Merger) and other documents
contemplated thereby. Promptly after the approval by the Shareholders of this
Proposal Three and Proposals Four and Five and the satisfaction of the
other conditions specified in the Acquisition Agreement, the Company intends
to effect the closing of the Merger. A copy of the Acquisition Agreement is
attached as Appendix C to this Proxy Statement.
Certain information regarding Interwest is set forth below under
"Interwest - Description of Business," "Pro Forma and Interwest - Selected
Financial Information," "Interwest - Management's Discussion and Analysis of
Liquidity and Results of Operations," "Interwest - Risks Relating to
Interwest's Business" and "Interwest - Management of Interwest."
On May 29, 1996, the Company and Group entered into the Acquisition
Agreement which provides for the matters summarized below. Such summary is
qualified by reference to the Acquisition Agreement.
Pursuant to the Acquisition Agreement, on May 29, 1996 the Company
issued to Group at par and for cash, a promissory note of the Company (the
"Note") in the principal amount of $900,000 and having a maturity on December
31, 1996, or, if earlier, the date that is 30 days after the earlier to occur
of (i) the failure of the shareholders of the Company to approve the
Acquisition Agreement at the Special Meeting or (ii) the termination of the
Acquisition Agreement by Group pursuant to the terms thereof, including,
without limitation, upon the breach by the Company of any representation or
warranty in the Acquisition Agreement, any modification, amendment or
withdrawal of the recommendation by the Board of Directors of the Company
that the Shareholders approve Proposals Three and Four in any respect
materially adverse to Group, or the acquisition by any person other than
Group of 30% or more of the outstanding shares of Company Common Stock or any
other event referred to in the Acquisition Agreement as a Subsequent Event
with respect to the Company. The Note bears interest at a rate of 8.0% per
annum from May 29, 1996 to and including July 28, 1996 or, if the Second
Closing (as defined below) shall then have occurred, August 27, 1996, and the
rate of 12.5% per annum thereafter, payable monthly in arrears or, upon the
occurrence and during the continuation of a default under the Note, at a rate
of interest 3.5% per annum greater than the rate otherwise applicable. If
the Company fails to pay in full the principal amount of the Note and all
interest accrued thereon at the maturity thereof (whether at scheduled
maturity, on the date of any required prepayment or, after the expiration of
applicable grace periods and cure periods, upon acceleration), then, at any
time during the period commencing the day after the date of such maturity of
the Note (if the principal amount thereof and all interest accrued thereon
shall then not have been paid in full) and ending on a date that is 45 days
after the date of such maturity, Group may elect to convert the Note into
300,000 shares of the Company Common Stock at a price of $3.00 per share (as
such number of shares and price per share may be adjusted pursuant to the
terms of the Note). Group has agreed that the Note will be extended to March
31, 1997 if on December 31, 1996, Internet is then conducting a public
offering of its stock on terms approved by Group. Internet has not made a
determination to conduct such an offering.
Proceeds from the loan of $900,000 are being used by the Company for
general working capital purposes. Working capital had been depleted due to
net operating losses during the two most recent fiscal years. Interwest is a
co-obligor on a loan (the "Bank One Loan") from Bank One, Denver, N.A. ("Bank
One") with Group and certain Group affiliates under which Interwest's
inventories, receivables and accounts are pledged as security. Advances that
were made to Interwest under the Bank One Loan are reflected as a payable to
Group, of which approximately $1,111,631 was outstanding as of April 30,
1996. It is expected that both the $900,000 loan to the Company and the
amounts owed by Interwest with respect to the Bank One
-23-
<PAGE>
Loan will be repaid through expanded credit lines and cashflows from operations.
It is a condition to closing the Merger that Interwest and its assets be
released from the Bank One Loan. Internet is currently in negotiation with a
number of lending institutions for expanded credit relationships. While the
results of these negotiations cannot be assured, it is the Company's expectation
that expanded credit relationships will be established. In the event that the
negotiations for expanded lines of credit are unsuccessful, Group may exercise
its option for 300,000 shares of Company Common Stock in payment of the
$900,000 note.
May 29, 1996, the date on which the Acquisition Agreement was signed,
the $900,000 was transferred from Group to the Company and the Company issued
the Note to Group, is referred to in the Acquisition Agreement as the "First
Closing."
The Acquisition Agreement provides that if the Merger is consummated,
three directors designated by Group will be appointed to the Company's Board
of Directors and the Company's Board of Directors will be divided into three
classes, with one class to be elected every year. The Company's Board of
Directors will appoint the three directors designated by Group and will
determine which directors are put in which class. Group and the Company have
agreed that each class of directors will include one of the three directors
designated by Group. It is expected that the Board of Directors will elect
John M. Couzens, Robert L. Smith and Craig D. Slater, as designees of Group,
to fill the three vacancies, and that Mr. Slater would be classified as a
Class I Director, Mr. Smith as a Class II Director and Mr. Couzens as a Class
III Director.
If the Merger is consummated, Group will be able to elect all Directors
up for election at any Shareholder meeting. Although it is theoretically
possible for all of the other shareholders of the Company to act unanimously
to elect directors not nominated by Group, the Company Common Stock is so
widely held that Group will exercise control over the election of directors.
The Acquisition Agreement provides that on the second business day after
the satisfaction or waiver of the conditions precedent to the respective
obligations of the Company and Group or on such other date of closing as the
Company and Group may agree in writing, but in no event later than September 30,
1996 (the "Second Closing"), the Merger will be consummated with Merger Sub
merging into Interwest. After the Merger, the Company will own all the
outstanding shares of capital stock of Interwest and Group will own 49.0% of
the shares of Company Common Stock issued and outstanding immediately
following the closing of the Merger, without taking into account any shares
issued pursuant to the 1995 Plan, the 1996 Plan, or pursuant to the
conversion of the Note.
The Acquisition Agreement contains representations and warranties by
each party regarding corporate existence and power, authorization, approvals and
consents, binding effect, financial information, taxes, litigation, compliance
with laws, subsidiaries, proprietary rights (including, with respect to the
Company, all necessary rights to the use of the name "Internet" in Colorado),
insurance, debt, capitalization, material contracts, misstatements and
omissions, documents filed by the Company with the SEC, the approval of the
Board of Directors, shareholders and creditors of the Company and Group, the
absence of other merger agreements and other agreements with respect to business
combination transactions, the absence of fees for brokers and finders and
continuing representations and warranties.
The Acquisition Agreement contains covenants of each party, including:
(a) covenant not to enter into business combination transactions prior to the
Second Closing, (b) additional affirmative covenants of each party, as
applicable, requiring the maintenance of records, maintenance of properties,
conduct of business, maintenance of insurance, compliance with laws, payment of
taxes, reporting
-24-
<PAGE>
of specified information to the other party, reservation by the Company of a
sufficient number of shares of Company Common Stock to be issued to Group,
qualification by the Company of the shares of Company Common Stock to be
issued to Group for inclusion in the National Association of Securities
Dealers Automated Quotations/Small Cap Market ("NASDAQ/Small Cap Market"),
maintenance of existence, compliance with laws, use of best efforts to
complete the Acquisition Agreement, coordination of publicity regarding the
Acquisition Agreement, maintenance of confidentiality of information and
further assurances, and (c) negative covenants of each party, as applicable
and subject to certain transactions undertaken in the ordinary course of
business, with respect to amendment of charter documents, merger agreements
or agreements with respect to other business combination transactions,
settling litigation, or delisting securities of the Company from NASDAQ/Small
Cap Market.
The Acquisition Agreement also contains conditions precedent to the
Second Closing including, without limitation, satisfaction of each party with
the terms and conditions of certain documents contemplated by the Acquisition
Agreement (forms of which are included as exhibits to the Acquisition Agreement
attached as Appendix C), receipt of all necessary approvals and consents from
the shareholders and creditors of the respective parties (including with
respect to the Company, approval by the Shareholders of Proposals Three, Four
and Five below), governmental authorities and other persons (including,
without limitation, all necessary approvals under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended) (the "HSR Act"), vendors
having distributor agreements with Interwest and the lessor of Interwest's
office and yard space at 1114 West Seventh Avenue, Suite 200, Denver, Colorado),
the release of Interwest and its assets from the Bank One Loan, the absence of
pending or threatened actions that would restrict in any material respect or
prohibit the Second Closing, the determination that the Merger will be
characterized as a tax-free reorganization under section 368(a)(1)(A) of the
Code, the absence of any violation or default with respect to any regulation
of any governmental body by any of the parties or their respective subsidiaries,
the continued accuracy and correctness of the representations and warranties of
each party as contained in the Acquisition Agreement, the performance by each
party of its obligations under the Acquisition Agreement, the delivery of
certificates from appropriate officers of the respective parties and the
delivery of opinions of counsel for each party acceptable to the other party in
its sole discretion.
The Company and Interwest have determined that it will not be necessary
to seek approval of the transactions contemplated by the Acquisition
Agreement under the HSR Act.
The Company has received all necessary consents of creditors to completion
of the transactions contemplated by the Acquisition Agreement. Interwest has
advised the Company that it is seeking the consent of the above-described
vendors and lessor and the release of Interwest and its assets from the Bank
One Loan and does not anticipate that these will be an impediment to closing.
The Company has concluded that the issuance of its stock pursuant to the
Merger transaction will not be a taxable event to the Company. The Company
has been advised by Interwest that it has concluded that the Merger will
qualify as a nontaxable reorganization to the Interwest shareholder to the
extent it receives stock of the Company in exchange for its Interwest stock.
The Acquisition Agreement provides that if a Subsequent Event shall
occur on or before August 28, 1996 (and prior to the Second Closing Date),
the responsible party shall pay to the other party $400,000 promptly
following the public announcement of such Subsequent Event.
-25-
<PAGE>
Concurrent with the execution of the Acquisiton Agreement, the Company
and Group entered into a registration rights agreement (the "Registration
Rights Agreement") pursuant to which Group and its successors and assigns will
have the right on five occasions, commencing on May 29, 1998, to cause the
Company to register shares of Company Common Stock acquired by Group pursuant
to the Acquisition Agreement (including shares of Company Common Stock issued
to Group in exchange for the shares of Interwest and shares of Company Common
Stock issued upon conversion of the Note) for sale under the Securities Act of
1933, as amended (the "Securities Act"), and, commencing on May 29, 1997, to
cause the Company to include Group's shares in any registration statement filed
under the Securities Act offering any other shares of the Company Common Stock.
For financial accounting purposes, the Merger will be accounted for as a
purchase of Interwest by the Company. The Company intends the Merger to be a
tax-free exchange under the Code. However, no legal opinion has been obtained,
and it is not anticipated that an opinion will be obtained regarding this, or
any other, income tax issues. In addition, an opinion of counsel is not
binding on the IRS or the courts. The federal income tax law is uncertain as
to many of the tax issues relevant to "tax-free" transactions, and it is not
possible to predict with certainty how the law will develop or how the courts
will decide various issues if they are litigated. Accordingly, there can be
no assurances that this will be treated as a tax-free transaction or that the
Merger will not be challenged by the IRS and that such challenge will not be
sustained by the courts. The only entity, however, which would suffer any
tax consequences from the Merger would be Group and the shareholders of the
Company are not subject to any tax consequences as a result of the Merger.
If the Merger is not consummated at the Second Closing, the Company will
be faced with a possible loss of liquidity and the inability to repay the
Note. Should this occur, the Company would seek to expand its existing lines
of credit and/or pursue secondary debt or equity financing. There can be no
assurance that the Company would be successful in this regard and no
discussions in this regard have occurred.
INTERWEST - DESCRIPTION OF BUSINESS.
GENERAL
Interwest is engaged in the sale, installation, maintenance and service of
telephone equipment and other telecommunications hardware, software, and other
specialty low-voltage systems, generally known in the telecommunications
industry as customer premise equipment ("CPE"). CPE includes all equipment at
the customer location up to the transmission carrier's termination circuit.
Businesses participating in this segment of the telecommunications industry are
generally known as interconnect companies.
Principal products distributed by Interwest are multi-featured, digital key
telephone systems, private branch exchange ("PBX") systems, voice processing
products with computer telephone integration ("CTI") and network services.
Interwest's products also include other peripheral data and telecommunications
products including wide area networking, call accounting, voice and data cable
networks and local area network integrated messaging. In addition, a subsidiary
of Interwest designs and installs commercial paging systems, school intercom
systems, nurse call, video security and card access security systems. A
division of Interwest operates in the secondary market for refurbished telephone
and voice mail systems throughout the United States.
-26-
<PAGE>
Interwest sells, installs, and services its products through its four
Colorado sales and service centers located in Pueblo, Colorado Springs, Denver,
and Fort Collins. Each of these locations is a stand-alone profit center with a
sales manager, operations manager, sales and customer service personnel,
technicians, and warehousing operations. Interwest's business plan calls for
continued growth through increased market penetration and acquisition of other
entities located in the western United States.
The complete mailing address of Interwest's principal executive offices
is 1114 West 7th Avenue, Suite 200, Denver, Colorado 80204. Its telephone
number is 303.534.2000.
HISTORY
Interwest was founded in Colorado in 1977 as an independent interconnect
company to provide businesses with an alternative to AT&T for telephone and
related equipment installations, maintenance and service. Over the years,
Interwest increased revenues and the range of product offerings with geographic
expansion into various cities in the Front Range of Colorado, customer base
acquisitions from smaller firms, and product diversification. On June 1, 1995
Interwest was acquired from Robert L. Smith by Group, a subsidiary of Anschutz
Company. Since the acquisition, Mr. Smith has remained on the Interwest Board
of Directors and continues as a key executive of Interwest. Mr. Smith has been
an employee of Interwest and its subsidiaries since 1979.
SUBSIDIARIES
As noted in the financial statement disclosure, Interwest has four
subsidiaries. The other shareholders of the subsidiaries are the business
managers in the respective subsidiary in which they own stock. Collectively,
these subsidiaries accounted for 29% of total revenues for the seven months
ended December 31, 1995.
WORK TELCOM SERVICES, INC. ("WORK TELCOM") - specializes in
maintenance of existing AT&T and Rolm PBX systems. 418 of the 1,000
shares outstanding are owned by John Work. Mr. Work has an option to
purchase an additional 82 shares of Work Telcom stock from Interwest
for $250.00 per share.
OMEGA BUSINESS COMMUNICATIONS SERVICES, INC. D/B/A INTERWEST SOUND
COMMUNICATIONS, INC. ("INTERWEST SOUND") - designs, installs,
maintains and services specialty sound systems, including commercial
paging, sound systems, school intercom, hospital nurse call, CCTV,
and card access security systems. 200 of the 1,000 shares outstanding
are owned by Randy Block as of the date of this Proxy Statement.
INTERWEST CABLE NETWORK SYSTEMS, INC. ("INTERWEST CABLE") - provides
outside cable plant construction in Metropolitan Denver for the
telecom and cable TV industries. 1,200 of the 39,300 shares
outstanding are owned by Glenn P. Marlow. Mr. Marlowe has an option
to purchase an additional 5,800 shares of Interwest Cable stock from
Interwest for $4.00 per share.
INTERWEST COMMUNICATIONS PUEBLO CORPORATION ("INTERWEST PUEBLO") -
This is a traditional voice CPE interconnect servicing southern
Colorado. 490 of the 1,000 shares outstanding are owned by
Patrick J. Galvin.
PRODUCTS AND SERVICES
-27-
<PAGE>
Interwest's core business is the design, installation, and maintenance of
digital customer premise equipment for voice applications. Interwest's
traditional flagship product is the NEC line of digital telecommunication
systems. Interwest is currently one of NEC America's 10 largest dealers in the
U.S. market. Additional products include Fujitsu, Iwatsu, and the Hitachi line
for the hospitality industry.
Due to Interwest's market position, it recently secured a dealership for
the full line of products offered by Northern Telecom (Nortel). The Nortel
product line is the leading telecom line available to independent distributors
in the U.S. market. The Nortel product line is sold through regional Bell
operating companies, GTE, WilTel, and other national industry leaders. The
significance of the Nortel dealership is substantial due to the size of the
existing base and the product recognition at the high end of the market.
Over the past five years, voice processing systems have become firmly
established as an integral component in business telephone systems. Voice
processing products installed and maintained by Interwest include the Centigram,
Active Voice and Voice Systems Research ("VSR") product lines. Interwest is one
of Active Voice's "AVID" dealers, designating superior sales and service
performance. Interwest also represents many specialty peripheral products that
interface with telephone systems to provide complete turnkey business solutions.
Interwest Sound's product line includes the complete line of Bose
professional audio equipment, Bogen audio and intercom systems, 3M satellite
music and drive-through intercom, and Sony audio and video systems. Interwest
Sound also represents specialty lines of equipment that are custom engineered to
meet the client's specific needs.
Critical to the product line offerings is employees' technical
qualifications to properly install and maintain the equipment. Maintaining
qualifications requires constant training and certification of the technical
staff.
Below is a summary of revenue for the 12 months ended March 31, 1996, 1995
and 1994. For 1996, these revenues do not tie directly into the historical
financial statements, due to the acquisition of Interwest by Group on June 1,
1995, which resulted in a disaggregate year for financial reporting. For
illustration purposes, revenue for 1996 has been recasted for consistent
presentation with prior periods.
-28-
<PAGE>
REVENUE BREAKDOWN FOR THE THREE YEARS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
HARDWARE SERVICE TOTAL
REVENUES REVENUES REVENUES
<S> <C> <C> <C>
April 1993 - March 1994 $ 5,750,000 $ 6,469,000 $ 12,219,000
% OF TOTAL REVENUES 47% 53% 100%
April 1994 - March 1995 $ 6,552,000 $ 5,523,000 $ 12,075,000
% OF TOTAL REVENUES 54% 46% 100%
April 1995 - March 1996 $ 8,472,000 $ 8,437,000 $ 16,909,000
% OF TOTAL REVENUES 50% 50% 100%
Total $ 20,774,000 $ 20,429,000 $ 41,203,000
% OF TOTAL REVENUES 50% 50% 100%
</TABLE>
Over the three year period ended March 31, 1996 service revenue has
accounted for between 46% and 53% of total revenue. Interwest's strategy is to
continue its emphasis on services. The overall revenue growth for the three
years ended March 31, 1996 is largely attributable to the growth in new
contracts. The average new contracts booked per month is listed below:
AVERAGE NUMBER OF
CONTRACTS PER MONTH
April 1993 - March 1994 36
April 1994 - March 1995 57
April 1995 - March 1996 75
STRATEGY
Interwest believes that it is the largest independent interconnect company
in Colorado based on annual revenues, with a cumulative installed base of over
5,000 customers on the Front Range.
Over the years, Interwest has grown and increased its regional market
share through a combination of several factors: developing a strong sales
organization, increasing emphasis on customer service, customer base
acquisitions from smaller firms, and strategic diversification with
complementary products and services. Examples of Interwest's strategic
diversification are highlighted below:
- WORK TELCOM performs maintenance for large CPE platforms not sold
through Interwest. This business is strategically important to
further developing maintenance revenues which are not as susceptible
to economic cycles as new system sales.
- INTERWEST SOUND installs and maintains specialty sound and security
systems. This niche in the low voltage systems market helps
differentiate Interwest and broadens market penetration.
- U.S. TELPHONICS is a division of Interwest and deals in the secondary
market for voice CPE, mostly selling to other interconnects throughout
the United States. U.S. Telphonics
-29-
<PAGE>
makes a market for those telephone systems Interwest is replacing
with new installations. Consequently, Interwest is positioned to
offer trade-in allowances for customers' old telephone systems.
By virtue of its consolidated management support and technical labor pool
at the Colorado Springs headquarters, Interwest management believes it is better
able to compete with smaller independent local firms as well as the large
national companies.
Interwest's strategy for the future includes the expansion of its products
and service lines so as to include data network systems products and services,
which will be marketed to Interwest's existing customer base. Management
believes Interwest customers want full service capabilities for data networking
systems in addition to voice, Interwest's current strength.
SALES OPERATIONS
Sales management is functionally under the Vice President of Sales with
accountability to the business unit managers. This organization structure
encourages consistent market coverage and coordination of team selling. Each
physical location has a sales manager responsible for the geographic market
coverage. In addition, the Interwest Sound, Work Telcom, and U.S. Telphonics
profit centers have general managers that provide sales management.
A summary of the sales organization is presented in the following table:
<TABLE>
<CAPTION>
SALES FORCE DEPLOYMENT
General Interwest Work U.S. Network
Business Sound Telcom Telphonics Systems Total
<S> <C> <C> <C> <C> <C> <C>
Denver 10 2 2 0 1 15
Colo. Spgs. 5 2 1 4 3 15
Pueblo 3 0 0 0 0 3
Ft. Collins 4 0 0 0 0 4
Total 22 4 3 4 4 37
</TABLE>
The General Business sales group focuses on small- to medium-sized users of
commercial grade telephone systems such as businesses and non-profit
organizations. The Network Systems sales group focuses on high-end PBX systems
and large scale projects that fall out of the scope of the day-to-day business.
TECHNICAL OPERATIONS
All operations report to the vice president of operations, the position
responsible for all installations, service, maintenance, customer service,
dispatch, and warehousing. Interwest's operations department is divided into
three management functions:
-30-
<PAGE>
1. Installation of new systems
2. Service, moves, adds and changes
3. Purchasing and warehousing.
Interwest has centralized dispatching at corporate headquarters, which
allows cross-utilization of technicians amongst the various business units.
Purchasing and warehousing are centralized in the Colorado Springs headquarters,
and materials are distributed to other locations on an as-needed basis.
Management believes this system generates purchasing economies of scale and
maximizes inventory turns.
RESEARCH AND DEVELOPMENT AND PATENTS
Interwest is not engaged in research and development, nor does it hold any
patents. Interwest is positioned in the market as a follower of technology.
Technology changes tend to benefit Interwest since such changes stimulate
customer demand for new installations and upgrades of customer premise
equipment.
WARRANTY AND MAINTENANCE
Interwest generally provides customers, for an additional fee, with a
warranty on a purchase basis on equipment and installation for one to five years
after the installation of a new system, subject to a deductible payment from the
customer. In addition, Interwest generally receives back-to-back warranties
from manufacturers which it passes on to its customers. In those situations
where Interwest extends warranties beyond those of the manufacturers, warranty
reserves are established, recorded in the financial records, and amortized over
the warranty period. Interwest charges its customers for all repairs done
subsequent to the warranty period.
Interwest assists customers in the installation, maintenance and repair of
Interwest's products and provides training to the employees of such customers.
CUSTOMERS
No single customer accounted for more than 10% of sales for the seven
months ended December 31, 1995. Interwest customers consist of a broad range
of Colorado businesses, health care providers, educational institutions, banks
and state and local governmental entities.
BACKLOG
Interwest receives orders and is awarded contracts for the sale and
installation of telephone systems and other work to be performed in the future.
Since contract installations are typically completed within 30 days of contract
execution, Interwest's backlog is not generally indicative of future
performance. Generally contract payment terms are 40% paid upon contract
execution, 50% paid upon installation completion, and 10% paid upon customer
acceptance. As of March 31, 1996, there were 86 unfilled orders from various
customers which will account for approximately $2,428,000 in future sales. The
majority of these orders are expected to be shipped over the subsequent three
months.
COMPETITION
-31-
<PAGE>
The telecommunications equipment industry is characterized by intense
competition and rapid change. Interwest's products and services compete with
similar products and services offered by a number of telephone equipment
distributors, certain telephone operating companies and telephone interconnect
companies. Many competitors have financial, technical and market resources
significantly greater that Interwest.
Effective January 1, 1984, AT&T was divested of the regional Bell operating
companies ("RBOCs"). The RBOCs were permitted to market, sell, install and
service, but not manufacture, telecommunications products of the type marketed
by Interwest pursuant to the anti-trust decree entered in connection with the
divestiture. The recently enacted Telecommunications Act of 1996 contains
provisions that permit the RBOCs, subject to satisfying certain conditions
designed to facilitate competition, to manufacture telecommunications equipment.
In light of this provision, it is possible that one or more RBOCs may eventually
decide to manufacture telecommunications equipment or to form alliances with
other manufacturers to design, market, install and service telecommunications
equipment.
Following the AT&T divestiture, U.S. West, which was the RBOC in the Rocky
Mountain region, maintained a presence in the CPE market, selling both equipment
and services to business communications customers. Interwest competed against
the perceived reliability of U.S. West and other larger competitors such as
Lucent Technologies, Inc. (formerly known as AT&T) and ROLM, especially with
clients who had never bought communications systems from other independent
providers. Moreover, pricing against U.S. West and AT&T was difficult due to
differentiated volume-based wholesale pricing which was prevalent in the
industry. As customer acceptance of independent interconnects has expanded and
the number of independent CPE providers has grown, Interwest has been able to
gain a larger share of the regional market and to realize certain economies of
scale. Interwest believes this growth is a result of its ability to attract
small and mid-sized customers and to serve them more efficiently and effectively
than its larger competitors.
In the Front Range middle market, Interwest not only competes against the
large corporate CPE providers noted above, but also smaller dealers which
compete with a price orientation. Interwest believes it differentiates its
solution from the smaller independents with its technical operations and market
presence described above.
REGULATION
The Federal Communications Commission ("FCC") has promulgated regulations
which, among other things, set forth installation and equipment standards for
private telephone systems and require that all interconnect equipment installed
after January 1, 1980, meet standards adopted by the FCC. Interwest believes
that the suppliers of its interconnect equipment comply with these requirements.
EMPLOYEES
On May 31, 1996, Interwest employed 199 full-time employees. The number of
employees is significantly greater than at May 31, 1995 (165) and May 31, 1994
(94) due to the growth strategies implemented by Interwest over the past two
years. The 199 employees at May 31, 1996 are broken down into the following
categories: 4 executives, 37 sales and marketing, 144 operations, technical and
warehouse, 13 accounting and administration, and 1 legal.
-32-
<PAGE>
PROPERTIES
Interwest and its subsidiaries lease all of their office and warehouse
space and own no real property. The following table provides information
regarding the total space leased by Interwest and its subsidiaries.
LOCATION APPROXIMATE EXPIRATION
SQUARE FEET DATE OF LEASE
2150 Naegele Road 10,000 June 1, 2000
Colorado Springs, CO 80904
2637 Midpoint Drive 2,400 May 1, 1997
Building A-2, Suite C
Fort Collins, CO 80525
728 North Elizabeth 2,000 May 1, 2000
Pueblo, CO 81003
3101 East 52nd Avenue 6,400 August 31, 1998
Unit E
Denver, CO 80216
1114 West 7th Avenue 9,432 July 31, 2001
Suite 200
Denver, CO 80204
Presented below is selected pro forma combined financial information. The
pro forma balance sheet combines the balance sheets of the Company as of April
30, 1996 with Interwest as of March 31, 1996 (their respective quarter end), as
if the Merger had occurred on the balance sheet dates. The Merger will be
treated for financial accounting purposes as a purchase transaction.
The pro forma statement of operations combines the Company's and
Interwest's three month interim and year end operations as if the Merger
had occurred at the beginning of the period presented. This pro forma
information is not necessarily indicative of future operations or the actual
results that would have occurred had the Merger been consummated at the
beginning of the period indicated.
-33-
<PAGE>
Also presented is selected financial information of Interwest based upon
its interim and prior fiscal year ends. Interwest was acquired by Group on June
1, 1995. Group's year end was December 31, 1995. Prior to Group's acquisition,
Interwest had a March 31 year end. The historical financial information of
Interwest is presented for the period subsequent to Group's acquisition (three
months ended March 31, 1996 and the seven months ended December 31, 1995) and
the periods prior to Group's acquisition (the two months ended May 31, 1995 and
the years ended March 31, 1995 and 1994).
Financial statements of the Company are included in the Company's Form
10-KSB and Form 10-QSB, which are included as Appendixes E and F, respectively,
attached to this Proxy Statement. Complete pro forma combined condensed
financial information and financial statements of Interwest are included in
Appendix D attached to this Proxy Statement.
(in thousands, except per share data)
Interwest
Pro Forma Historical
April 30, 1996 March 31, 1996
-------------- --------------
BALANCE SHEET:
Cash $1,908 $842
Working Capital 1,875 1,224
Long-term debt and other 639 639
Stockholders' equity 8,204 3,661
Total Assets 17,315 8,140
Pro Forma
-------------------------------------
Three Months Ended Year Ended
April 30, 1996 January 31, 1996
------------------ ----------------
OPERATIONS:
Net Revenue $8,273 $34,147
Gross Margin 2,740 8,972
Income (loss) before income taxes (292) (1,031)
Net income (loss) (292) (903)
Net income (loss) per share (.06) (.19)
Weighted shares outstanding 4,707 4,704
-34-
<PAGE>
<TABLE>
Interwest Historical
---------------------------------------------------------------------
Three Months Seven Two
Ended Months Months Years Ended
March 31, Ended Ended March 31,
--------- December 31, May 31, ---------
1996 1995 1995 1995 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Revenue $4,659 $3,371 $10,284 $1,966 $12,075 $12,219
Gross Margin 1,674 1,195 3,794 864 5,064 5,030
Income (loss) before
income taxes (80) 170 42 18 781 1,011
Net income (loss) (62) 96 (3) 10 467 627
</TABLE>
-35-
<PAGE>
COMPARATIVE PER SHARE DATA - INTERNET
<TABLE>
Pro-Forma Historical
--------- ----------
Three Months Three Months
Ended Year Ended Ended Years Ended
April 30, 1996 January 31, 1996 April 30, 1996 January 31, 1996
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Book Value per
Share $1.74 N/A $1.13 $1.22
Cash Dividends
per Share None None None None
Net income (loss)
per Share (.06) (.22) (.08) (.41)
</TABLE>
INTERWEST - MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND RESULTS
OF OPERATIONS.
The following is Interwest's discussion and analysis of certain significant
factors which have affected Interwest's financial condition and results of
operations during the periods included in the accompanying financial statements.
FINANCIAL CONDITION
The current ratio (current assets divided by current liabilities)
declined to 1.41 at December 31, 1995 from 1.64 at March 31, 1995. The
current ratio was 1.32 at March 31, 1996. Accounts receivable balances were
$3,034,000 and $2,922,000 at December 31, 1995 and March 31, 1996,
respectively. This increase from the March 31, 1995 balance of $2,045,000 is
due to the overall growth in revenues, and an increase in progress billings
on large installation contracts. Average days outstanding for accounts
receivable had decreased to 51.3 for the seven month period ended December
31, 1995 from 59 for the fiscal year ended March 31, 1995. This was due to
increased collection efforts on trade receivables and progress payments on
installation contracts. Average days outstanding for accounts receivable had
increased to 57 for the three month period ended March 31, 1996, due to two
large contracts. As of March 31, 1996, Interwest had the following
outstanding amounts accrued related to these two large contracts:
Large business system for corporate client $334,249
Extended installation contract for government client $594,828
As of June 30, 1996 the uncollected amount of the contract for the
government client was $234,836.
The installation for the government client is expected to be completed by
August 31, 1996, with payment due October 31, 1996. Change orders and
additional claims are expected to be settled by December 31,
-36-
<PAGE>
1996, with payment due by February 28, 1997. The business system work on the
corporate client was completed subsequent to March 31, 1996 and full payment
was received.
Inventory increased from $892,000 at March 31, 1995 to $1,169,000 at
December 31, 1995 and decreased to $1,085,000 at March 31, 1996. The overall
increase in inventory is due to larger inventory balances required to support
the increased sales of Interwest.
Working capital was $1,308,000 as of December 31, 1995, a decrease of
$181,000 from working capital of $1,489,000 as of March 31, 1995. Working
capital declined further to $1,224,000 as of March 31, 1996, generally as a
result of loss from operations and purchases of equipment.
LIQUIDITY AND RESOURCES
Interwest's cash position decreased by $427,000 during the seven month
period ended December 31, 1995. This decrease in cash balances was primarily
attributable to capital expenditures of $398,000, repayments of debt of
$219,000, and income tax payments of $427,000. Cash was provided through
advances from Group of $422,000, and an increase in the revolving line of
credit of $236,000. Following consummation of the Merger, advances from
Group will not be continued. Interwest's cash position increased by $699,000
during the three month period ended March 31, 1996. The main source of cash
was provided by a subcontractor bond of $850,000, which was held in a money
market account. Subsequent to March 31, 1996 Interwest learned that it was
not awarded the contract, and the bond was refunded to the subcontractor.
During the three months ended March 31, 1996, cash was used primarily for
capital expenditures of $100,000, and repayments of debt of $44,000.
Additional cash was provided through an increase in the revolving line of
credit of $58,000. Interwest's cash position decreased by $150,000 during
the quarter ended March 31, 1995. Cash was used to support an increase in
accounts receivable, and to purchase fixed assets and a customer list. Cash
was provided by new financing.
The balance of the revolving line of credit with Interwest's bank was
$330,000 at March 31, 1996. The total revolving line of credit available to
Interwest as of March 31, 1996 was $500,000. In May, 1996, Group obtained a
new credit facility of $4,300,000 under a two-year revolving line of credit.
Interwest can draw upon this line of credit jointly with its parent and
affiliates for working capital purposes and general corporate needs and is
obligated to repay all advances jointly and severally with Group and other
affiliates. Certain assets of Interwest and its subsidiaries also
collateralized this credit facility. It is a condition to closing of the
Merger that Interwest and its assets be released of its joint obligation
after repayment by Interwest of its outstanding balance.
Interwest will have a continuing need for working capital to sustain its
growth, either from operations or from outside financing. There can be no
assurance that such working capital will be available.
RESULTS OF OPERATIONS
SEVEN MONTHS ENDED DECEMBER 31, 1995 COMPARED TO FISCAL YEAR ENDED
MARCH 31, 1995
During the seven month period ended December 31, 1995, Interwest started up
the Fort Collins business unit utilizing a customer list purchased May, 1995.
In addition, Interwest continued to build up the Interwest Cable subsidiary,
which was incorporated in January, 1995.
Interwest experienced average monthly revenues of $1,469,000 for the seven
month period ended December 31, 1995. This represents a 46.0% increase from the
average monthly revenues of $1,006,000
-37-
<PAGE>
for the twelve month period (prior fiscal year) ended March 31, 1995. Of
this growth, 5.9% came from incremental revenues generated by the Fort
Collins business unit, 15.6% came from incremental revenues generated by
Interwest Cable, and 24.5% came from growth experienced by the remaining
business units.
The gross profit margin for the seven month period ended December 31, 1995,
was 36.9%. This is a decrease from the 41.9% gross profit margin experienced
by Interwest for the fiscal year ended March 31, 1995. Gross profit margins
have declined due to the increase in large, institutional and government
contracts, which are sold at a lower markup than smaller retail contracts.
For the seven month period ended December 31, 1995 government and
institutional contracts accounted for 18% of the total revenue from contracts.
Future revenue from government and institutional contracts is expected to be
in the same range.
Net interest expense during the seven month period ended December 31, 1995
averaged $8,429 per month. Interest expense is the result of the following:
(a) Debt incurred to purchase customer lists in 1995.
(b) Use of new revolving line of credit in 1995.
(c) Debt incurred to purchase new equipment.
Selling, general and administrative expenses and depreciation and
amortization expenses averaged $527,000 per month (35.9% of revenues) for the
seven month period ended December 31, 1995. This is an increase from an
average of $351,000 per month (34.8% of revenues) for the fiscal year ended
March 31, 1995. This increase is due to increased operating expenses
attributable to the addition of the Fort Collins business unit and Interwest
Cable, building up the sales staff to generate revenue growth, and redesigning
the compensation structure for the sales managers. Rent expenses were increased
due to the addition of new space in Fort Collins and Denver; and amortization
expenses were increased due to the effects of the June 1, 1995 acquisition.
However, offsetting savings were recognized as Interwest made efforts to
consolidate administrative functions.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995
Interwest experienced average monthly revenues of $1,553,000 for the
quarter ended March 31, 1996, as compared to average monthly revenues of
$1,124,000 for the quarter ended March 31, 1995. Of this 38.2% increase,
27.9% came from incremental revenues generated by Interwest Cable and the
Fort Collins business units and a change in accounting method from completed
contract to percentage of completion for revenue recognition, and 10.3% came
from the remaining business units. For the three months ended March 31, 1996
governmental and institutional contracts accounted for approximately 10.7% of
revenues from contracts. Interwest had a backlog of orders at approximately
$2,428,000 as of March 31, 1996.
The gross profit margin for the quarter ended March 31, 1996 was 35.9%,
as compared to 35.5% for the quarter ended March 31, 1995.
Selling, general and administrative expenses averaged $582,000 per month
(37.4% of revenues) for the quarter ended March 31, 1996, and $348,000 (31.1%
of revenues) for the quarter ended March 31, 1995. This increase is due to
increased operating expenses attributable to the addition of the Fort Collins
business unit and Interwest Cable, building up the sales staff to generate
revenue growth, and redesigning the compensation structure for the sales
managers. Rent expenses were increased due to the addition of new space in
Fort Collins and Denver; depreciation expense increased due to the
capitalization
-38-
<PAGE>
of Interwest Cable; and amortization expense increased due to the addition of
a new customer list and the effects of the June 1, 1995 acquisition. Some
savings were recognized as Interwest made efforts to consolidate administrative
functions. Interest expense was approximately $25,000 for the quarter ended
March 31, 1996.
RISKS RELATING TO INTERWEST'S BUSINESS.
The following are risks related to the Interwest's business and the
telecommunications industry in general. Should the Merger be consummated,
the following risks will apply to the Company's ownership and operation of
Interwest.
LOSS FROM OPERATIONS. For the seven months ended December 31, 1995 and for
the three months ended March 31, 1996, Interwest's results from operations in
both periods included net losses in the income statement. Interwest may
continue to incur operating losses in the future.
DEPENDENCE ON MANAGEMENT. Interwest is dependent on certain key
managers. There is no assurance that these key managers will remain with
Interwest.
COMPETITION. The telecommunications equipment industry is characterized
by intense competition. Interwest competes against a number of competitors,
some of which are larger and have significantly greater sales, marketing and
financial resources than Interwest. Larger competitors include companies
with regional or national operations, including Rolm, AT&T and U.S. West,
which have generally been able to offer lower pricing schemes to their
customers because of economies of scale. Interwest management believes it
has succeeded in this environment based on the quality of its customer
service and the efficiency and economy of its technical operations. Over the
past three years one large competitor, U.S. West, has shifted its focus away
from the local interconnect market in order to concentrate in other
telecommunications markets, such as long distance. In addition, Interwest
was awarded a Northern Telecom dealership early in the second quarter of
1996. Interwest believes these developments have changed the competitive
environment to its benefit, because the combination of the new Northern
Telecom dealership and an existing NEC dealership will allow Interwest to
pursue larger accounts which have traditionally been the domain of
Interwest's larger competitors such as U. S. West. However, there can be no
assurance that Interwest will be successful in such efforts.
PENDING LEGISLATION. Congress has recently passed, and the President
approved, a major telecommunications bill and various state legislatures have
under consideration or have passed various proposals that would allow the local
exchange carriers and large competitors such as U.S. West to enter into the
inter-LATA long distance market. Congress and numerous state legislatures have
also adopted
-39-
<PAGE>
proposals which would open up the local access market currently dominated by
the RBOCs. Interwest is unable to predict the impact of the various
legislation; however, it does believe competition will increase in its
markets. Interwest also views the new legislation favorably as it believes
new opportunities may develop in the local markets to date controlled by the
RBOCS. See "Business - Governmental Regulation."
OBSOLESCENCE DUE TO TECHNOLOGICAL CHANGE AND NEW SERVICES. The
telecommunications industry has been characterized by steady technological
change, frequent new service introductions and evolving industry standards.
Interwest believes that its future success will depend on its ability to
anticipate such changes and to offer on a timely basis services that meet
these evolving industry standards. There can be no assurance that Interwest
will have sufficient resources to make the investments necessary to introduce
new services that would satisfy an expanded range of customer needs.
NO DIVIDENDS. Interwest has paid no cash dividends on its common stock and
has no present intention of paying cash dividends in the foreseeable future. It
is the present policy of the Board of Directors to retain all earnings to
provide for the growth of Interwest. Payment of cash dividends in the future
will depend, among other things, upon Interwest's future earnings, requirements
for capital improvements, the operating and financial conditions of Interwest
and other factors deemed relevant by the Board of Directors.
MANAGEMENT OF INTERWEST.
The present executive officers of Interwest are as follows:
President John M. Couzens
Executive Vice President, Network Systems Robert L. Smith
Vice President, Operations Steven M. Seligmann
Vice President, Sales and Marketing Donald S. Vaughn
Mr. Couzens, 35, has been President and Chief Executive Officer of
Interwest since April, 1996. Mr. Couzens was Vice President, Chief Financial
Officer and Treasurer of Group from September 1994 until March 1996. Prior
to joining Group, Mr. Couzens was Vice President and Division Manager at The
Northern Trust Company. Mr. Couzens is a director of Interwest.
Mr. Smith, 52, joined Interwest in 1980 as General Manager. Mr. Smith
was President of Interwest from 1987 until April 1996. In April 1996, Mr.
Smith became the Executive Vice President of Network Systems for Interwest.
Mr. Smith is a director of Interwest.
Mr. Couzens is expected to become President of the Company after
consummation of the Merger. Mr. Galley, the current President and Chief
Executive Officer of the Company, is expected to remain as Chief Executive
Officer of the Company after consummation of the Merger. The Company has not
yet determined which, if any, of the existing members of management besides
Mr. Couzens and Mr. Smith will become officers of the Company, and what
salaries such persons (other than Messrs. Smith and Seligman, who have
employment agreements with Interwest) will receive after consummation of the
Merger.
Each of Messrs. Couzens and Smith and Craig D. Slater are expected to
become directors of the Company after consummation of the Merger.
-40-
<PAGE>
Mr. Slater, 39, was elected to the Board of Directors of Group in July
1994 in conjunction with the acquisition of Group by Anschutz Company. Mr.
Slater serves as Vice President of Acquisitions and Investments at Anschutz
Company, a holding company with investments in a variety of industries,
including telecommunications, transportation, energy and real estate. Mr.
Slater has been an employee of Anschutz Company and/or The Anschutz
Corporation since 1988. Mr. Slater also serves as a member of the Board of
Directors of Forest Oil Corporation, to which he was elected in 1995.
Mr. Smith has an employment agreement with Interwest for a two year
period ending June 1, 1997 under which he is to receive a salary of $170,000
per year. Of this amount, Group has agreed in the Acquisition Agreement to
pay $45,000 per year. Mr. Smith may be terminated without cause, in which
case he is to receive three months salary and bonus.
Mr. Smith leases to the Company its principal office for $4,990 per
month. The lease will expire May 31, 2000. The Company pays all taxes,
maintenance and insurance under the lease.
When Interwest was acquired from Mr. Smith, Mr. Smith agreed to
indemnify Group for certain matters that arose before closing of that
acquisition. Interwest expects to suffer losses on a contract that was bid
before that acquisition and Interwest and Group may make a claim for
indemnification against Mr. Smith. Group and Interwest have entered into an
agreement under which Group forgave $125,000 of intercompany indebtedness
from Interwest to Group, Interwest assigned to Group all rights for
indemnification by Mr. Smith up to $143,000 and Interwest agreed to reimburse
50% of Group's legal costs in any proceedings brought by Group against Mr.
Smith. It is not possible at this time to estimate the amount of the loss
that may be incurred by Interwest on this contract; however, if the amount of
the loss exceeds $143,000, Interwest may seek indemnification from Mr. Smith
for the balance.
Mr. Seligman has an employment agreement with Interwest under which he
is to receive a salary of $100,000 per year plus a bonus based on the
Company's achievement of goals mutually negotiated by him and the Company.
The employment is at will and no term of employment is specified.
INTEREST OF MANAGEMENT IN MATTERS TO BE VOTED UPON.
The present management of the Company and nominees for director (other
than the director nominees to be designated by Group at closing of the
Acquisition Agreement) have no material interest in the approval by
Shareholders of Proposal Three.
EFFECTS OF ADOPTION OF PROPOSAL THREE.
ANTI-TAKEOVER EFFECTS; CHANGE OF CONTROL
Group will have a substantial ownership position in the Company and may
designate three of the Company's directors at the Second Closing. Pursuant
to the Acquisition Agreement, based upon the number of shares of Company
Common Stock outstanding on August 5, 1996, the Company will issue to Group
2,306,541 shares of Company Common Stock, or 49% of the 4,707,228 shares of
Company Common Stock that would be outstanding after giving effect to such
issuance of shares upon the consummation of the Merger at the Second Closing.
If the Company were then to default on the payment of the Note (whether at
scheduled maturity, on the date of any required prepayment, or after the
expiration of applicable grace periods and cure periods, upon acceleration)
and Group were to elect to convert the Note, the Company would be required to
issue to Group 300,000 shares of Company Common Stock at the price of $3.00
per share (as such number of shares and price per share may be
-41-
<PAGE>
adjusted pursuant to the terms of the Note). If effect were given to the
issuance to Group of these 2,606,541 shares, then Group would own 52.1% of
the 5,007,227 shares of Company Common Stock that would then be outstanding,
based upon the number of shares outstanding on August 5, 1996.
Comparatively, based on such share ownership by Group, the percentage
ownership of the Company's current shareholders will be reduced to 51%
initially, with the potential to be further reduced to 47.9% if the Company
were to default on the payment of the Note. Group will also have the right
to designate three of the eight directors of the Company who will hold that
position upon the consummation of the Merger at the Second Closing.
As a result, Group will have the ability to exert substantial influence
with respect to matters considered by the Board of Directors and will control
the outcome of matters submitted to the approval of the shareholders of the
Company, including the election of the other directors of the Company,
subject to the staggered terms that are the subject of Proposal Five. Group
will have a veto power over proposed transactions between the Company and
third parties (such as a merger) that currently require the approval of the
holders of at least a majority of the issued and outstanding shares of
Company Common Stock and, if Proposal Six is approved and the Company's
Articles of Incorporation are so amended, that would require the approval of
the holders of at least two-thirds of the issued and outstanding shares of
Company Common Stock. It would be unlikely that control of the Company would
be transferred to a third party without Group's consent and agreement. It is
also unlikely that a third party would offer to pay a premium to acquire the
Company without the prior agreement of the Group, even if the Board of
Directors were to choose to attempt to sell the Company in the future.
-42-
<PAGE>
BOARD RECOMMENDATION TO SHAREHOLDERS AND VOTE REQUIRED.
The Board of Directors recommends the approval of the Acquisition
Agreement and the transactions (including the Merger) and other documents
contemplated thereby. The Board believes that the Company must compete in an
environment of rapid change in technology, increased pressure on gross
margins, and a trend toward consolidation of business entities within the
Company's industry. Important elements of the Company's long range plan
include expanding its operations in terms of product and service offerings
and geographic presence and achieving the benefits of being a larger company
within its industry. Benefits of size within the industry which may enhance
Company opportunities and financial performance include increased
marketability of products and services due to customer perceptions of
increased capability and stability, spreading of overhead expenses over a
larger revenue base, increased visibility to the financial community in the
event that secondary funding raising activities are undertaken, and increased
financial capabilities in future business acquisitions and strategic
alliances.
The acquisition of Interwest is in accordance with Internet's long range
plans. The Board of Directors believes that the Company and Interwest are
complementary in their product and service offerings in that both companies
will be able to solicit each other's customer base with products and services
not previously offered. This will also allow the combined companies to retain
revenues previously referred to outside parties. The broader range of
products and services will enhance the combined company's ability to attract
potential customers over a wider geographic area. Due to the similarity of
company operations, it is anticipated that greater efficiencies in manpower,
sales and marketing programs, business systems, inventories and real estate
can be achieved. The timing of these efficiencies is dependent upon a number
of factors including lease and other contractual obligations.
The number of shares to be issued in accordance with the Acquisition
Agreement was determined in negotiations with Group. Factors that the
Company's Board of Directors considered included the relative revenue size of
each entity, opportunities for synergies in the marketplace and in the
combined operations, and fit with the Company's long range plans.
The affirmative vote of a majority of the shares of Company Common Stock
issued and outstanding is required to approve Proposal Three. The Officers
and Directors have advised the Company that they plan to vote their shares of
Company Common Stock in favor of Proposal Three. The Company will not
consummate the Merger if the required approval of the Shareholders of the
Company is not obtained with respect to each of Proposals Three, Four and
Five.
PROPOSAL FOUR
A PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF COMPANY COMMON STOCK TO
20,000,000 SHARES
-43-
<PAGE>
The Board of Directors intends to present at the Special Meeting a
proposal to approve an amendment to the Company's Articles of Incorporation
to increase the number of authorized shares of no par value Company Common
Stock to 20,000,000 shares of Company Common Stock. The presently authorized
capital stock of the Company consists of 4,500,000 shares of Company Common
Stock and 100,000,000 shares of Preferred Stock, $.0001 par value.
The rights of holders of additional shares of Company Common Stock for
which authorization is sought would be identical to the rights of holders of
shares of Company Common Stock now currently authorized.
To date no series of Preferred Stock has been established by the Board
of Directors. The Preferred Stock could have preference over the Company
Common Stock with respect to the payment of dividends and voting and other
preferences as would be determined by the Board of Directors of the Company
at the time of establishment of any series of Preferred Stock. Holders of
Company Common Stock do not have preemptive rights to subscribe to additional
securities which may issued by the Company.
As permitted by the Colorado Business Corporation Act ("CBCA"), the Board
of Directors is empowered to issue the Preferred Stock in series, at any time or
from time to time, and to determine the price or prices, the number of shares
designated for a particular series, and the relative preferences, privileges and
restrictions of the shares so issued. Among the determinations to be made by
the Board of Directors for each issuance of a series of Preferred Stock are the
following:
(a) the rate of dividend, the time of payment of dividends, whether
dividends are cumulative, and the date from which any dividends shall accrue;
(b) whether shares may be redeemed and, if so, the redemption price and
the terms and conditions of redemption;
(c) the amount payable upon shares in the event of involuntary
liquidation;
(d) the amount payable upon shares in the event of voluntary liquidation;
(e) sinking fund or other provisions, if any, for the redemption or
purchase of shares;
(f) the terms and conditions under which shares may be converted, if the
shares of any series are issued with the right of conversion; and
(g) voting powers, if any.
Such determinations would be made by the Board of Directors at the time it
designated the particular series of Preferred Stock comprising the series and
would take into account the circumstances pertinent at that time. No shares of
Preferred Stock are issued and outstanding.
The Company currently has no plans to issue any additional shares of
Company Common Stock or any shares of Preferred Stock other than: (i) the
shares of Company Common Stock that previously have been reserved for
issuance with respect to outstanding stock options, including the stock
option plans discussed in Proposals One and Two above, and (ii) shares of
Company Common Stock to be issued
-44-
<PAGE>
pursuant to the Acquisition Agreement described in Proposal Three (including
shares of Company Common Stock issued to Group in the Merger and shares of
Company Common Stock issued upon conversion of the Note).
If this Proposal Four is approved and the Articles of Incorporation are
amended accordingly, the increased number of authorized shares of Company
Common Stock will be available for issuance from time to time for such
purposes and consideration as the Board of Directors may approve and no
further vote of shareholders of the Company will be required, except as
provided under Colorado law or the rules of any national securities exchange
on which shares of the Company are at the time listed. The availability of
additional shares for issuance, without the delay and expense of obtaining
the approval of shareholders at a special meeting, will afford the Company
greater flexibility in acting upon proposed transactions.
In the event this Proposal Four is approved, the amendment to the
Company's Articles of Incorporation authorizing 20,000,000 shares of Company
Common Stock will become effective upon the filing with the Secretary of
State of the State of Colorado of a certificate with respect to such
amendment.
It is therefore proposed that the Company's Articles of Incorporation
be amended so that Article IV, Section 1 reads as follows:
ARTICLE IV
SECTION 1. CLASSES AND SHARES AUTHORIZED. The authorized capital
stock of the corporation shall be 20,000,000 shares of Common Stock, no par
value, and 100,000,000 shares of Preferred Stock, $.0001 par value.
INTEREST OF MANAGEMENT IN MATTERS TO BE VOTED UPON.
The management of the Company and the director nominees (other than the
director nominees to be designated by Group at closing of the Acquisition
Agreement) do not have an interest in the approval by shareholders of
Proposal Four.
EFFECTS OF ADOPTION OF PROPOSAL FOUR.
ANTI-TAKEOVER EFFECTS. The additional authorized but unissued shares of
Company Common Stock, for which approval is sought, could be used by incumbent
management to make more difficult a change in control of the Company. Under
certain circumstances such shares could be used to create voting impediments or
to frustrate persons seeking to effect a takeover or otherwise gain control of
the Company. For example, such shares could be privately placed with purchasers
who might side with the Board of Directors in opposing a hostile takeover bid.
Despite such anti-takeover implications, this Proposal Four is not the
result of management's knowledge of any effort to accumulate the Company's
securities or to obtain control of the Company by means of a merger, tender
offer, solicitation in opposition to management or otherwise.
Except as disclosed in this Proxy Statement, the Company's Board of
Directors is not aware of the existence of any provisions in the Articles of
Incorporation or Bylaws or terms of contracts to which it is a party which may
be considered to have an anti-takeover effect. The Company's Articles of
Incorporation and Bylaws do not contain any provisions which would impose any
burden in excess of requirements
-45-
<PAGE>
imposed by Colorado law upon potential tender offerors or others seeking a
takeover of the Company, other than provisions for limitation of director
liability.
VOTING AND FUTURE ISSUANCES. The Articles do not provide for cumulative
voting. As a result, in order to be ensured of representation on the Board,
a shareholder must control the votes of a majority of the shares present and
voting at a shareholders' meeting at which a quorum is present. The lack of
cumulative voting requires an entity seeking a takeover to acquire a
substantially greater number of shares to ensure representation on the Board
than would be necessary were cumulative voting available. Further, because
the Articles deny preemptive rights to the shareholders, any authorized but
unreserved shares of Company Common Stock, in the event this Proposal Four is
passed, may be issued to parties without first offering such shares to
existing shareholders. Such issuances, particularly in light of the
flexibility which will be afforded to the Board, might be used to reduce the
equity ownership of a tender offeror or other acquiring entity thereby
rendering acquisition efforts more difficult or impossible.
DILUTIVE EFFECT. The issuance of additional shares of Company Common
Stock could have the effect of diluting the interests of the existing holders
of the Company Common Stock. Holders of Company Common Stock do not have
preemptive rights to subscribe to additional securities which may issued by
the Company.
MANAGEMENT RECOMMENDATION AND REQUIRED VOTE.
Management recommends the approval of the Amendment to the Articles of
Incorporation to increase the number of authorized shares of Company Common
Stock from 4,500,000 shares to 20,000,000 shares. The Board believes the
increase will make available for further expansion additional shares to be
issued in an acquisition or other form of business acquisition and/or
secondary financing.
The affirmative vote of a majority of the shares of Company Common Stock
issued and outstanding is required to approve Proposal Four. The Officers
and Directors have advised the Company that they plan to vote their shares of
Company Common Stock in favor of Proposal Four.
The approval of Proposal Four is a condition to the obligations of the
Company and Group to consummate the Merger described in Proposal Three.
-46-
<PAGE>
PROPOSAL FIVE
A PROPOSAL TO AMEND THE ARTICLES OF
INCORPORATION CONCERNING CLASSIFICATION OF DIRECTORS AND
ELECTION FOR STAGGERED TERMS
The Company's Articles of Incorporation presently provide that at any
time when there are at least six directors, the directors shall be divided
into three classes, with one class to be elected every year. Presently there
are five directors and the Board is not divided into classes. Upon
consummation of the Merger, three new directors designated by Group would be
appointed to the Board and the Board would be divided into classes. The
Company and Interwest have agreed that one new director designated by Group
would be appointed to each class.
The provisions of the Company's Articles of Incorporation are unclear as
to whether the Board would continue to be classified if the number of
directors were later to fall below six. Further, the Articles of
Incorporation permit the Shareholders to remove any director at any time
without cause.
Pursuant to the Acquisition Agreement, the Board of Directors intends to
present at the Special Meeting a proposal to approve an amendment to the
Company's Articles of Incorporation to cause the Board to be classified
regardless of the number of directors and to permit directors to be removed
before the expirations of their terms only for cause.
If Proposal Five is approved, the Board of Directors will be divided
into Class I, Class II and Class III Directors, with one class to be elected
every year, regardless of whether the Merger is consummated. The Class I
Director or Directors terms of office would expire at the first Annual
Meeting of Shareholders to be held in 1997; the term of office for the Class
II Directors would expire at the second Annual Meeting of Shareholders to be
held in 1998; and the terms of the Class III Directors would expire at the
third Annual Meeting of Shareholders to be held in 1999. Upon the expiration
of the initial staggered terms, Directors would be elected for three year
terms to succeed those Directors whose terms expire.
It is therefore proposed that the Company's Articles of Incorporation be
amended so that Article VIII, Section 2 reads as follows and to add a new
Article VIII, Section 6:
-47-
<PAGE>
ARTICLE VIII
BOARD OF DIRECTORS
SECTION 2. CLASSIFICATION OF DIRECTORS. The Board of Directors
shall be divided into three classes on the dates and in the manner set
forth below. Each class of Directors shall consist, as nearly as
possible, of one-third of the total number of Directors. The Class I
Directors term shall expire at the first Annual Meeting of Shareholders
to be held in 1997; the Class II Directors term shall expire at the
second Annual Meeting of Shareholders to be held in 1998; the Class III
Directors term shall expire at the third Annual Meeting of Shareholders
to be held in 1999. Upon expiration of the initial staggered terms,
Directors will be elected for three years to succeed those Directors
whose terms expire. Notwithstanding the foregoing, and except as
otherwise required by law, whenever the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a
class, to elect one or more directors of the Company, the terms of the
director or directors elected by such holders shall expire at the next
succeeding annual meeting of shareholders. Vacancies which occur during
the year may be filled by the Board of Directors to serve for the
remainder of the initial term of each class.
ARTICLE VIII
SECTION 6. REMOVAL OF MEMBERS OF BOARD OF DIRECTORS. The
shareholders may remove one or more directors only for cause.
In the event this Proposal Five is approved, the amendment to the
Company's Articles of Incorporation relating to the classification and
removal of Directors will become effective upon the filing with the Secretary
of State of the State of Colorado of a certificate with respect to such
amendment.
INTEREST OF MANAGEMENT IN MATTERS TO BE VOTED UPON.
The present directors of the Company may have longer terms of office if
Proposal Five is adopted.
EFFECTS OF ADOPTION OF PROPOSAL FIVE.
ANTI-TAKEOVER EFFECTS. The Board of Directors presently consists of
five members. If the Board of Directors is fixed at eight members as is
proposed by the Acquisition Agreement, it will be divided into three classes
(with one designee of Group in each class) and at least two Directors will be
elected each year. Each class will have a term of one to three years. If
the Merger
-48-
<PAGE>
is consummated, Group, with 49% of the outstanding Company Common Stock, will
exercise practical control over the election of directors. However, by
prohibiting removal of directors other than for cause, Group will not be able
to remove any of the five existing directors until they stand for reelection
at the end of their terms of office. In the absence of this amendment, Group
could elect a whole new Board at the next Shareholder meeting.
If the Merger is not consummated, this proposal, if adopted, could have
the effect of discouraging, or making it more difficult to effect a merger,
tender offer, the assumption of control by a holder of a large block of the
Company Common Stock, or the removal of incumbent management, because the
proposed amendment would require a longer period of time to change the Board
even if a majority of the shareholders desired a change. This effect could
occur even if such actions would be favorable to the interest of the
shareholders. However, except for the transactions contemplated by the
Acquisition Agreement, the Board is not aware of any efforts to obtain
control of the Company, and the proposal of this measure is not in response
to any such efforts.
In addition, the Company's Articles of Incorporation prohibit cumulative
voting in the election of Directors. The prohibition on cumulative voting,
the proposed separate classification of Directors, the prohibition on removal
other than for cause and the staggered terms of Directors could have the
effect of discouraging possible take-overs of the Company.
MANAGEMENT RECOMMENDATION AND REQUIRED VOTE.
Management recommends approval of Proposal Five. Management believes the
proposal will help assure continuity and stability in the Board membership.
Although the Company has not experienced any problems in the past with lack of
continuity or stability in the Board, the Board of Directors believes that the
classification of the Board of Directors effected by the proposed amendment will
serve the best interests of the Company and its shareholders.
The affirmative vote of a majority of the shares of Company Common Stock
issued and outstanding is required to approve Proposal Five. The Officers
and Directors have advised the Company that they plan to vote their shares of
Company Common Stock in favor of Proposal Five.
The approval of Proposal Five is a condition to the obligations of the
Company and Group to consummate the Merger described in Proposal Three.
PROPOSAL SIX
A PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION TO INCREASE
THE VOTING REQUIREMENT BY THE COMPANY'S SHAREHOLDERS IN
CERTAIN CORPORATE ACTIONS AND TO PROVIDE FOR MANDATORY
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Acquisition Agreement, the Board of Directors intends to
present at the Special Meeting a proposal to approve an amendment to the
Company's Articles of Incorporation to
-49-
<PAGE>
increase the number of shares required to be voted (A) in favor of the sale,
lease, exchange or disposal of all or substantially the Company's property or
assets not in the ordinary course of business, (B) to approve a merger,
consolidation or exchange of the issued and outstanding shares of the Company
with another corporation or entity or (C) to approve dissolution of the
Company.
The current Articles of Incorporation of the Company require only a
majority vote of the outstanding shares of the Company at a Special Meeting
of Shareholders to approve these types of corporate activity, and require a
majority vote to approve a pledge of substantially all of the assets of the
Company not in the ordinary course of business. The proposed amendment will
raise the voting requirement to the affirmative vote of at least two-thirds
of the shares issued and outstanding to approve such sales of assets, mergers
and dissolution, and will remove the requirement that shareholders approve
pledges of assets.
This proposal would also amend the Articles of Incorporation to provide
for mandatory indemnification of directors and officers in all circumstances
in which a corporation is entitled to indemnify directors and officers under
Colorado law. The current Articles of Incorporation of the Company are
ambiguous as to whether indemnification of officers and directors is
mandatory or permissive.
It is therefore proposed that the Company's Articles of Incorporation be
amended to delete Article VIII, Section 5(f)and Article XIV in their
entireties, to renumber Article XV as Article XIV and to amend Article VIII,
Sections 5(c) and 5(d), the first two paragraphs of Article X and Article XIV
(formerly Article XV) to read as follows:
ARTICLE VIII
SECTION 5(c) to sell, lease, exchange or otherwise dispose of all or
substantially all of the property or assets of the corporation, with or
without its goodwill, other than in the usual and regular course of business,
and to vote or otherwise consent, other than in the usual and regular course
of its business, with respect to the sale, lease, exchange, or other
disposition of all, or substantially all, of the property with or without the
goodwill of another entity which it controls, when the shares or other
interests held by the corporation in such other entity constitute all, or
substantially all, of the property of the corporation, upon such terms and
conditions as the Board of Directors may determine; PROVIDED, HOWEVER, that
such transaction or consent shall be approved by each voting group entitled
to vote separately on the transaction or consent by two-thirds of all the
votes entitled to be cast on the transaction or consent by that voting group
at a meeting duly called for that purpose, or shall be authorized or ratified
by the written consent of the holders of all of the shares entitled to vote
thereon;
SECTION 5(d) to merge, consolidate or exchange all of the issued or
outstanding shares of one or more classes of the corporation upon such terms
and conditions as the Board of Directors may authorize; PROVIDED, HOWEVER,
that such merger, consolidation or exchange shall be approved
-50-
<PAGE>
by each voting group entitled to vote separately on the transaction by
two-thirds of all the votes entitled to be cast on the transaction at a
meeting duly called for that purpose, or shall be authorized or ratified by
the written consent of the holders of all of the shares entitled to vote
thereon; and
ARTICLE X
The first two paragraphs of Article X are amended to read as follows:
The corporation shall indemnify its officers and directors to the
fullest extent permitted under Colorado law.
ARTICLE XIV
SECTION 1. PROCEDURE. A proposal to dissolve the corporation shall be
approved by each voting group entitled to vote separately on the proposal by
two-thirds of all the votes entitled to be cast on the proposal by that
voting group at a meeting duly called for that purpose, or when authorized or
ratified by the written consent of the holders of all of the shares entitled
to vote thereon.
SECTION 2. REVOCATION. A proposal to revoke voluntary dissolution
proceedings shall be approved by each voting group entitled to vote
separately on the proposal by two-thirds of all the votes entitled to be cast
on the proposal by that voting group at a meeting duly called for that
purpose, or when authorized or ratified by the written consent of the holders
of all of the shares entitled to vote thereon.
In the event this Proposal Six is approved, the amendment to the
Company's Articles of Incorporation relating to increase in voting
requirements will become effective upon the filing with the Secretary of
State of the State of Colorado of a certificate with respect to such
amendment.
INTEREST OF MANAGEMENT IN MATTERS TO BE VOTED UPON.
The current management of the Company and the Director nominees could
benefit from the amendment to Article X but do not otherwise have an interest
in the approval by Shareholders of Proposal Six.
EFFECTS OF ADOPTION OF PROPOSAL SIX.
ANTI-TAKEOVER EFFECTS. The increase in the voting requirement for
approval of the sale of the Company's assets or the merger or consolidation
of the Company with another corporation or entity will make either of these
corporate actions more difficult to achieve and may have the result of
discouraging the liquidation or merger of the Company even if a majority of
the Company's voting shares are in favor of such proposal.
-51-
<PAGE>
Despite such anti-takeover implications, this Proposal Six is not the
result of management's knowledge of any effort to accumulate the Company's
securities or to obtain control of the Company by means of a merger, tender
offer, or sale of the Company's assets, other than the acquisition of shares
by Group in the Merger.
Except for certain provisions contained in the Acquisition Agreement or
as disclosed elsewhere in this Proxy Statement, the Company's Board of
Directors is not aware of the existence of any provisions in the Articles of
Incorporation or Bylaws or terms of contracts to which it is a party which
may be considered to have an anti-takeover effect and the Company's Articles
of Incorporation and Bylaws do not contain any provisions which would impose
any burden in excess of requirements imposed by Colorado law upon potential
take-over attempts.
MANAGEMENT RECOMMENDATION AND REQUIRED VOTE.
Management recommends approval of Proposal Six to increase the voting
requirement by the Company's Shareholders for certain corporation actions and
to remove the requirement for shareholder approval of pledges.
The affirmative vote of two-thirds of the Company's shares issued and
outstanding is required to approve of Proposal Six. The Officers and
Directors have advised the Company that they plan to vote their shares of
Company Common Stock in favor of Proposal Six.
PROPOSAL SEVEN
A PROPOSAL TO ELECT FIVE DIRECTORS
The Company's Board of Directors intends to recommend the election to
the Board of the five nominees listed below. If Proposal Five is approved
and the Company's Articles of Incorporation are amended to provide for a
classified Board of Directors with staggered terms, the Directors would be
assigned to the classes specified and for the terms so indicated, to hold
office until the Annual Meeting of Shareholders in the year indicated and/or
until their successors are elected and qualified or until their earlier
death, resignation or removal. If Proposal Five is not approved, each of the
Directors would hold office until the next Annual Meeting of Shareholders
and/or until their successors are elected and qualified or until their
earlier death, resignation or removal.
All members of the present Board of Directors have been nominated for
re-election to the Board. The persons named as "proxies" in the enclosed
form of Proxy, intend to vote for the five nominees for election as Directors
unless otherwise instructed in such proxy. If at the time of the Special
Meeting, any of the nominees named below should be unable to serve, which
event is not expected to occur, the discretionary authority provided in the
Proxy will be exercised to vote for such substitute nominee and nominees, if
any, as shall be designated by the Board of Directors. In the election of
directors, that number of candidates equaling the number of directors to be
elected, having the highest number of votes cast in favor of their election,
are elected to the board of directors. The Officers and Directors have
advised the Company that they plan to vote their shares in favor of each of
the nominees set forth below.
-52-
<PAGE>
NOMINEES.
The following table sets forth the name and age of each nominee for
Director, indicating all positions and offices with the Company presently held
by him, the period during which he has served as such, and the class and term
for which he has been nominated, assuming for these purposes the approval by the
shareholders of Proposal Five and the related amendment of the Articles of
Incorporation:
Class I Nominee - Terms Expiring at the
Annual Shareholders Meeting in 1997
-----------------------------------
Year
Name Age Position First Director
- - - - ---- --- -------- --------------
Dale Morrison 40 Director 1988
William J. Maxwell 54 Director 1996
Class II Nominee - Terms Expiring at the
Annual Shareholders Meeting in 1998
-----------------------------------
Year
Name Age Position First Director
- - - - ---- --- -------- --------------
Arnell J. Galley 40 Secretary 1988
Peter A. Guglielmi 53 Director 1995
Class III Nominee - Terms Expiring at the
Annual Shareholders Meeting in 1999
-----------------------------------
Year
Name Age Position First Director
- - - - ---- --- -------- --------------
Thomas C. Galley 40 President 1988
If Proposal Three is approved by the Shareholders and the Merger
described therein is closed, the Board of Directors will amend the Bylaws to
fix the number of directors at eight directors and the Board of Directors
will elect John M. Couzens, Robert L. Smith and Craig D. Slater, as designees
of Group, to fill the three vacancies created thereby. The Company currently
expects that Craig D. Slater would be classified as a Class I Director,
Robert L. Smith as a Class II Director and John M. Couzens as a Class III
Director.
Additional information regarding the nominees for directors and the
executive officers, compensation of executive officers, related party
transactions involving the Company and the directors and executive officers
and their affiliates, compliance with Section 16(a) of the 1934 Act and
information regarding Board committees and meetings of the Board and
committees can be found beginning on page 3 of this Proxy Statement.
COMPANY'S RELATIONSHIP WITH
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
-53-
<PAGE>
It is expected that a representative of Hein + Associates LLP, Denver,
Colorado, the Company's independent certified public accountants, will be
present at the Special Meeting to respond to appropriate questions and to
make a statement if he so desires. The Company intends to select Hein +
Associates LLP as its independent certified public accountants to perform an
audit of the accounts of the Company for the fiscal year ending January 31,
1997.
FINANCIAL INFORMATION
A copy of the Company's Annual Report on Form 10-KSB for the fiscal year
ended January 31, 1996, including Audited Financial Statements, and the
Company's Quarterly Report on Form 10-QSB for the quarter ended April 30,
1996, are attached hereto as Appendixes E and F, respectively. Information
as to the Company's business, property, legal proceedings, supplementary
financial information, management's discussion and analysis of financial
condition and results of operations are contained in Appendixes E and F.
Audited and Unaudited Financial Statements of Interwest and its
subsidiaries and Pro Forma Financial Information with respect to the Merger
are attached to this Proxy Statement as Appendix D.
OTHER MATTERS
Management does not know of any other matters to be brought before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the appointees named in the enclosed form of proxy to vote in
accordance with their best judgment on such matters.
SHAREHOLDER PROPOSALS
Any shareholder proposing to have any appropriate matter brought before the
1997 Annual Meeting of Shareholders must submit such proposal in accordance with
the proxy rules of the Commission. Such proposals should be sent to the
Secretary of the Company not later than February 1, 1997 to be considered for
inclusion in the 1997 Proxy Statement.
By Order of the Board of Directors:
INTERNET COMMUNICATIONS CORPORATION
Date: August , 1996 Thomas C. Galley,
Chairman of the Board of Directors
-54-
<PAGE>
APPENDIX A
INTERNET COMMUNICATIONS CORPORATION
1995 STOCK OPTION PLAN FOR
NON-EMPLOYEE DIRECTORS
1. PURPOSE OF THE PLAN.
The purpose of the 1995 Stock Option Plan for Corporate Non-Employee
Directors ("Plan") is to advance the interests of INTERNET COMMUNICATIONS
CORPORATION ("the Corporation") by encouraging and facilitating the acquisition
of a larger personal financial interest in the Corporation by non-employee
corporate directors upon whose judgment and interest the Corporation is heavily
dependent for the successful conduct of its operation. It is anticipated that
the Plan will encourage such directors to continue to serve as directors and
officers of the Corporation and that the opportunity to obtain such a financial
interest will prove attractive to potential new directors and will assist the
Corporation in attracting such individuals to serve in that capacity.
2. DEFINITIONS.
A. "1934 Act" means the Securities Exchange Act of 1934, as amended.
B. "Board" means the Board of Directors of Internet Communications
Corporation, a Colorado corporation.
C. "Code" means the Internal Revenue Code of 1986, as amended.
D. "Common Stock" or "Stock" means the common stock of the Corporation,
no par value per share.
E. "Corporation" means Internet Communications Corporation, a Colorado
corporation.
F. "Fair Market Value" means an amount equal to the closing bid price
on the applicable date for sales of shares of Common Stock made and reported
through the Small Cap Market System of the National Association of Securities
Dealers, Inc. or such national stock exchange on which the Stock may then be
listed and which constitutes the principal market for the Stock, or, if no
sales of Stock shall have been reported with respect to that date, on the
next preceding date with respect to which sales are reported.
G. "Grant Date" means the date on which any Option shall be duly granted
under Article 5 hereof.
H. "Grantee" means an individual who has been granted an Option.
A-1
<PAGE>
I. "Non-Employee Director" means any member of the Board who is not an
officer or full-time employee of the Corporation or any of its subsidiaries.
J. "Option" means an option granted under the Plan to purchase shares of
Common Stock.
K. "Option Agreement" means the agreement between the Corporation and the
Grantee evidencing the Option granted under the plan and specifying the terms
and conditions of such Option.
L. "Rule 16b-3" means Rule 16b-3 or any successor rule or rules
applicable to Options granted under the Plan promulgated by the Securities and
Exchange Commission under Section 16(b) of the 1934 Act.
3. SHARES SUBJECT TO OPTION.
Subject to adjustment as provided in Article 12, the number of shares of
Common Stock of the Corporation which may be sold upon the exercise of Options
granted under the Plan, and accordingly the number of shares for which Options
may be granted, shall not exceed 40,000 shares. Such number of authorized but
unissued shares shall be reserved for this purpose. The aggregate number of
shares of Common Stock available under the Plan shall be subject to adjustment
as set forth in Article 12 hereunder. Shares sold upon the exercise of Options
granted under the Plan may come from authorized but unissued shares. If any
unexercised Option for any reason terminates or expires in whole or in part
prior to the termination of the Plan, the unpurchased shares subject thereto
shall become available for the granting of other Options under the Plan. Any
stock issued as the result of the exercise of the options shall be registered
pursuant to the Securities Act of 1933 at the Corporation's expense.
4. ADMINISTRATION OF THE PLAN.
The Plan shall be generally administered by the Board. Any action of the
Board with respect to the administration of the Plan shall be taken pursuant to
a majority vote or by the written consent of all of its members.
The Board shall have full authority to interpret the Plan, to determine the
terms and provisions of Option Agreements, to require withholding from or
payment in cash by a Grantee of any federal, state or local taxes and to make
such rules and regulations and establish such procedures as it deems appropriate
for the administration of the Plan.
All decisions made by the Board in the matters referred to in this Article
4 shall be conclusive and binding. No member of the Board shall be liable for
any action or determination made in good faith with respect to the Plan or any
Option granted thereunder.
A-2
<PAGE>
5. GRANT OF OPTIONS.
A. An Option under which a total of 10,000 shares of Common Stock
shall be automatically granted to each Non-Employee Director upon the date
of his or her election to the Board, subject to the following vesting
schedule:
EXERCISABLE
YEARS AFTER PERCENTAGE
GRANT DATE OF SHARES
---------- ----------
One Year 33 1/3%
Two Years 66 2/3%
Three Years 100.00%
B. On each annual anniversary of the day on which the Non-Employee
Director was elected to the Board, such Non-Employee Director shall be
granted an immediately vested option to purchase 2000 shares of Common
Stock, provided he or she continues to serve as a Non-Employee Director as
of such anniversary date.
C. The grant of Options provided for in this Section 5 shall be
made only to Non-Employee Directors who are newly elected to the Board
on or after July 24, 1995. Options shall be automatically granted under
the Plan in the aforesaid amounts and on said dates without further action
or authorization by the Corporation or Board.
6. OPTION AGREEMENTS.
The officers of the Corporation are authorized and directed, upon receipt
of notice from the Board of the granting of an Option, to sign and deliver on
behalf of the Corporation, by mail or otherwise, to the Grantee an Option upon
the terms and conditions specified under the Plan and in the form of an Option
Agreement. The Option Agreement shall be dated and signed by an officer of the
Corporation. If the Grantee fails to sign and return the Option Agreement, by
delivery or by mailing, within thirty (30) days after the date of its delivery
or mailing to him, the Option grant shall be deemed withdrawn.
7. OPTION PRICE.
The purchase price of each share of Common Stock covered by each Option
shall be not less than the Fair Market Value per share of such Stock on the
Grant Date.
A-3
<PAGE>
8. NON-TRANSFERABILITY OF OPTIONS.
Any Option granted hereunder shall, by its terms, be non-transferable by a
Grantee other than by will or the laws of descent and shall be exercisable
during the Grantee's lifetime solely by the Grantee or the grantee's duly
appointed guardian or personal representative.
9. EXERCISE AND TERM OF OPTION.
Each Option described above shall be exercisable in full upon the earlier
to occur of (a) the date on which it becomes vested pursuant to Article 5, or
(b) the death, disability (as defined in Section 22(e)(3) of the Code) or
termination of directorship.
No Option may be exercised if in the determination of the Board the
issuance or sale of Stock or payment of cash by the Corporation, as appropriate,
pursuant to such exercise shall for any reason be unlawful or fail to comply
with any requirements of any national securities exchange on which the Stock is
then listed or any other regulatory body having jurisdiction with respect
thereto. Further, no Option may be exercised after the expiration of ten (10)
years from the Grant Date. In no event shall the Corporation be required to
issue fractional shares upon the exercise of an Option.
10. METHOD OF EXERCISE.
To the extent that the right to purchase shares pursuant to an Option has
accrued hereunder, such Option shall be exercised as provided in this Article
10. An Option may be exercised from time to time by written notice to the
Corporation setting the number of shares being purchased and accompanied by the
payment in full of the Option price for such shares. Such payment shall be made
in cash, outstanding shares of the Common Stock or in combinations thereof. If
shares of Common Stock are used in part or full payment for the shares to be
acquired upon exercise of the Option, such shares shall be valued for the
purpose of such exchange as of the date of exercise of the Option at the Fair
Market Value of the shares. Any certificates evidencing shares of Common Stock
used to pay the Option price shall be accompanied by stock powers duly endorsed
in blank by the registered holder of the certificate (with signatures thereon
guaranteed). In the event the certificates tendered by the Grantee in such
payment cover more shares than are required for such payment, the certificate
shall also be accompanied by instructions from the Grantee to the Corporation's
transfer agent with regard to the disposition of the balance of the shares
covered thereby.
11. EFFECT OF TERMINATION OF DIRECTORSHIP, DISABILITY OR DEATH.
In the event a Grantee ceases to be a director of the Corporation for any
reason prior to the occurrence of a Change in Control (as described in Article
12), any Option or unexercised portion thereof granted under this Plan may be
exercised, to the extent such Option would have been exercisable by the Grantee
hereunder on the date on which the Grantee ceased to be a director, within
A-4
<PAGE>
three (3) months of such date, but in no event later than the date of
expiration of the term of the Option. In the event a Grantee ceases to be a
director of the Corporation for any reason following the occurrence of a
Change in Control (as described in Article 12), any Option or unexercised
portion thereof granted under this Plan may be exercised, to the extent such
Option would have been exercisable by the Grantee hereunder on the date on
which the Grantee ceased to be a director, within seven (7) months of such
date, but in no event later than the date of expiration of the term of the
Option. In the event of the death or disability (as defined in Section
22(e)(3) of the Code) of the Grantee while a director of the Corporation or
within not more than three (3) months after the date on which the Grantee
ceases to be a director, any Option or unexercised portion thereof may be
exercised, to the extent exercisable at the date of such death or disability,
by the Grantee's personal representatives, heirs or legatees at any time
prior to one (1) year after the date on which the Grantee ceased to be a
director, but in no event later than the date of the expiration of the term
of the Option.
12. EFFECT OF CHANGE IN STOCK SUBJECT TO PLAN.
Except as provided below, the Board shall make equitable adjustments in
the number and class of shares of stock subject to the Plan, and to the
Option rights granted hereunder and the exercise prices of such Option
rights, in the event of a stock dividend, stock split, reverse stock split,
recapitalization, reorganization, merger, consolidation, acquisition,
separation or other change in the capital structure of the Corporation. Upon
the occasion of a liquidation of the Corporation, or a merger, reorganization
or consolidation of the Corporation in which the Corporation is not the
surviving corporation (other than a merger, reorganization or consolidation
of the Corporation with or into a corporation or corporations owned directly
or indirectly by the stockholders of the Corporation in substantially the
same proportions as their ownership of stock of the Corporation), each
Grantee shall have the right immediately prior to such liquidation, merger,
recapitalization or consolidation of the Corporation to exercise the
Grantee's Options in whole or in part. Notwithstanding the foregoing
provisions of this Article 12, in the event a Change in Control (as described
below) shall occur, each Grantee shall have the right to exercise his Options
in whole or in part.
For purposes of this Article 12, a "Change in Control" shall be deemed
to occur when and only when the first of the following events occurs:
A. any person becomes the beneficial owner, directly or indirectly,
of securities of the Corporation representing twenty percent (20%) or more
of the combined voting power of the Corporation's then outstanding voting
securities and a majority of the Incumbent Board does not approve the
acquisition before the acquisition occurs; or
B. members of the Incumbent Board cease to constitute a majority of
the Board of Directors.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred pursuant to paragraph A. above solely because twenty percent (20%) or
more of the combined voting power
A-5
<PAGE>
of the Corporation's then outstanding securities is acquired by (i) one or
more employee benefit plans maintained by the Corporation or any of its
subsidiaries, or (ii) any person who, as of the Effective Date of this Plan,
was a beneficial owner of ten percent (10%) or more of the combined voting
power of the Corporation's outstanding securities as of such Effective Date.
The terms "person" and "beneficial owner" shall have the same meaning
ascribed to such terms in Section 3(a) and 13(d) of the Securities Exchange
Act of 1934, as amended, and regulations promulgated thereunder; and
"Incumbent Board" shall mean (i) the members of the Board on the Effective
Date of this Plan and (ii) any individual who becomes a member of the Board
after such Effective Date, if his or her election or nomination for election
as a director was approved by the affirmative vote of a majority of the then
Incumbent Board.
13. STOCKHOLDER RIGHTS.
Grantee shall not, by reason of any Options granted hereunder, have any
rights of a stockholder of the Corporation, except with respect to shares
issued pursuant to the exercise of an Option.
14. ADDITIONAL RESTRICTIONS.
Options shall not be exercisable for six (6) months after the Grant Date
unless (i) the Grantee dies or becomes disabled within such six-month
period; or (ii) in the opinion of counsel for the Corporation, such
requirement is unnecessary to exempt the grant of the Option and the
acquisition of Common Stock upon exercise from Section 16(b) of the 1934 Act.
15. CONTROLLING LAW.
The corporate law of the State of Colorado shall govern all issues
concerning the relative rights of the Corporation and the Grantees with
respect to Options granted and Stock issuable under the Plan. The law of the
State of Colorado, except its law with respect to choice of law, shall be
controlling in all other matters relating to the Plan.
16. INDEMNIFICATION.
In addition to such other rights of indemnification as they may have as
members of the Board or as directors or officers generally, the members of the
Board administering the Plan and the members of the Board shall be indemnified
by the Corporation against the reasonable expenses, including attorneys fees
actually and necessarily incurred in connection with the defense of any action,
suit or proceeding, or in connection with any appeal therein, to which they or
any of them may be a party by reason of any action taken or failure to act under
or in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or
A-6
<PAGE>
paid by them in satisfaction of a judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such member acted in bad faith in the
performance of his or her duties; provided that within twenty (20) days after
institution of any such action, suit or proceeding, the member shall in
writing offer the Corporation the opportunity, at its own expense, to handle
and defend the same.
17. USE OF PROCEEDS.
The proceeds from the sale of shares of Common Stock pursuant to Options
granted under the Plan shall constitute general funds of the Corporation.
18. EFFECTIVE DATE OF PLAN.
The Plan is effective July 24, 1995, ("Effective Date"), the date it was
originally adopted by the Board of Directors of the Corporation. Neither the
Plan nor any option granted under the Plan shall become binding until the
Plan has been approved by the shareholders of the Corporation.
19. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may from time to time amend the Plan as it shall deem
advisable but not more than once every six months except to comport to
changes in the Code or rules and regulations promulgated thereunder; and,
provided further, that except as provided in Article 12 hereof, no amendment
shall, without such approval thereof by the stockholders of the Corporation
as may then be required by Rule 16b-3, any national securities exchange or
system on which the Stock is then listed or reported, or any regulatory body
having jurisdiction with respect thereto, have the result of:
(a) increasing the number of shares of Common Stock reserved for
Options that may be granted under this Plan;
(b) changing the manner of determining the Option exercise price;
(c) increasing the maximum term of the Options provided for herein;
(d) changing the class of persons eligible to receive Options under
this Plan; or
(e) materially increasing in any other fashion the benefits accruing
to Grantees under the Plan.
A-7
<PAGE>
The Plan shall terminate at such time as the Board may determine.
No amendment or termination of the Plan or any provision hereof shall,
without the written consent of the Grantee, adversely affect any Option
theretofore granted to such Grantee under the Plan.
A-8
<PAGE>
APPENDIX B
INTERNET COMMUNICATIONS CORPORATION
1996 INCENTIVE STOCK PLAN
1. PURPOSE OF PLAN. This Incentive Stock Plan is intended to encourage
ownership of shares of Internet Communications Corporation (the
"Corporation") by key Employees and Consultants of the Corporation, thereby
providing additional incentive for such Employees and Consultants to promote
the success of the business. Options granted hereunder may be either
Incentive Stock Options or Nonstatutory Stock Options, at the discretion of
the Committee and as reflected in the terms of the written option agreement.
The Committee also has the discretion to grant Stock Purchase Rights, or to
issue stock to Employees in consideration of past services.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Committee, if one has been appointed, or
the Board of Directors of the Corporation, if no Committee is appointed.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "CORPORATION" shall mean Internet Communications Corporation, a
Colorado corporation.
(d) "COMMITTEE" shall mean the Committee appointed by the Board of
Directors in accordance with Section 4 of the Plan, if one is appointed.
(e) "CONSULTANT" shall mean any person, including directors,
performing services for the benefit of the Corporation as an independent
consultant or advisor.
(f) "CONTINUOUS STATUS AS AN EMPLOYEE OR A CONSULTANT" shall mean
the absence of any interruption or termination of service as an Employee or a
Consultant, as applicable. Continuous Status as an Employee or a Consultant
shall not be considered interrupted in the case of sick leave, military
leave, leave of absence or sabbatical, the "loan" of the Employee or
Consultant to another business or agency, or any other leave of absence
approved by the Board.
(g) "EMPLOYEE" shall mean any person employed by the Company or any
Parent or Subsidiary of the Corporation in a management position or in a
position requiring specialized training or expertise. The payment of a
director's fee by the Corporation shall not be sufficient to constitute
"employment" by the Corporation.
(h) "INCENTIVE STOCK OPTION" shall mean an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
B-1
<PAGE>
(i) "NONSTATUTORY STOCK OPTION" shall mean an Option not intended to
qualify as an Incentive Stock Option.
(j) "OPTION" shall mean a stock option granted pursuant to the Plan.
(k) "OPTIONED STOCK" shall mean the Stock subject to an Option.
(l) "OPTIONEE" shall mean an Employee or Consultant who receives an
Option.
(m) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(n) "PLAN" shall mean this Incentive Stock Plan.
(o) "PURCHASER" shall mean an Employee or Consultant who exercises a
Stock Purchase Right.
(p) "SHARE" shall mean a share of the Stock, as adjusted in
accordance with Section 11 of the Plan.
(q) "STOCK" shall mean the no par value common stock of the
Corporation.
(r) "STOCK OPTION AGREEMENT" shall mean the written agreement setting
forth the grant of an Option and terms and conditions relating thereto (which
need not be the same for each Option), in the form attached hereto or such other
form as the Board in its discretion may approve.
(s) "STOCK PURCHASE AGREEMENT" shall mean a written agreement (which
need not be the same for each Stock Purchase Right) setting forth the terms and
conditions relating to the purchase of Stock under a Stock Purchase Right, in
such form as the Board in its discretion may approve.
(t) "STOCK PURCHASE RIGHT" shall mean a purchase of Stock pursuant to
the Plan.
(u) "SUBSIDIARY" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. SHARES SUBJECT TO PLAN. There will be reserved for use from time to
time under the Plan, an aggregate of 625,000 shares of Stock. As the Board
of Directors of the Corporation shall from time to time determine, the Shares
may be in whole or in part authorized but unissued Shares or issued Shares
which shall have been reacquired by the Corporation. If an Option should
expire or become unexercisable for any reason without having been exercised
in full, or if any shares of Stock are repurchased by or forfeited to the
Corporation, the unpurchased, repurchased, or forfeited Shares which
B-2
<PAGE>
were subject thereto shall become available for future grant or sale under
the Plan unless the Plan shall have been terminated.
4. ADMINISTRATION OF PLAN.
(a) COMMITTEE. The Plan shall be administered by the Board of
Directors of the Corporation; provided that the Board of Directors may appoint a
Committee, which shall consist of not less than three (3) members of the Board
of Directors. The Board of Directors may from time to time appoint members of
the Committee in substitution for or in addition to members previously appointed
and may fill vacancies, however caused, in the Committee. The Committee shall
select one of its members as its chairman and shall hold its meetings at such
times and places as it shall deem advisable. A majority of its members shall
constitute a quorum. All action of the Committee shall be taken by a majority
of its members. Any action may be taken by a written instrument signed by a
majority of the members and action so taken shall be fully as effective as if it
had been taken by a vote held. The Committee may appoint a secretary, shall
keep minutes of its meetings, and shall make such rules and regulations for the
conduct of its obligation to the Corporation, its shareholders, and its option
holders, the Committee's interpretation and construction of any of the
provisions of this Plan, or of any rules promulgated under this Plan, shall be
final and binding on all Optionees, Purchasers, and any other holders of any
Options or Stock Purchase Rights granted under the Plan, unless overturned by
the Board of Directors. No member of the Committee shall be liable for any
action or determination made in good faith in connection with this Plan.
(b) INTERESTED DIRECTORS. Members of the Committee who are either
eligible for Options or have been granted Options may vote on any matters
affecting the administration of the Plan or the grant of any Options pursuant to
the Plan, except that no such member shall act upon the granting of an Option to
himself or herself, but any such member may be counted in determining the
existence of a quorum at any meeting of the Board or Committee during which
action is taken with respect to the granting of Options to said Board or
Committee member. Notwithstanding the foregoing, with respect to the grant of
Options or Stock Purchase Rights to Employees or Consultants who are or who
may become "covered employees" within the meaing of Section 162(m) of the
Code, the Committee shall be so constituted that it meets the requirements
for a "compensation committee" within the meaning of Section 162(m) of the
Code. The Committee shall at all times be constituted so that it meets the
requirements of Securities and Exchange Commission Rule 16b-3, as such Rule
may be in effect from time to time.
(c) POWER OF THE BOARD. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant
Incentive Stock Options, Nonstatutory Stock Options or Stock Purchase Rights;
(ii) to determine, upon review of relevant information and in accordance
with Section 6 of the Plan, the fair market value of the Stock; (iii) to
determine the exercise price per share of Options, or Stock Purchase Rights
to be granted, which exercise price shall be determined in accordance with
Section 6 of the Plan; (iv) to determine the Employees and Consultants to
whom, and the time or times at which,
B-3
<PAGE>
Options or Stock Purchase Rights shall be granted and the number of shares to
be represented by each Option or Stock Purchase Right; (v) to interpret the
Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to
the Plan; (vii) to determine the terms and provisions of each Option or Stock
Purchase Right granted (which need not be the same for each Option or Stock
Purchase Right granted) and, with the consent of the holder thereof, modify,
terminate or amend each Option or Stock Purchase Right; (viii) to accelerate
or defer (with the consent of the Optionee) the exercise date of any Option;
(ix) to authorize any person to execute on behalf of the company any
instrument required to effectuate the grant of an Option or Stock Purchase
Right previously granted by the Committee; and (x) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
5. ELIGIBILITY.
(a) GENERALLY. Options and Stock Purchase Rights may be granted to
Employees and Consultants, provided that Incentive Stock Options may only be
granted to Employees. An Employee or Consultant who has been granted an
Option or Stock Purchase Right may, if he is otherwise eligible, be granted
additional Options or Stock Purchase Rights. The maximum number of shares
that may be subject to Options granted to an Employee or Consultant shall be
500,000 shares.
(b) CRITERIA. In making any determination as to Employees and
Consultants to whom Options and Stock Purchase Rights shall be granted, the
Committee shall take into account such factors as it shall deem relevant in
accomplishing the purpose of the Plan, including but not limited to the
Employee's or Consultant's loyalty, performance, and experience.
(c) ISO LIMITATIONS WITH RESPECT TO PRICE. In no event shall an
Incentive Stock Option be granted to any person who, at the time such Option is
granted, owns (as defined in Section 422 of the Code) shares possessing more
than 10% of the total combined voting power of all classes of shares of the
Corporation or of its parent or subsidiary corporation, unless the option
price is at least 110% of the fair market value of the stock subject to the
Option.
(d) ISO LIMITATIONS WITH RESPECT TO SHARES. Moreover, the aggregate
fair market value (determined as of the time that option is granted) of the
Shares with respect to which Incentive Stock Options are exercisable for the
first time by any individual Employee during any single calendar year under
this Plan and all the incentive stock option plans of the Corporation (and its
parent and subsidiary corporations, if any), shall not exceed $100,000.
(e) NO EMPLOYMENT CONTRACT. The Plan shall not confer upon any
Optionee or holder of a Stock Purchase Right any right with respect to
continuation of employment by or the rendition of consulting services to the
Corporation, nor shall it
B-4
<PAGE>
interfere in any way with his right or the Corporation's right to terminate
his employment or services at any time.
6. PRICES.
(a) GENERALLY. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option or Stock Purchase Right shall be
such price as is determined by the Committee. However, the exercise price of
the Shares which shall be covered by each Incentive Stock Option shall be at
least 100% of the fair market value of the Shares at the time of granting the
Incentive Stock Option. For purposes hereof, fair market value means an
amount equal to the closing bid price on the applicable date for shares of
Common Stock made and reported through the Small Cap Market of the National
Association of Securities Dealers, Inc., or such national stock exchange on
which the Stock may then be listed and which constitutes the principal
market for the Stock, or, if no sales of the Stock shall have been reported
with respect to that date, on the next preceding date with respect to which
sales are reported. If, however, the stock is not publicly traded at time of
grant of an Incentive Stock Option, the fair market value at date of grant
shall be established by the Committee, in good faith, based on such
information as it shall deem necessary.
(b) PAYMENT. The consideration to be paid for the Shares to be
issued upon exercise of an Option, or Stock Purchase Right, including the
method of payment, shall be determined by the Committee and may consist
entirely of cash, check, or other Shares of Stock of the Corporation having a
fair market value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option or Stock Purchase Right shall be
exercised, or any combination of such methods of payment, or such other
consideration and method of payment for the issuance of Shares to the extent
permitted under applicable law; provided however, no Optionee shall be
entitled to pay for Shares to be issued upon exercise of an Incentive Stock
Option by exchanging shares of the Corporation which were previously acquired
as "statutory option stock," as that term is identified in Section 425 of the
Code, until the applicable holding period, as prescribed by the Code, has
been satisfied. In addition, the Corporation may accept a promissory note
issued by a Purchaser in exercise of a Stock Purchase Right; provided that
such note shall not be considered payment for the Shares and no Share
Certificate shall issue until the note is paid in full. In making its
determination as to the type of consideration to accept, the Board shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Corporation.
7. OPTIONS.
(a) GENERALLY. Subject to the provisions of the Plan, the Committee
shall determine for each Option (which need not be identical) the number of
shares for which the Option shall be granted, the Option price of the Option,
and all other terms and conditions of the Option.
B-5
<PAGE>
(b) TERM OF OPTION. The term of each Option may be up to ten (10)
years from the date of grant thereof or such shorter term as may be provided in
the Stock Option Agreement.
(c) EXERCISE OF OPTION.
(i) Any Option granted hereunder shall be exercisable at such
times and under such conditions as determined by the Committee, including
performance criteria with respect to the Corporation or the Optionee, or both,
and as shall be permissible under the terms of the Plan.
(ii) An Option may not be exercised for a fraction of a Share.
(iii) An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Corporation in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Corporation. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under Section 6 of
the Plan. Until the issuance (as evidenced by the appropriate entry on the
books of the Corporation or of a duly authorized transfer agent of the
Corporation) of the stock certificate evidencing such Shares, no right to vote
or receive dividends or any other rights of a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
(iv) Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Plan and for sales under the Option, by the number of Shares as
to which the Option is exercised.
(v) Except as otherwise specifically provided herein, an Option
may not be exercised at any time unless the holder thereof shall have maintained
Continuous Status as an Employee or Consultant of the Corporation or of one or
more of its subsidiaries, or a parent corporation, from the date of the granting
of the Option to the date of its exercise.
(d) TERMINATION OF EMPLOYMENT. In the event that the employment of
an Employee or the engagement of a Consultant to whom an Option shall have
been granted shall be terminated other than by reason of death or disability,
such Option may be exercised (to the extent that the Employee or Consultant
shall have been entitled to do so at the termination of his employment or
consultancy) at any time within three (3) months after such termination, but
in any event no later than the date of expiration of the Option term. So
long as the holder of an Option shall maintain Continuous Status as an
Employee or Consultant of the Corporation or one or more of its subsidiaries,
his Option shall not be affected by any change of duties or position. To the
extent that the holder of an Option was not entitled to exercise his Option
at the time of his termination, or insofar as he does not exercise such
B-6
<PAGE>
Option to the extent he was entitled within the time specified herein, the
Option shall itself terminate at the time of such termination.
(e) DISABILITY OF OPTIONEE. Notwithstanding the provisions of
Section 7(d) above, in the event an Employee or Consultant is unable to
continue his employment with or to perform services for the benefit of the
Company as a result of his total and permanent disability (as defined in
Section 22(e)(3) of the Code), he may, but only within six (6) months after
termination due to such disability (or such other period set forth in his
Option Agreement) exercise his Option to the extent he was entitled to
exercise it at the date of such disability. To the extent that he was not
entitled to exercise the Option at the date of disability, or insofar as he
does not exercise such Option to the extent he was entitled within the time
specified herein, the Option shall terminate. The Option may be exercised in
the event of such disability by any parent, sibling, spouse or issue of the
Employee or Consultant, or by any other person the Corporation reasonably
believes to have the authority to exercise such Option on the Employee's or
Consultant's behalf.
(f) DEATH OF OPTIONEE. Unless otherwise set forth in the Option
Agreement, in the event of the death of an Optionee:
(i) if Optionee dies during the term of the Option and is at the
time of his death an Employee or Consultant of the Corporation who shall have
been in Continuous Status as an Employee or Consultant since the date of grant
of the Option, the Option may be exercised, at any time within six (6) months
following the date of death (or such other period set forth in his Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent of the
right to exercise that would have accrued had the Optionee continued living and
remained in Continuous Status as an Employee or Consultant six (6) months after
the date of death, or
(ii) if Optionee dies within three (3) months after the
termination of Continuous Status as an employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of such termination.
8. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. After the Board determines that it will
offer an Employee or Consultant the right to purchase Shares (other than
pursuant to an Option) under the Plan, it shall advise the offeree in writing
of the terms, conditions, and restrictions relating to the offer, including
the number of Shares which such person shall be entitled to purchase, the
proposed Stock Purchase Agreement, and the time within which such person must
accept such offer, which shall in no event exceed nine (9) months from the
date upon which the Board of Directors or its Committee made the
determination to grant the Stock Purchase Right. The offer may be accepted
by execution of the Stock Purchase Agreement and its
B-7
<PAGE>
return to the Corporation (together with payment for the Stock being
purchased) within the time specified.
(b) ISSUANCE OF SHARES. Forthwith after payment therefor, the
Shares purchased shall be duly issued; provided, however, that the Board may
require that the Purchaser make adequate provision for any Federal and State
withholding obligations of the Corporation as a condition to the Purchaser
purchasing such Shares.
(c) OTHER PROVISIONS. The Stock Purchase Agreement shall contain
such other terms, provisions, and conditions not inconsistent with the Plan
as may be determined by the Board.
9. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. The Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee or Purchaser, only by the Optionee or Purchaser.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any required
action by the shareholders of the Company, the number of shares of Stock
covered by each outstanding Option and Stock Purchase Right, and the number
of shares of Stock which have been authorized for issuance under the Plan but
as to which no Options or Stock Purchase Rights have yet been granted or
which have been returned to the Plan upon cancellation or expiration of an
Option or Stock Purchase Right, or repurchase of Shares from a Purchaser upon
termination of Employment, as well as the price per share of Stock covered
by each such outstanding Option or Stock Purchase Right, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock resulting from a stock split, the payment of a stock dividend
with respect to the Stock, or any other increase or decrease in the number of
issued shares of Stock effected without receipt of consideration by the
Corporation; provided, however, that conversion of any convertible securities
of the Corporation shall not be deemed to have been "effected without receipt
of consideration." Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding, and conclusive.
Except as expressly provided herein, no issuance by the Corporation of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Stock subject to an Option or
Stock Purchase Right.
11. ACCELERATION AND VESTING OF OPTIONS. In the event the Corporation
consummates a transaction in which 50% of the outstanding shares of the
Corporation are acquired or the assets of the Corporation are acquired,
immediately prior to the consummation of such transaction, options and stock
purchase rights granted under this plan become fully vested and immediately
exercisable.
B-8
<PAGE>
12. EFFECTIVENESS OF PLAN. The Plan shall become effective on such date
as the Board of Directors shall determine, but only after the shareholders of
the Corporation shall, by the affirmative vote of a majority in interest of all
the shares of the Corporation taken within twelve (12) months after the date the
Plan is adopted, have approved the Plan.
13. TERMINATION AND AMENDMENT OF PLAN. The Plan shall terminate on July
1, 2005, and no Option or Stock Purchase Right shall be granted under the
Plan after that date. The Board of Directors may at any time and from time
to time modify or amend the Plan (including the form of Stock Option
Agreement or Stock Purchase Agreement) in such respects as it shall deem
advisable. The Board of Directors may not make changes in the class of
persons eligible to receive options or rights under the Plan, including the
definitions of "Employee" and "Consultant" without approval by a majority in
interest of all the shares of the Corporation. The termination or any
modification or amendment of the Plan shall not, without the consent of the
employee, affect his rights under an Option theretofore granted to him unless
such amendment is required to enable the Option to qualify as an "Incentive
Stock Option" as defined in Section 422 of the Internal Revenue Code of 1986.
14. ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an Option
or Stock Purchase Right unless the exercise of such Option or Stock Purchase
Right and the issuance and delivery of such Shares pursuant thereto shall comply
with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Corporation with respect to such compliance, which approval
shall not be unreasonably withheld.
(b) As a condition to the exercise of an Option or Stock Purchase
Right, the Corporation may impose various conditions, including a requirement
that the person exercising such Option represent and warrant, at the time of
any such exercise, that the Shares are being purchased only for investment
and without any present intention to sell or distribute such Shares.
15. RESERVATION OF SHARES. The Corporation, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy
B-9
<PAGE>
the requirements of the Plan. The inability of the Corporation to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Corporation's counsel to be necessary to the lawful issuance
and sale of any Shares hereunder, shall relieve the Corporation of any
liability in respect to the failure to issue or sell such Shares as to which
such requisites authority shall not have been obtained, provided that such
inability is not directly caused by the Corporation or its agents or cannot
be cured by the Corporation without unreasonable effort or expense.
B-10
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
THIS OPTION AGREEMENT is made this _______ day of _______________________,
19____, by and between Internet Communications Corporation, a Colorado
corporation (the "Corporation") and ________________________________________ an
employee of the Corporation ("Optionee").
The Corporation desires, by affording the Optionee an opportunity to
purchase Shares of its Common Stock (the "Shares"), to carry out the purpose of
the 1996 Incentive Stock Plan (the "Plan") approved by its shareholders and
directors. The terms defined in the Plan shall have the same defined meanings
herein.
1. GRANT OF OPTION. The Corporation hereby irrevocably grants to the
Optionee the right and option (the "Option") to purchase all or any part of an
aggregate of _________________________ (__________) Shares (such number being
subject to adjustment as provided in section 12 hereof) on the terms and
conditions herein set forth.
2. NATURE OF THE OPTION. This Option is intended to qualify as an
Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
3. EXERCISE PRICE. The purchase price of the Shares covered by the
Option shall be $___________ per share, which purchase price is the fair market
value per share of the Corporation's Common Stock as determined in good faith by
the Corporation's Board of Directors. The purchase price of the shares shall be
paid in full in cash at the time of exercise.
4. TERM OF OPTION. The term of the Option shall be for a period of ten
(10) years from date hereof, subject to earlier termination as provided in
Sections 10, 11, and 12 hereof.
5. LIMIT ON EXERCISE OF OPTION. The Option shall become vested
according to the following schedule:
Employment After Vested
Grant Date Percentage
---------------- ----------
On Grant Date 25%
One Year After Grant Date 25%
Two Years After Grant Date 25%
Three Years After Grant Date 25%
B-11
<PAGE>
Once an increment has become vested, it shall remain vested. Except as
provided in paragraphs 10, 11, and 12 hereof, the Option may not be exercised
at any time unless the Optionee shall have maintained Continuous Status as an
Employee of the Corporation or of its Parent or of one or more of its
Subsidiaries, from the date hereof to the date of the exercise of the Option.
The holder of the Option shall not have any of the rights of a shareholder
with respect to the Shares covered by the Option except to the extent that
one or more certificates for such Shares shall be delivered to him upon the
due exercise of the Option.
6. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of
this Option Agreement, the Option may be exercised by written notice to the
Corporation, at its principal office. Such notice shall be in the form of
Exhibit A attached hereto, shall state the election to exercise the Option and
the number of shares in respect of which it is being exercised, and shall be
signed by the person or persons so exercising the Option. Such notice shall
either: (a) be accompanied by payment of the full purchase price of such
shares, in which event the Corporation shall deliver a certificate or
certificates representing such shares as soon as practicable after the notice
shall be received; or (b) fix a date (not less than five (5) nor more than ten
(10) business days from the date such notice shall be received by the
Corporation) for the payment of the full purchase price of such shares at the
principal office of the Corporation, against delivery of a certificate or
certificates representing such shares. Payment of such purchase price shall, in
either case, be made by check payable to the order of the Corporation. The
certificate or certificates for the shares as to which the Option shall have
been so exercised shall be registered in the name of the person or persons so
exercising the Option and shall be delivered as provided above to or upon the
written order of the person or persons exercising the Option. In the event the
Option shall be exercised, pursuant to Section 11 hereof, by any person or
persons other than the Optionee, such notice shall be accompanied by appropriate
proof of the right of such person or persons to exercise the Option. All shares
that shall be purchased upon the exercise of the Option as provided herein shall
be fully paid and nonassessable.
7. NONTRANSFERABILITY. The Option shall not be transferable otherwise
than by will or the laws of descent and distribution, and the Option may be
exercised, during the lifetime of the Optionee, only by the Optionee. More
particularly (but without limiting the generality of the foregoing), the Option
may not be assigned, transferred (except as provided above), pledged, or
hypothecated in any way, shall not be assignable by operation of law, and shall
not be subject to execution, attachment, or similar process. Any attempted
assignment, transfer, pledge, hypothecation, or other disposition of the Option
contrary to the provisions hereof,
B-12
<PAGE>
and the levy of any execution, attachment, or similar process upon the
Option, shall be null and void and without effect.
8. DISCLOSURE AND RISK. The Optionee represents and warrants to the
Corporation as follows:
(a) This Option and the Shares will be acquired by the Optionee for
Optionee's own account, for investment and not with a view to, or for resale
in connection with, any distribution or public offering thereof within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
(b) The Optionee understands that: (i) at time of grant and
exercise, the Option and the shares have not been and probably will not have
been registered under the Securities Act by reason of their issuance in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act, and that they must be held by the Optionee indefinitely;
(ii) that the Optionee must therefore bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered under the
Securities Act or is exempt from registration; (iii) that Rule 144, the usual
exemption from registration, is only available after the satisfaction of certain
holding periods and in the presence of a public market for the Shares, that
there is no certainty that a public market for the Shares will exist, and that
otherwise it will be necessary that the Shares be sold pursuant to another
exemption from registration which may be difficult to satisfy.
(c) That because of Optionee's position with the Corporation and as a
result of inquires made by Optionee and information furnished to Optionee by the
Cooperation, Optionee has as of the date of grant and will have as of the date
of exercise, reviewed all information necessary to make an informed investment
decision.
(d) The Optionee understands that, under certain conditions,
disposition of the Shares subject to this Option Agreement could result in
adverse tax consequences because of failure to meet prescribed holding period
requirements. The Optionee understands that, if any of the Shares received
under this Option are disposed of within two (2) years after the date of the
Agreement or within one (1) year after such Shares were transferred to Optionee
upon exercise of the Option, Optionee will be treated for federal income tax
purposes as having received ordinary income at the time of such disposition in
an amount equal to the excess of the fair market value of the Shares at the time
such Shares were delivered to Optionee over the price paid for the Shares.
Optionee hereby agrees to notify the Corporation in writing within thirty (30)
days after the date of any such disposition.
(e) That Optionee understands that each certificate representing the
Shares shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED OR QUALIFIED UNDER ANY FEDERAL OR STATE
SECURITIES LAWS. THE SHARES MAY NOT BE OFFERED
B-13
<PAGE>
FOR SALE, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED UNLESS SO
REGISTERED OR QUALIFIED, OR UNLESS AN EXEMPTION FROM
REGISTRATION OR QUALIFICATION EXISTS. THE AVAILABILITY OF ANY
EXEMPTION FROM REGISTRATION OR QUALIFICATION MUST BE
ESTABLISHED BY AN OPINION OF COUNSEL FOR THE SHAREHOLDER,
WHICH OPTION AND COUNSEL MUST BE REASONABLY SATISFACTORY TO
THE COMPANY."
The Corporation need not register a transfer of any of the Shares unless one of
the conditions specified in the foregoing legend is satisfied and the
Corporation will not unreasonably withhold consent to registration of such a
transfer. The Corporation may also instruct its transfer agent not to register
the transfer of any of the Shares unless one of the conditions specified in the
foregoing legend is satisfied. Any legend endorsed on a certificate pursuant to
the foregoing language and the stop transfer instructions with respect to such
Shares, shall be removed, and the Corporation shall promptly issue a certificate
without such legend to the holder of such Shares, if such Shares are registered
under the Securities Act and a prospectus meeting the requirements of Section 10
of the Securities Act is available or if such holder provides the Corporation
with an opinion of counsel for such holder of the Shares reasonably satisfactory
to the Corporation, to the effect that such legend may be removed and such stop-
transfer instructions may be rescinded.
9. TERMINATION OF EMPLOYMENT. In the event that the employment of the
Optionee by the Corporation shall be terminated (otherwise than by reason of
death), the Option may be exercised by the Optionee at any time within three (3)
months after such termination, but in any event no later than the date of
expiration of the Option term. So long as the Optionee shall maintain
Continuous Status as an Employee of the Corporation, its Parent, or one or more
of its Subsidiaries (as defined in the Plan), the Option shall not otherwise be
affected by any change of duties or position. To the extent that the Optionee
was not entitled to exercise an Option held by the Optionee at the time of
termination of Optionee's employment with the Company, the Option shall itself
terminate at the time of such termination. Nothing in this Option Agreement
shall confer upon the Optionee any right to continue in the employ of the
Corporation or of its Parent or of any of its Subsidiaries or interfere in any
way with the right of the Corporation or any such Parent or Subsidiary to
terminate Optionee's employment or consultancy at any time.
10. DEATH OR DISABILITY OF EMPLOYEE.
(a) If the Optionee shall die while employed by the Corporation or
its Parent or one or more of its Subsidiaries and shall have been in Continuous
Status as an Employee since the date hereof, the Option may be exercised (to the
extend that the Optionee shall have been entitled to do so at the date of
Optionee's death) by a legatee or legatees of the Optionee under Optionee's last
will, or by Optionee's personal representatives or distributees, at any time
within six (6) months after the death of the Optionee, but in any event no later
than the date of expiration of the Option Term. However, if Optionee dies
within three (3) months
B-14
<PAGE>
after the termination of Continuous Status as an Employee, the Option may be
exercised, at any time within six (6) months following the date of death, by
the Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent of the right to
exercise that had accrued at the date of termination.
(b) Notwithstanding the provisions of Section 10 above, in the event
the Optionee is unable to continue Optionee's employment with or to perform
services for the benefit of the Company as a result of his total and permanent
disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only
within six (6) months after termination due to such disability, exercise
Optionee's Option to the extent Optionee was entitled to exercise it at the date
of such disability. To the extent that Optionee was not entitled to exercise
the Option at the date of disability, or if Optionee does not exercise such
Option to the extent Optionee was so entitled within the time specified herein,
the Option shall terminate. The Option may be exercised under this paragraph
(b) by any parent, sibling, spouse, or issue of the Optionee, or by any other
person the Corporation reasonably believes to have the authority to exercise
such Option.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
(a) Subject to any required action by the shareholders of the
Corporation, the number of Shares covered by the Option, as well as the purchase
price per Share covered by the Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock of the
Corporation resulting from a stock split, the payment of a stock dividend with
respect to the Common Stock, or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Corporation; provided however, that conversion of any convertible securities of
the Corporation shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding, and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to the Option.
(b) In the event of the proposed dissolution or liquidation of the
Corporation, or in the event of a proposed sale of all or substantially all of
the assets of the Corporation, or the merger of the Corporation with or into
another corporation, the Option granted hereunder will automatically terminate
and be of no further force or effect upon the effective date of such
dissolution, liquidation, sale or merger. The Corporation shall give reasonable
notice to the Optionee prior to effecting any transactions covered by this
paragraph to give the Employee the opportunity to gain the benefit, if any, from
such a transaction.
12. GENERAL. The Corporation shall at all times during the term of the
Option reserve and keep available such number of shares of Common Stock as
will be sufficient to satisfy the requirements of this Option Agreement,
shall pay all original issue and transfer taxes with respect to the issue and
transfer of shares pursuant hereto and all other fees and expenses
B-15
<PAGE>
necessarily incurred by the Corporation in connection therewith, and will
from time to time use its best efforts to comply with all laws and
regulations which, in the opinion of counsel for the Corporation, shall be
applicable thereto.
B-16
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement to be
duly executed by its officers thereunto duly authorized, and the Optionee has
executed this Agreement, all as of the day and year first above written.
INTERNET COMMUNICATIONS CORPORATION
By:_________________________________________
Title:______________________________________
____________________________________________
Optionee
B-17
<PAGE>
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
annexed hereto, and represents that Optionee is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the terms
and provisions thereof. Optionee hereby agrees to accept as binding, conclusive
and final all decisions of interpretations of the Corporation's Board of
Directors upon any questions arising under the Plan, provided that such
interpretations are made in good faith and in accordance with the Board's
fiduciary obligations to the Corporation, its shareholders, and its Option
holders.
Dated:_____________________________, 19______.
____________________________________________
Optionee
B-18
<PAGE>
EXHIBIT A
INTERNET COMMUNICATION CORPORATION
NOTICE OF EXERCISE OF OPTION
I, _____________________________________, hereby give notice to Internet
Communications Corporation (the "Company"), of my intent to exercise the
option to purchase ________ shares of the Company's common stock granted to
me under the Company's 1996 Incentive Stock Plan adopted effective March 18,
1996 (the "Option Plan").
IN WITNESS WHEREOF, I have executed this Notice this ________ day of
______________________________, 19______.
X_________________________________________
__________________________________________
Print Name
_______________________________________
Witness
B-19
<PAGE>
APPENDIX C
AMENDED AND RESTATED ACQUISITION AGREEMENT
dated as of
May 29, 1996
among
INTERNET COMMUNICATIONS CORPORATION,
INTERWEST GROUP, INC.
and
INTERWEST ACQUISITION ONE, INC.
C-1
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
TRANSACTIONS
Section 1.1 First Closing........................................... 1
Section 1.2 Second Closing.......................................... 1
Section 1.3 Effect of the Merger.................................... 1
Section 1.4 Certificate of Incorporation; Bylaws.................... 1
Section 1.5 Directors and Officers.................................. 1
Section 1.6 Merger Consideration; Conversion and Cancellation
of Securities.......................................... 1
Section 1.7 Exchange and Surrender of Certificates.................. 1
Section 1.8 Adjustments............................................. 2
ARTICLE II
CLOSINGS
Section 2.1 First Closing........................................... 3
Section 2.2 Second Closing.......................................... 3
Section 2.3 Location of Closings.................................... 3
ARTICLE III
CONDITIONS OF CLOSINGS
Section 3.1 Conditions Precedent to Both Closings................... 3
Section 3.2 Additional Conditions Precedent to First Closing........ 5
Section 3.3 Additional Conditions Precedent to Second Closing....... 6
Section 3.4 Legends................................................. 6
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Corporate Existence and Power........................... 7
Section 4.2 Authorization; Contravention; Modifications............. 8
Section 4.3 Approvals............................................... 8
Section 4.4 Binding Effect.......................................... 9
Section 4.5 Financial Information................................... 9
C-2
<PAGE>
Section 4.6 Taxes................................................... 10
Section 4.7 Litigation.............................................. 10
Section 4.8 Compliance with Laws.................................... 10
Section 4.9 Subsidiaries............................................ 10
Section 4.10 Proprietary Rights...................................... 11
Section 4.11 Insurance............................................... 11
Section 4.12 Debt.................................................... 12
Section 4.13 No Default.............................................. 12
Section 4.14 Capitalization.......................................... 12
Section 4.15 Material Contracts...................................... 14
Section 4.16 Investment Intent....................................... 14
Section 4.17 Fees for Brokers and Finders........................... 15
Section 4.18 Misstatements.......................................... 15
Section 4.19 Company Representations................................ 15
Section 4.20 No Merger Agreements................................... 16
Section 4.21 Continuing Representations and Warranties.............. 16
ARTICLE V
COVENANTS
Section 5.1 Special Covenants....................................... 17
Section 5.2 Affirmative Covenants................................... 20
Section 5.3 Negative Covenants...................................... 23
Section 5.4 Additional Affirmative Covenants........................ 24
ARTICLE VI
TERMINATION
Section 6.1 Termination............................................. 25
Section 6.2 Expenses and Fees....................................... 26
ARTICLE VII
MISCELLANEOUS
Section 7.1 Notices................................................. 27
Section 7.2 No Waivers; Remedies; Specific Performance.............. 27
Section 7.3 Amendments, Etc. ....................................... 28
Section 7.4 Successors and Assigns.................................. 28
Section 7.5 Accounting Terms and Determinations..................... 28
Section 7.6 Governing Law........................................... 28
Section 7.7 Counterparts; Effectiveness............................. 29
C-3
<PAGE>
Section 7.8 Severability of Provisions.............................. 29
Section 7.9 Headings and References................................. 29
Section 7.10 Entire Agreement........................................ 29
Section 7.11 Survival................................................ 29
Section 7.12 Non-Exclusive Jurisdiction.............................. 29
Section 7.13 Waiver of Jury Trial.................................... 30
Section 7.14 Affiliate............................................... 30
Section 7.15 Non-Recourse............................................ 30
C-4
<PAGE>
ANNEX
Annex A - Definitions
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Registration Rights Agreement
Exhibit C - Form of Amendment
Exhibit 3.1(f)(1) - Certificate of Secretary of the Company, Group or Interwest
Exhibit 3.1(f)(2) - Certificate of Officer of the Company or Group
Exhibit 3.1(f)(5) - Opinion of Counsel for the Company
Exhibit 3.1(f)(6) - Opinion of Counsel for Group
C-5
<PAGE>
AMENDED AND RESTATED ACQUISITION AGREEMENT
AMENDED AND RESTATED ACQUISITION AGREEMENT dated as of May 29,
1996 between INTERNET COMMUNICATIONS CORPORATION, a Colorado corporation (the
"Company"), INTERWEST GROUP, INC., a Colorado corporation ("Group"), and
INTERWEST ACQUISITION ONE, INC., a Colorado corporation and wholly owned
subsidiary of the Company ("Merger Sub").
The Company and Interwest were parties to that certain Share
Exchange Agreement dated as of May 29, 1996, as amended by a letter agreement
dated as of May 29, 1996, and hereby amend and restate the same effective as
of May 29, 1996.
Terms not otherwise defined in this Agreement have the meanings
stated in Annex A.
The parties agree as follows:
ARTICLE I
TRANSACTIONS
SECTION 1.1 FIRST CLOSING. Subject to the terms and conditions
set forth in this Agreement, at the First Closing,
(a) the Company shall issue, sell and deliver to Group, and
Group shall purchase, accept and acquire from the Company at par
and for cash, a promissory note (the "Note") in the principal
amount of $900,000 and substantially in the form of EXHIBIT A
attached hereto, pursuant to which, if the principal amount of and
interest accrued on the Note shall not be paid in full at the
maturity thereof (whether at stated maturity, on any date of
required prepayment or upon acceleration), Group may require the
Company to issue, sell and deliver to the Holder upon the
conversion of the Note up to 300,000 shares of common stock, no par
value, of the Company (the "COMPANY COMMON STOCK"; as such number
of shares may be adjusted pursuant to the terms of the Note, the
"CONVERSION SHARES"), at a price of $3.00 per Conversion Share (as
such price per share may be adjusted pursuant to the terms of the
Note, the "Note Conversion Price"); and
(b) the Company and Group shall execute and deliver the
Registration Rights
C-6
<PAGE>
Agreement substantially in the form of Exhibit B attached hereto
(the "REGISTRATION RIGHTS AGREEMENT").
SECTION 1.2 SECOND CLOSING. Subject to the terms and conditions
set forth in this Agreement, at the Second Closing, the parties hereto shall
cause Merger Sub to be merged with and into Interwest by filing a Certificate
of Merger with the Secretary of State of the State of Delaware, in such form
as required by, and executed in accordance with the relevant provisions of,
Delaware Law (the date and time of such filing, or such later date or time
agreed upon by the Company and Interwest and set forth therein, being the
"Effective Time"). As a result of the Merger, the separate corporate
existence of Merger Sub shall cease and Interwest shall continue as the
surviving corporation of the Merger (the "Surviving Corporation").
SECTION 1.3 EFFECT OF THE MERGER. At the Effective Time, the
effect of the Merger shall be as provided in the applicable provisions of
Delaware Law.
SECTION 1.4. CERTIFICATE OF INCORPORATION; BYLAWS. At the
Effective Time, the certificate of incorporation of Interwest, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation of the Surviving Corporation and thereafter shall continue to
be its certificate of incorporation until amended as provided therein and
pursuant to Delaware Law. The bylaws of Interwest, as in effect immediately
prior to the Effective Time, shall be the bylaws of the Surviving Corporation
and thereafter shall continue to be its bylaws until amended as provided
therein and pursuant to Delaware Law.
SECTION 1.5. DIRECTORS AND OFFICERS. The directors of Merger Sub
immediately prior to the Effective Time shall be the directors of the
Surviving Corporation, each to hold office in accordance with the charter and
bylaws of the Surviving Corporation, and the officers of Merger Sub
immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, each to hold office in accordance with the bylaws of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
SECTION 1.6. MERGER CONSIDERATION; CONVERSION AND CANCELLATION OF
SECURITIES. At the Effective Time, by virtue of the Merger and without any
action on the part of the Company, Interwest, Merger Sub or their respective
stockholders:
(a) Subject to the other provisions of this Agreement, all of the
shares of common stock of Interwest ("Interwest Common Stock") issued and
outstanding immediately prior to the Effective Time (excluding any Interwest
Common Stock described in Section 2.01(b) of this Agreement), all of which
are owned by Group, shall be converted into the right to receive 2,306,541
shares of Company Common Stock (as such number of shares may be adjusted
pursuant
C-7
<PAGE>
to Section 1.8, the "ADDITIONAL SHARES"), which number of shares (as so
adjusted) is intended by the parties to be equal to 49.0% of the number of
shares of Company Common stock issued and outstanding after giving effect to
the issuance of the Additional Shares pursuant to this Section 1.6(a) but
without taking into account the issuance of shares of Company Common Stock
after the date of this Agreement (i) pursuant to the exercise of Company
Outstanding Options, in each case in accordance with the terms thereof as of
the date of this Agreement, (ii) pursuant to the conversion of the Note and
(iii) with the approval of Group, which approval may be granted, withheld,
conditioned or delayed in its sole discretion (collectively, "PERMITTED
ISSUANCES").
(b) Notwithstanding any provision of this Agreement to the
contrary, each share of Interwest Common Stock held in the treasury of
Interwest shall be canceled and extinguished without any conversion thereof
and no payment shall be made with respect thereto.
(c) All shares of Interwest Common Stock shall cease to be
outstanding and shall automatically be canceled and retired, and each
certificate previously evidencing Interwest Common Stock outstanding
immediately prior to the Effective Time (other than Interwest Common Stock
described in Section 1.6(b) of this Agreement) ("Converted Shares") shall
thereafter represent the right to receive that number of shares of Company
Common Stock determined pursuant to Section 1.6(a) (the "Merger
Consideration"). The holders of certificates previously evidencing Converted
Shares shall cease to have any rights with respect to such Converted Shares
except as otherwise provided herein or by law. Such certificates previously
evidencing Converted Shares shall be exchanged for certificates evidencing
whole shares of Company Common Stock upon the surrender of such Certificates
in accordance with the provisions of Section 1.7 of this Agreement, without
interest. No fractional shares of Company Common Stock shall be issued in
connection with the Merger.
(d) Each share of voting common stock, no par value per share, of
Merger Sub issued and outstanding immediately prior to the Effective Time
shall be converted into one share of voting common stock, no par value per
share, of the Surviving Corporation, and each share of non-voting common
stock, no par value per share, of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into one share of
non-voting common stock, no par value per share, of the Surviving
Corporation.
C-8
<PAGE>
SECTION 1.7. EXCHANGE AND SURRENDER OF CERTIFICATES.
(a) As of the Effective Time, the Company shall deposit, or shall
cause to be deposited with American Securities Transfer, Inc. (the "Exchange
Agent"), for the benefit of the holders of certificates which immediately
prior to the Effective Time evidenced shares of Interwest Common Stock (the
"Interwest Certificates"), for exchange in accordance with this Agreement,
certificates representing the shares of Company Common Stock (such
certificates for shares of Company Common Stock, together with any dividends
or distributions with respect thereto, being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 1.6 in exchange for such shares
of Interwest Common Stock.
(b) The Company shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any former
holder of Converted Shares such amounts as the Company (or any affiliate
thereof) is required to deduct and withhold with respect to the making of
such payment under the Code, or any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Company, such withheld
amounts shall be treated for all purposes of this Agreement as having been
paid to Group.
SECTION 1.8. ADJUSTMENTS.
(a) Except as provided to the contrary in the following
sentence, the respective numbers of Conversion Shares and Additional Shares
and the Note Conversion Price, in each case as stated in this Article I,
shall be adjusted in the event of any change in Company Common Stock by
reason of the issuance of any Equity Securities, stock or other non-cash
dividends, extraordinary cash dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of
shares or the like on or before the First Closing Date (in the case of the
Conversion Shares and the Note Conversion Price) or on or before the Second
Closing Date (in the case of the Additional Shares), such that Group shall
receive upon the payment of the Note Conversion Price or the issuance of the
Interwest Common Stock upon consummation of the Merger, as the case may be,
the number and class of shares or other securities or property that would
have been received in respect of a share of Common Stock, as the case may be,
if the First Closing Date or the Second Closing Date, as the case may be, had
occurred immediately prior to such event, or the record date therefor, as
applicable. Notwithstanding anything in this Agreement or in any other
Transaction Document to the contrary, no such adjustments shall be required
with respect to Permitted Issuances.
(b) No adjustment made pursuant to this Section 1.8 shall
constitute or be deemed a waiver by Group of any breach of any of the
representations, warranties or obligations of the Company contained in this
Agreement.
C-9
<PAGE>
ARTICLE II
CLOSINGS
SECTION 2.1. FIRST CLOSING. The closing of the transactions
subject to Section 1.1 (the "First Closing Transactions") shall take place
(the "First Closing") on May 29, 1996 or, at the election of Group, on the
second Business Day after the conditions precedent to the obligations of the
parties under this Agreement with respect thereto shall have been satisfied
or waived, as the case may be, or on such other date as the parties may agree
in writing (the "First Closing Date"), but in no event later than May 31,
1996.
SECTION 2.2. SECOND CLOSING. The closing of the transactions
subject to Section 1.2 (collectively, the "Second Closing Transactions")
shall take place (the "Second Closing") on September 5, 1996 or, at the
election of Group, on the second Business Day after the conditions precedent
to the obligations of the parties under this Agreement with respect thereto
shall have been satisfied or waived, as the case may be, or on such other
date as the parties may agree in writing (the "Second Closing Date"), but in
no event later than September 30, 1996.
SECTION 2.3. LOCATION OF CLOSINGS. Each of the First Closing and
the Second Closing (collectively, the "Closings") shall take place at the
executive offices of the Company at its address stated on the signature pages
of this Agreement or at such other location as agreed to by the parties.
ARTICLE III
CONDITIONS OF CLOSINGS
SECTION 3.1. CONDITIONS PRECEDENT TO BOTH CLOSINGS. The
obligations of each party under this Agreement with respect to the
Transactions are subject to the satisfaction of each of the following
conditions, unless such conditions either are required to be satisfied by
such party (for the benefit of the other party) or are waived by such party
at or before the related Closing:
(a) each party shall have obtained from each Governmental
Body or other person each Approval or taken all actions required to be taken
in connection with each Approval, and all waiting, review or appeal periods
prescribed with respect to each Approval shall have terminated or expired, as
the case may be, in each case with respect to an Approval that is required or
advisable on the part of such party for (1) the due execution and delivery by
such party of each Transaction Document to which it is or may become a party,
(2) the conclusion of the First Closing Transactions or the Second Closing
Transactions, as the case may be, (3) the performance by such party of its
obligations under each Transaction Document to which it is or may become a
party with
C-10
<PAGE>
respect to the First Closing Transactions or the Second Closing Transactions,
as the case may be, and (4) the exercise by such party of its rights and
remedies under each Transaction Document to which the party is or may become
a party with respect to the First Closing Transactions or the Second Closing
Transactions, as the case may be;
(b) no Action shall be pending or, to the knowledge of either
party, threatened against such party or any other person that restricts in
any material respect or prohibits (or, if successful, would restrict or
prohibit) the conclusion of the First Closing Transactions or the Second
Closing Transactions, as the case may be;
(c) neither party (1) is in violation of or default, in any
material respect, with respect to any Regulation of any Governmental Body or
any decision, ruling, order or award of any arbitrator applicable to it or
its business, properties or operations, (2) would be in violation of or
default, in any material respect, with respect to the same in connection with
or as a result of the conclusion of the First Closing Transactions or the
Second Closing Transactions, as the case may be, or (3) has received notice
that, in connection with or as a result of the conclusion of the First
Closing Transactions or the Second Closing Transactions, as the case may be,
it is or would be in violation of or default, in any material respect, with
respect to the same;
(d) the representations and warranties of the other party
contained in each Transaction Document to which such other party is a party
shall be true and correct in all material respects on and as of the First
Closing Date or the Second Closing Date, as the case may be, with the same
force and effect as though made on and as of such Closing Date;
(e) the other party shall have performed, in all material
respects, all of the covenants and other obligations that are required by the
Transaction Documents to which it is a party to be performed by such other
party at or before the First Closing or the Second Closing, as the case may
be; and
(f) the party shall have received from the other party the
following, each dated the First Closing Date or the Second Closing Date, as
the case may be, in form and substance reasonably satisfactory to the
receiving party:
(i) a certificate of the Secretary or an Assistant Secretary
of such other party and, with respect to the Company, a certificate
of the Secretary or an Assistant Secretary of Interwest,
substantially in the form of EXHIBIT 3.1(f)(1), with respect to (i)
the articles of incorporation of such other party, (ii) the bylaws
of such other party, (iii) the resolutions of the Board of
Directors of such other party approving each Transaction Document
and the other documents to be delivered by it under the Transaction
Documents and (iv) the names and true signatures of the officers of
such other party authorized to sign each Transaction Document to
which such other party is a party as of the First Closing Date or
the Second
C-11
<PAGE>
Closing Date, as the case may be, and the other documents to be
delivered by such other party under such Transaction Documents;
(ii) a certificate of the President or a Vice President of
such other party, substantially in the form of EXHIBIT 3.1(f)(2) to
the effect that (i) the representations and warranties of such
other party contained in the Transaction Documents to which it is a
party are true and correct in all material respects as of the First
Closing Date or the Second Closing Date, as the case may be, and
(ii) such other party has performed, in all material respects, all
covenants and other obligations required by the Transaction
Documents to which it is a party to be performed by it at or before
the First Closing or the Second Closing, as the case may be;
(iii) certified copies, or other evidence satisfactory to
such receiving party, of all Approvals of all Governmental Bodies
and other persons with respect to the other party referred to in
Section 4.3(a) with respect to the First Closing Date and Section
4.3(b) with respect to the Second Closing Date;
(iv) a certificate of the Secretary of State of each
jurisdiction in which such other party is incorporated, dated as of
a recent date, as to the good standing of and payment of taxes by
such other party and as to the charter documents of such other
party or Consolidated Subsidiary, as the case may be, on file in
the office of the Secretary of State;
(v) with respect to the Company, a favorable opinion of one
or more counsel for the Company, which together are substantially
in the form of EXHIBIT 3.1(f)(5), in each case to the extent
indicated therein as applicable to the First Closing or the Second
Closing, as the case may be, and as to other matters reasonably
requested by the receiving party; and
(vi) with respect to Group, a favorable opinion of one or more
counsel for Group, which together are substantially in the form of
EXHIBIT 3.1(f)(6) in each case to the extent indicated therein as
applicable to the First Closing or the Second Closing, as the case
may be, and as to other matters reasonably requested by the
receiving party, including, at the election of Group, an opinion
that the Second Closing Transactions will be characterized as a
tax-free reorganization under Section 368(a)(1)(A) of the Code.
SECTION 3.2. ADDITIONAL CONDITIONS PRECEDENT TO FIRST CLOSING.
The obligations of each party under this Agreement with respect to the First
Closing Transactions are also subject to the satisfaction of each of the
following conditions at or before the First Closing, unless the conditions
either are required to be satisfied by such party (for the benefit of the
other party) or are waived by such party:
(a) the Company shall have duly executed and delivered
to Group the
C-12
<PAGE>
Note substantially in the form of EXHIBIT A attached hereto, with such
changes therein as shall have been approved by the Company and Group;
(b) Group shall have delivered to the Company an amount in
immediately available funds equal to the purchase price for the Note; and
(c) the Company and Group shall have executed and delivered
the Registration Rights Agreement substantially in the form of EXHIBIT B
attached hereto, with such changes therein as shall have been approved by the
Company and Group;
SECTION 3.3. ADDITIONAL CONDITIONS PRECEDENT TO SECOND CLOSING.
The obligations of each party under this Agreement with respect to the Second
Closing Transactions are also subject to the satisfaction of each of the
following conditions at or before the Second Closing, unless the conditions
either are required to be satisfied by such party (for the benefit of the
other party) or are waived by the party:
(a) the Company's Articles of Incorporation shall have been
duly amended pursuant to the Amendment substantially in the form of Exhibit C
attached hereto, with such changes therein as shall have been approved by the
Company and Group;
(b) the shareholders of the Company shall have duly approved
the Transaction Documents and the Transactions;
(c) the shareholder of Group shall have duly approved the
Second Closing Transactions;
(d) the Company shall have duly executed and delivered to
Group one or more certificates representing the Additional Shares;
(e) Group shall have delivered to the Company one or more
certificates representing the Interwest Common Stock, duly endorsed for
transfer or together with a stock power duly endorsed for transfer;
(f) the bylaws of the Company shall have been amended to fix
the number of directors of the Company at eight;
(g) three persons designated by Group shall have been elected
as directors of the Company effective as of the Second Closing Date to serve
in such capacities until the next annual meeting of the shareholders of the
Company; and
C-13
<PAGE>
(h) the Second Closing Transactions shall be characterized as
a tax-free reorganization under Section 368(a)(1)(A) of the Code.
Section 3.4. Legends.
(a) Each certificate for Company Shares and any certificate
issued in exchange therefor or on conversion or upon transfer, except
certificates issued in connection with a sale registered under the Securities
Act and except as provided below, shall bear legends to the following effect:
(i) "The shares represented by this certificate have not been
registered under the Securities Act of 1933 and may not be offered,
sold, transferred or otherwise disposed of except in compliance
with said Act."
(ii) "The shares represented by this certificate are subject
to the restrictions contained in the Registration Rights Agreement
dated as of May 29, 1996, a copy of which is on file at the office
of the Secretary of the Company."
(b) The Note and any certificate issued in exchange therefor
or on conversion or upon transfer, shall bear the legends to the effect
stated in Section 3.4(a), MUTATIS MUTANDIS.
(c) The legend stated in Section 3.4(a)(1), and the
corresponding legend referred to in Section 3.4(b), shall be removed by
delivery of one or more substitute certificates without such legend if the
holder thereof shall have delivered to the Company a copy of a letter from
the staff of the Securities and Exchange Commission or an opinion of counsel,
in form and substance reasonably satisfactory to the Company, to the effect
that the legend is not required for purposes of the Securities Act.
(d) The legend stated in Section 3.4(a)(2) and the
corresponding legend referred to in Section 3.4(b) shall be removed at such
time as the related securities are no longer subject to the Registration
Rights Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Each party represents and warrants, with respect to itself and, in
the case of Group, with respect to Interwest, as follows (the Company or
Interwest being referred to in this Article IV as a "SUBJECT COMPANY"):
C-14
<PAGE>
SECTION 4.1. CORPORATE EXISTENCE AND POWER. The representing
party, and, with respect to Interwest, the Subject Company each (1) is a
corporation duly incorporated, validly existing and in good standing under
the laws of the jurisdiction of its incorporation, (2) has all necessary
corporate power and authority and all material licenses, authorizations,
consents and approvals required to own, lease, license or use its properties
now owned, leased, licensed or used and proposed to be owned, leased,
licensed or used and to carry on its business as now conducted and proposed
to be conducted, (3) is duly qualified as a foreign corporation under the
laws of each jurisdiction in which both (A) qualification is required either
(i) to own, lease, license or use its properties now owned, leased, licensed
and used or (ii) to carry on its business as now conducted and (B) the
failure to be so qualified could materially and adversely affect either or
both of (i) the business, properties, operations, prospects or condition
(financial or otherwise) of the Subject Company, and (ii) the ability of the
representing party or the Subject Company to perform its obligations under
any Transaction Document to which it is or may become a party and (4) has all
necessary corporate power and authority to execute and deliver each
Transaction Document to which it is or may become a party.
SECTION 4.2. AUTHORIZATION; CONTRAVENTION; MODIFICATIONS. Subject
to obtaining the Approvals referred to in Section 4.3, the execution and
delivery by the representing party of each Transaction Document to which the
representing party is or may become a party and the performance by it of its
obligations under each such Transaction Document have been duly authorized by
all necessary corporate action and do not and will not (1) contravene,
violate, result in a breach of or constitute a default under, (A) its
articles of incorporation or bylaws, (B) any Regulation of any Governmental
Body or any decision, ruling, order or award of any arbitrator by which the
representing party or any of its properties may be bound or affected or (C)
any agreement, indenture or other instrument to which the representing party
is a party or by which the representing party or its properties may be bound
or affected, (2) except as contemplated by the Transaction Documents, result
in or require the creation or imposition of any Lien on any of the properties
now owned or hereafter acquired by the representing party.
SECTION 4.3. APPROVALS.
(a) Except with respect to the Approval that may be required
under the Hart-Scott-Rodino Act in connection with the conversion of the Note
and such other Approvals as shall have been disclosed in writing to the other
party, which writing makes reference to this Agreement, no Approval of any
Governmental Body or other person is required or advisable on the part of the
representing party for (1) the due execution and delivery by the representing
party of any Transaction Document to which it is or may become a party, (2)
the conclusion of the First Closing Transactions, (3) the performance by the
representing party of its obligations under each Transaction Document to
which it is or may become a party with respect to the First Closing
Transactions and (4) the exercise by Group of its rights and remedies under
each such Transaction Document with respect to the First Closing
Transactions. Each such Approval shall have been obtained, all actions
C-15
<PAGE>
by each person required to be taken in connection with each such Approval,
other than Approval under the Hart-Scott-Rodino Act, shall have been taken
and all prescribed waiting, review or appeal periods with respect to each
such Approval shall have terminated or expired, as the case may be, in each
case on or before the First Closing Date.
(b) Except with respect to the Approvals required in
connection with the performance by the Company of its obligations under
Section 5.1(a)(1), including, without limitation, the Approval by the
shareholders of the Company of the Amendment and the filing of articles of
amendment with respect thereto with the Secretary of State of the State, the
Approvals required in connection with the performance by Group of its
obligations under Section 5.1(a)(2), the Approval that may be required under
the Hart-Scott-Rodino Act in connection with the conversion of the Note and
such other Approvals as shall have been disclosed in writing to the other
party, which writing makes reference to this Agreement, no Approval of any
Governmental Body or other person that is required or advisable on the part
of the representing party for (1) the due execution and delivery by the
representing party of any Transaction Document to which it is or may become a
party, (2) the conclusion of the Second Closing Transactions, (3) the
performance by the representing party of its obligations under each
Transaction Document to which it is or may become a party with respect to the
Second Closing and (4) the exercise by Group of its rights and remedies under
each such Transaction Document with respect to the Second Closing
Transactions. Each such Approval shall have been obtained, all actions by
each person required to be taken in connection with each such Approval shall
have been taken and all prescribed waiting, review or appeal periods with
respect to each such Approval shall have terminated or expired, as the case
may be, in each case on or before the Second Closing Date.
SECTION 4.4. BINDING EFFECT. Each Transaction Document to which
the representing party is or may become a party is, or when executed and
delivered in accordance with this Agreement will be, the legally valid and
binding obligation of the representing party enforceable against it in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally and general principles of equity,
including, without limitation, concepts of materiality, reasonableness, good
faith and fair dealing and the possible unavailability of specific
performance or injunctive relief, regardless of whether considered in a
proceeding in equity or at law.
SECTION 4.5. FINANCIAL INFORMATION.
(a) The consolidated balance sheet of the Subject Company and
its Consolidated Subsidiaries as of the last day of its latest complete
fiscal year (the "Balance Sheet Date") and the related consolidated
statements of operations, shareholders' equity and cash flows for the fiscal
year then ended, reported on by the independent public accountants of the
representing party (and, with respect to the Company, filed with the
Securities and Exchange Commission in the Company's Annual Report on Form
10-K for the year ended January 31, 1996), a true and complete
C-16
<PAGE>
copy of which has been delivered to the other party, fairly present the
consolidated financial position of the Subject Company and its Consolidated
Subsidiaries as of that date and their consolidated results of operations and
cash flows for the year then ended, in accordance with GAAP applied on a
consistent basis except as described in the footnotes to such financial
statements or as disclosed in writing to the other party, which writing makes
reference to this Agreement.
(b) The representing party has made available to the other
party copies of each management letter delivered to the representing party by
the independent public accountants of the representing party in connection
with the financial statements referred to in this Section 4.5 or relating to
any review by them of the internal controls of the Subject Company and its
Consolidated Subsidiaries during the three years ended on its Balance Sheet
Date or thereafter, and has made available for inspection all reports and
working papers produced or developed by them or management in connection with
their examination of those financial statements, as well as all such reports
and working papers for prior periods for which any liability of the Subject
Company and its Subsidiaries for Taxes has not been finally determined or
barred by applicable statutes of limitation.
SECTION 4.6. TAXES. Each of the Subject Company and its
Subsidiaries has filed all Tax Returns that are required to be filed with any
Governmental Body and has paid all Taxes due pursuant to the Tax Returns or
any assessment received by it or otherwise required to be paid, except Taxes
being contested in good faith by appropriate proceedings and for which
adequate reserves or other provisions are maintained, and except for the
filing of Tax Returns as to which the failure to file could not, individually
or in the aggregate, have a Material Adverse Effect.
SECTION 4.7. LITIGATION.
(a) Except as previously disclosed to the other party in
writing, which writing makes reference to this Agreement, there is no Action
pending or, to the knowledge of the representing party, threatened against
the Subject Party or any of its Subsidiaries that (1) involves any of the
Transactions or (2) individually or in the aggregate, if determined adversely
to any of them, could result in a liability to any of them in an amount that
could have a Material Adverse Effect.
(b) There is no Action pending or, to the knowledge of the
representing party, threatened against the representing party, any of its
Subsidiaries or any other person that involves any of the Transactions or any
property owned, leased, licensed or used by the representing party or such
Subsidiary that, individually or in the aggregate, if determined adversely to
any of them, could have a Material Adverse Effect.
SECTION 4.8. COMPLIANCE WITH LAWS. None of the Subject Company
and its Subsidiaries is in, and none of them has received notice of, a
violation of or default with respect to, any Regulation of any Governmental
Body or any decision, ruling, order or award of any arbitrator
C-17
<PAGE>
applicable to it or its business, properties or operations, including
individual products or services sold or provided by it, except for violations
or defaults that, individually or in the aggregate, could not have a Material
Adverse Effect.
SECTION 4.9. SUBSIDIARIES.
(a) The representing party has previously delivered to the
other party a correct and complete list of the Subsidiaries of the Subject
Company, which list makes reference to this Agreement, showing the following
as of the date of this Agreement with respect to each such Subsidiary: (i)
the jurisdiction of its incorporation; (ii) the title of each authorized
class or series of capital stock; (iii) the number of shares of each
authorized class or series of capital stock; (iv) the number of such shares
outstanding; (v) the number of outstanding shares owned directly or
indirectly by the representing party; and (vi) the directors and officers of
the Subsidiary as of the date of this Agreement.
(b) All outstanding shares of capital stock of each
Subsidiary are duly authorized, validly issued, fully paid and nonassessable
and are owned as set forth in the written notice referenced in Section
4.13(a), directly or indirectly, beneficially and of record by the
representing party, free and clear of all Liens other than Permitted Liens.
SECTION 4.10. PROPRIETARY RIGHTS.
(a) The representing party has previously disclosed to the
other party in writing, which writing makes reference to this Agreement, a
correct and complete description and list of all Proprietary Rights in which
one or more of the Subject Company and its Subsidiaries has an interest, the
failure to hold which, individually or in the aggregate, could have a
Material Adverse Effect. None of the representing party and its Subsidiaries
has received notice that the validity of any such Proprietary Right or its
title to or use of any such Proprietary Right is being questioned in any
Action.
(b) With respect to the Company, without derogating from the
generality of Section 4.10(a), the Company has the right to use the name
"Internet" in the State of Colorado.
(c) The Subject Company or such Subsidiary, as the case may
be, has good title to each of the interests created by such Proprietary
Rights. The right, title and interest of the Subject Company or such
Subsidiary, as the case may be, in and to each such Proprietary Right is free
and clear of all Liens other than Permitted Liens.
(d) The representing party has no reason to believe, and does
not believe, that any use has been or is being made of any such Proprietary
Right by any person other than the Subject Company, such Subsidiary or a
person duly authorized to make that use. All such
C-18
<PAGE>
Proprietary Rights used by the Subject Company or such Subsidiary, as the
case may be, but previously owned or held by any of its directors, officers,
employees or agents, have been duly transferred to the Subject Company or
such Subsidiary, as the case may be.
(e) There is no liability or obligation of any of the Subject
Company and its Subsidiaries with respect to any such Proprietary Right that
is required to have been paid or otherwise performed, as of the date of this
Agreement, that has not been paid or otherwise performed in full.
SECTION 4.11. INSURANCE. The Subject Company and its Subsidiaries
are insured with reputable insurers against all risks normally insured
against in accordance with generally prevailing practices in the
communications industry and all of such insurance policies and bonds
maintained by or for the benefit of the Subject Company and such Subsidiary,
as the case may be, are in full force and effect. The Subject Company and
its Subsidiaries maintain insurance with reputable insurance companies in
such amounts and covering such risks as are usually carried by companies
engaged in the same or similar business and similarly situated. There are no
currently outstanding material losses for which the Company or such
Subsidiary has failed to give or present notice or claim under any policy.
There are no requirements by any insurance company or by any board of fire
underwriters or other body exercising similar functions or by any
Governmental Body of which the representing party has knowledge requiring any
repairs or other work to be done to any of the properties owned, leased,
licensed or used by the Subject Company or such Subsidiary or requiring any
equipment or facilities to be installed on or in connection with any of the
properties, the failure to complete which could result in the cancellation of
the policy of insurance. Policies for all the insurance are in full force
and effect and none of the Subject Company and its Subsidiaries is in default
in any material respect under any of the policies. The representing party
has no knowledge of the cancellation or proposed cancellation of any of the
insurance or of any proposed increase in the contributions for workers'
compensation or unemployment insurance or of any conditions or circumstances
applicable to the business of the Company or such Subsidiary, as the case may
be, which might result in a material increase in those contributions.
SECTION 4.12. DEBT. The representing party has previously
disclosed to the other party in writing, which writing makes reference to
this Agreement, a correct and complete description and list of the following:
(i) all credit agreements, indentures, purchase agreements, Guarantees,
Capitalized Leases and other Investments, agreements and other arrangements
presently in effect providing for or relating to Debt in any amount greater
than $250,000 in respect of which any of the Subject Company and its
Subsidiaries is in any manner directly or contingently obligated; (ii) the
maximum principal or face amounts of such Debt outstanding or which may be
outstanding under each of those agreements and other arrangements; and (iii)
the maturity date or dates of such Debt.
SECTION 4.13. NO DEFAULT. Except as previously disclosed to the
other party in
C-19
<PAGE>
writing, which writing makes reference to this Agreement, none of the Subject
Company and its Subsidiaries is in default in respect of any obligation under
any credit agreement, indenture, purchase agreement, Guarantee, Capitalized
Lease and other Investment, agreement or arrangement referred to in Section
4.12, which default either alone or together with any other default, entitles
another party thereto, with the giving of notice or the passage of time or
both, to terminate or modify the rights and obligations of the parties
thereunder or with respect thereto or to accelerate, increase or otherwise
modify any obligation of the Subject Company or any of its Subsidiaries
thereunder.
SECTION 4.14. CAPITALIZATION.
(a) With respect to the Company,
(i) the authorized capital stock of the Company consists of
(A) 4,500,000 shares of Common Stock and (B) 100,000,000 shares of
preferred stock, par value $.0001 per share, of which no shares are
issued and outstanding;
(ii) the number of shares of Common Stock as of the date
hereof (A) issued and outstanding, (B) held in the treasury of the
Company, (C) reserved for issuance upon exercise of outstanding
stock options granted by the Company (the "Outstanding Options"),
together with the exercise prices therefor and (D) reserved for
issuance as Conversion Shares upon conversion of the Note and
reserved for issuance as Additional Shares has been previously
disclosed to Group in writing, which writing makes reference to
this Agreement.
(b) With respect to Interwest, (1) the authorized capital
stock of Interwest consists of (A) 100,000 shares of voting common stock, no
par value, of which 40,000 shares are issued and outstanding, and (B) 10,000
shares of nonvoting common stock, no par value, of which 1,000 shares are
issued and outstanding, and (2) all of which shares of issued and outstanding
Interwest Common Stock are owned, beneficially and of record, by Group.
(c) Except as set forth above and except as provided in the
Transaction Documents, no Equity Securities of the Subject Company are
issued, reserved for issuance or outstanding.
(d) All outstanding shares of capital stock of the Subject
Company are, and all shares that may be issued pursuant to the exercise of
the Outstanding Options, the Conversion Shares that may be issued pursuant to
the conversion of the Note (if the same shall be executed and delivered) and
the Additional Shares, as the case may be, will be, when issued, duly
authorized, validly issued, fully paid and nonassessable and, except as
provided in the Transaction Documents, are not subject to preemptive rights.
(e) Except with respect to the Outstanding Options and the
Transaction
C-20
<PAGE>
Documents, there are no outstanding bonds, debentures, notes or other
indebtedness or other securities of the Subject Company having the right to
vote (or convertible into, or exchangeable for, securities having the right
to vote) on any matters on which shareholders of the Subject Company may vote.
(f) Except with respect to the Outstanding Options and the
Transaction Documents, there is no agreement or arrangement restricting the
voting or transfer of the Equity Securities of the Subject Company.
(g) Except with respect to the Outstanding Options and the
Transaction Documents, there are no outstanding securities, options,
warrants, calls, rights, commitments, agreements, arrangements or
undertakings of any kind to which any of the Subject Company and its
Subsidiaries is a party or by which any of them is bound obligating the
Subject Company or such Subsidiary to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other Equity
Securities of the Subject Company or such Subsidiary or obligating the
Subject Company or such Subsidiary to issue, grant, extend or enter into any
such security, option, warrant, call, right, commitment, agreement,
arrangement or undertaking.
(h) Except as previously disclosed to the other party in
writing, which writing makes reference to this Agreement, there are no
outstanding contractual obligations, commitments, understandings or
arrangements of any of the Subject Company and its Subsidiaries to
repurchase, redeem or otherwise acquire, require or make any payment in
respect of any shares of Equity Securities of the Subject Company or such
Subsidiary.
(i) Except with respect to statutory restrictions of general
application, there are no legal, contractual or other restrictions on the
payment of dividends or other distributions or amounts on or in respect of
any of the Equity Securities of the Subject Company.
(j) Except as contemplated by the Registration Rights
Agreement, there are no agreements or arrangements to which any of the
Subject Company and its Subsidiaries is a party pursuant to which the Subject
Company is or could be required to register shares of common stock or other
securities under the Securities Act.
(k) Equity Securities of the Subject Company that were issued
and reacquired by the Subject Company were so reacquired (and, if reissued,
so reissued) in compliance with all applicable Regulations, and the Subject
Company has no liability with respect to the reacquisition or reissuance of
the Equity Securities.
SECTION 4.15. MATERIAL CONTRACTS. The representing party has
previously disclosed to the other party in writing, which writing makes
reference to this Agreement, a correct and complete description and list of
the following (collectively, the "MATERIAL CONTRACTS") with respect to any of
the Subject Company and its Subsidiaries:
C-21
<PAGE>
(a) agreements with investment bankers, brokers, finders,
consultants and advisers engaged by or on behalf of the Subject Company or
such Subsidiary with respect to the Transactions or other transactions
contemplating the recapitalization of the Subject Company or such Subsidiary,
the purchase or sale by the Subject Company or such Subsidiary of assets not
in the ordinary course of business or the issuance and sale by the Subject
Company or such Subsidiary of any Equity Securities or Debt of the Subject
Company or such Subsidiary, as the case may be;
(b) agreements with any person having beneficial ownership of
5.0% or more of the shares of common stock of the Subject Company then issued
and outstanding, director or officer of the Subject Company or such
Subsidiary and all shareholders' agreements and voting trusts; and
(c) agreements not made in the ordinary course of business
and which are materially adverse to the business of the Subject Company or
such Subsidiary.
SECTION 4.16. INVESTMENT INTENT.
(a) The representing parties acknowledge that the Company is
issuing and selling the Note (and, upon conversion thereof, the Conversion
Shares) and the Additional Shares and that Group is selling the Interwest
Common Stock, in each case pursuant to the terms of the Transaction
Documents, in reliance upon the exemption afforded by Section 4(2) of the
Securities Act for transactions by an issuer not involving any public
offering.
(b) The representing party (1) represents that it is
acquiring securities pursuant to Section 1.1 for investment and without any
view toward distribution of any of the securities to any other person and (2)
agrees that it will not sell or otherwise dispose of the securities except in
compliance with the registration requirements or exemption provisions under
the Securities Act.
SECTION 4.17. FEES FOR BROKERS AND FINDERS. The representing
party and its Subsidiaries and other Affiliates have not authorized any
person to act as financial advisor, broker, finder or other intermediary that
might be entitled to any fee, commission, expense reimbursement or other
payment of any kind from any of the representing party, such Subsidiaries and
such other Affiliates upon the conclusion of or in connection with any of the
Transactions.
SECTION 4.18. MISSTATEMENTS. Except to the extent revised or
superseded by a subsequent certificate, schedule or report furnished to the
other party, no information, certificate, schedule or report furnished by or
on behalf of the representing party to the other party with respect to any of
the Subject Company and its Subsidiaries in connection with the negotiation
of any Transaction Document or the satisfaction of any condition under any
Transaction Document contained as of the date thereof any untrue statement of
a material fact or omitted to state a material
C-22
<PAGE>
fact necessary to make the statement contained therein, in the light of the
circumstances under which it was made, not misleading.
SECTION 4.19. COMPANY REPRESENTATIONS. With respect to the
Company:
(a) RECOMMENDATIONS. The Board of Directors of the Company,
at a meeting duly called and held, has duly (1) determined that the
Transaction Documents and the Transactions, taken as a whole, are in the best
interests of the Company and its shareholders, (2) resolved to recommend that
holders of shares of Common Stock approve the Transaction Documents and the
Transactions (collectively, the "RECOMMENDATIONS") and (3) approved the
Transaction Documents and the Transactions.
(b) SHAREHOLDER APPROVAL. The affirmative vote of a majority
of the shares of the Common Stock voted at the duly convened Shareholders
Meeting (or any other duly convened meeting of the holders of the Common
Stock) is the only vote of the holders of any class or series of the Equity
Securities of the Company necessary to approve the Transaction Documents and
the Transactions, including, without limitation, the increase in the number
of authorized shares of Common Stock from 4,500,000 shares to 20,000,000
shares. None of the First Closing Transactions is required to be approved by
the holders of shares of any class of Equity Securities of the Company.
(c) NO RESTRICTIONS ON GROUP. No provision of the articles
of incorporation or bylaws of the Company or any other agreement, indenture
or other instrument to which the Company or its properties are subject (1)
directly or indirectly restricts or impairs the right or ability of Group to
vote, or otherwise to exercise the rights and receive the benefits of a
shareholder with respect to, Equity Securities of the Company that may be
acquired or controlled by Group, including, without limitation, restrictions
based upon the size of the security holdings of Group, the business in which
it is engaged or other considerations applicable to it and not to security
holders generally, or (2) permits any other security holder of the Company to
acquire securities of the Company on a basis not available to Group if Group
were to acquire Equity Securities of the Company.
(d) SEC DOCUMENTS. The Company has filed with the Securities
and Exchange Commission all reports, schedules, forms, statements and other
documents required by the Exchange Act to be filed by the Company since
January 1, 1993 (collectively, and in each case including all exhibits and
schedules thereto and documents incorporated by reference therein, the "SEC
DOCUMENTS"). The Company has delivered or made available to Group all SEC
Documents. As of their respective dates, except to the extent revised or
superseded by a subsequent filing with the Securities and Exchange
Commission, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be,
and none of the SEC Documents (including any and all financial statements
included therein) as of such dates contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein
C-23
<PAGE>
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of the Company and the Subsidiaries included in all SEC
Documents, including any amendments thereto (the "SEC FINANCIAL STATEMENTS"),
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Securities and
Exchange Commission with respect thereto.
SECTION 4.20. NO MERGER AGREEMENTS. None of the representing
party and its Subsidiaries has entered into any agreement with any person
which has not been terminated as of the date of this Agreement and under
which there remains any liability or obligation of any of the representing
party and its Subsidiaries with respect to a merger or consolidation with any
of the Subject Company and its Subsidiaries, an acquisition of any Equity
Securities of any of the Subject Company and its Subsidiaries, any other
acquisition of a substantial amount of the assets of any of the Subject
Company and its Subsidiaries or any Business Combination Transaction with
respect to any of the Subject Company and its Subsidiaries.
SECTION 4.21. CONTINUING REPRESENTATIONS AND WARRANTIES. Each of
the representations and warranties made by the representing party in this
Agreement or in any other Transaction Document as of any date other than a
Closing Date will be true and correct in all material respects on and as of
the Closing Date except as otherwise contemplated by such Transaction
Document, and the representing party will prepare and deliver to the other
party such updates or other revisions of the written disclosures referred to
in this Article IV as have been delivered by the representing party to the
other party as shall be necessary in order to make each of such written
disclosures correct and complete in all material respects on and as of the
Closing Date. The requirement to prepare and deliver updates or other
revisions of the written disclosures, and the receipt by the other party of
information pursuant to Section 5.1 or otherwise on or before a Closing Date,
shall not limit the right of the other party under Article III to require as
a condition precedent to the performance of its obligations under this
Agreement on such Closing Date the accuracy in all material respects of the
representations and warranties and the performance in all material respects
of the covenants of the representing party made in the Transaction Documents
(without regard to such updates or other revisions) and to receive an
unqualified certificate with respect to the same.
ARTICLE V
COVENANTS
SECTION 5.1. SPECIAL COVENANTS.
(a) FIRST CLOSING. Until the conclusion of the First Closing:
C-24
<PAGE>
(i) COMPANY APPROVALS. The Company shall use its best
efforts to obtain:
the Approvals with respect to the Transaction Documents
and the Transactions specified in writing to Group, which writing
makes reference to this Agreement;
the Approval of the shareholders of the Company with
respect to the Transaction Documents and the Transactions,
including, without limitation, the increase in the number of
authorized shares of Common Stock from 4,500,000 shares to
20,000,000 shares; and
the Approval required, if any, to cause the Company
Shares to be qualified for inclusion in the National Association of
Securities Dealers Automated Quotation/Small Cap (the "NASDAQ/SMALL
CAP"), and give such notice as required, if any, to the National
Association of Securities Dealers, Inc. with respect to the
Transaction Documents and the Transactions.
(ii) GROUP APPROVALS. Group shall use its best efforts to
obtain the following Approvals with respect to the Transaction
Documents and the Transactions on terms and conditions that shall
have been approved by the Company, which approval may not be
unreasonably withheld:
the Approvals with respect to the Transaction Documents
and the Transactions specified in writing to the Company, which
writing makes reference to this Agreement; and
the Approval of the shareholder of Group with respect to
the Second Closing Transactions.
(b) SECOND CLOSING. Until the conclusion of the Second Closing:
(i) SHAREHOLDERS MEETING; PREPARATION OF PROXY STATEMENT. Without
limiting the generality of Section 5.1(a)(1)(C), the Company, acting through
its Board of Directors, shall, in accordance with applicable law and as soon
as practicable following the execution and delivery of this Agreement, (A)
duly postpone the annual meeting of shareholders of the Company currently
scheduled to be held on May 30, 1996, or convene and immediately adjourn
(without conducting any other business), give such notice to the shareholders
as may be appropriate or required by law, convene and, subject to Section
5.1(b)(1)(D), hold the annual meeting of its shareholders or a special
meeting thereof (such meeting, including any adjournments thereof, the
"SHAREHOLDERS MEETING") for the purpose, among other things, of considering
and taking action upon the Transaction Documents and the Transactions, and
C-25
<PAGE>
prepare and file with the Securities and Exchange Commission proxy statement
(such proxy statement including the form of proxy and all such other
materials distributed in connection therewith, as amended or supplemented
from time to time, the "Proxy Statement"), (B) use its best efforts (i) to
obtain and furnish the information required to be included by it in the Proxy
Statement and, after consultation with Group, respond promptly to any
comments made by the Securities and Exchange Commission with respect to the
Proxy Statement and any preliminary version thereof and cause the Proxy
Statement to be mailed to its shareholders at the earliest practicable time
following the execution and delivery of this Agreement and (ii) to solicit
proxies in favor of the Transactions and otherwise obtain the approval by its
shareholders of the Transaction Documents and the Transactions, including,
without limitation, the increase in the number of authorized shares of Common
Stock from 4,500,000 shares to 20,000,000 shares, and (C) cause the Proxy
Statement and the distribution thereof to comply in all material respects
with the Exchange Act and ensure that the Proxy Statement will not, at the
date the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to shareholders and at the time of the Shareholders Meeting, be
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements made therein, in the light of the circumstances under which they
are made, not misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the
Shareholders Meeting which has become false or misleading. Subject to the
Company's right pursuant to clause (z) of the proviso to Section 5.1(b)(2) to
withdraw or modify the Recommendations, the Company shall include in the
Proxy Statement the recommendation of its Board of Directors that holders of
Common Stock vote in favor of the approval of the Transaction Documents and
the Transactions. If the Company is advised by its proxy solicitors prior to
the Shareholders Meeting or otherwise determines that a vote in favor of the
Transactions is not likely to be obtained at the Shareholders Meeting, the
Shareholders Meeting shall, at the request of Group, be adjourned from time
to time, provided that in no event will the Shareholders Meeting be required
hereunder to be held more than 120 days from the original scheduled meeting
date, which 120 day period shall be extended by the number of days, if any,
that the Company is enjoined from soliciting proxies in connection with the
Shareholders Meeting or that the holding of the Shareholders Meeting or the
vote thereat is enjoined. The obligations of the Company pursuant to Section
5.1(b)(1) (including, without limitation, the obligation to submit the
Transactions to a vote of its shareholders), shall not be affected by the
withdrawal or modification of the Recommendations.
(ii) NO SOLICITATION. None of the parties and their respective
Subsidiaries shall, and none of the parties and their respective Subsidiaries
shall authorize or permit any of its officers, directors, employees or
Affiliates or any financial advisor, attorney, accountant or other
representative retained by it to,
C-26
<PAGE>
solicit, initiate or encourage (including, without
limitation, by way of furnishing information), any inquiry or the
making of any proposal to the Company or Interwest (each being
referred to in this Section 5.1(b)(2) as a "SUBJECT COMPANY") or
their respective Affiliates from any person (other than (x) the
other party or any Affiliate of, or any person acting in concert
with or representing such other party and (y) the persons
previously identified by the covenanting party to the other party),
which proposal constitutes, or may reasonably be expected to lead
to, in each case whether in one transaction or in a series of
transactions, (i) an acquisition from the Subject Company or its
shareholders of any Equity Securities of any of the Subject Company
and its Subsidiaries (other than the Transactions), (ii) any
acquisition of a substantial amount of assets of any of the Subject
Company and its Subsidiaries, (iii) a merger or consolidation of
any of the Subject Company and its Subsidiaries or (iv) any tender
offer (including a self-tender offer) or exchange offer,
recapitalization, liquidation, dissolution or similar transaction
involving any of the Subject Company and its Subsidiaries (other
than the Transactions) or any other transaction the consummation of
which would or could reasonably be expected to impede, interfere
with, prevent or materially delay the conclusion of any of the
Transactions or which would or could reasonably be expected to
materially reduce the benefits of the Transactions to the other
party (collectively, "BUSINESS COMBINATION TRANSACTIONS") or agree
to or endorse any Business Combination Transaction; or
enter into or participate in any discussions or
negotiations regarding any Business Combination Transaction, or
furnish to any other person (other than the other party or any
Affiliate of, or any person acting in concert with or representing,
such other party) any information with respect to the business,
properties, operations, prospects or conditions (financial or
otherwise) of the Subject Company and its Subsidiaries or any
Business Combination Transaction, or otherwise cooperate in any way
with, or assist or participate in, facilitate or encourage, any
effort or attempt by any other person to seek or conclude any
Business Combination Transaction;
PROVIDED, HOWEVER, that the foregoing clauses (i) and (ii) of
Section 5.1(b)(2)(A) and Section 5.1(b)(2)(B) shall not prohibit a
party from (x) furnishing to a third party who has made a written
proposal with respect to a Business Combination Proposal (a
"TRANSACTION PROPOSAL") information pursuant to an appropriate
confidentiality letter concerning the Subject Company and its
Subsidiaries and the business, properties, operations, prospects or
conditions (financial or otherwise) of the Subject Company and its
Subsidiaries, (y) engaging in discussions or negotiations with such
a third party who has made such a Transaction Proposal or (z)
following receipt of a Transaction Proposal, taking and disclosing
to its shareholders a position contemplated by Rule 14e-2(a) under
the Exchange Act or changing the Recommendations, but in each case
referred to in the foregoing clauses (x) through (z)
C-27
<PAGE>
only after the Board of Directors of the Subject Company concludes in
good faith, based upon the written opinion of its counsel, that such
action is necessary or appropriate in order for the Board of Directors of
the Subject Company to act in a manner which is consistent with its
fiduciary obligations under applicable law. If the Board of
Directors of a party or a Subject Company receives a Transaction
Proposal, then the party or the Subject Company, as the case may
be, shall promptly inform the other party of the terms and
conditions of such proposal and the identity of the person making
the Transaction Proposal and shall keep the other party generally
informed with reasonable promptness of any steps it is taking
pursuant to the preceding sentence of this Section 5.1(b)(2) with
respect to the Transaction Proposal. Each party has advised the
directors of the related Subject Company with respect to the
obligations of the party under this Section 5.1(b), and each of
such directors has agreed to comply with such obligations.
(c) NUMBER OF DIRECTORS. If the shareholders of the
Company shall have approved the Transaction Documents and the Transactions,
the Board of Directors of the Company shall amend the bylaws of the Company
to increase the number of directors of the Company from five persons to eight
persons, thereby creating three vacancies, and shall divide the Board of
Directors into three classes, with one vacancy per class, and at the Second
Closing shall cause the vacancy in each class to be filled by a person
designated by Group to serve in such capacity until the next annual meeting
of the shareholders of the Company.
(d) RESERVATION OF COMPANY SHARES. The Company shall reserve
from its authorized but unissued shares of Common Stock, for issuance
pursuant to the terms of the Note and this Agreement, a number of shares
equal to the number of Conversion Shares issuable upon conversion of the Note
from time to time and, upon the approval of the Amendment by the shareholders
of the Company, a number of shares equal to the Additional Shares.
(e) LITIGATION. With regard to the three Litigation matters
described in the letter dated May 28, 1996 from Interwest to the Company (the
"Interwest Disclosure Letter"), (A) Group must approve any payments to the
three plaintiffs in excess of $50,000 for all three plaintiffs in the aggregate
and shall promptly reimburse Interwest for any such payments and (B) the
defense of such matters after January 31, 1997 shall be conducted by Group and
at Group's expense.
(f) ROBERT L. SMITH EMPLOYMENT CONTRACT. With regard to the
Employment Agreement between Interwest and Robert L. Smith ("Smith"), Group
shall assume 45/170 of the salary obligation to Smith under the Employment
Agreement for the balance of the term of the Employment Agreement.
(g) EXTENSION OF NOTE. If on December 31, 1996, the Company is
C-28
<PAGE>
pursuing a public offering of Company Common Stock approved by Group, then
the maturity date of the Note shall be extended to March 31, 1997.
(h) GROWTH SHARE PLAN. Group shall cause the termination of
the Interwest Growth Share Plan and shall assume all amounts due thereunder.
SECTION 5.2. AFFIRMATIVE COVENANTS. Each party covenants and
agrees, with respect to itself and, in the case of Group, with respect to
Interwest, to do the following until the conclusion of the Second Closing
(the Company or Interwest, as the case may be, being referred to in this
Section 5.2 as a "Subject Company"):
(a) MAINTENANCE OF EXISTENCE. The covenanting party shall,
and shall cause its Subsidiaries to, preserve and maintain its corporate
existence and good standing in the jurisdiction of its incorporation and
qualify and remain qualified as a foreign corporation in each jurisdiction in
which both (1) qualification is required either (A) to own, lease, license or
use its properties now owned, leased, licensed or used and proposed to be
owned, leased, licensed or used or (B) to carry on its business as now
conducted or proposed to be conducted and (2) the failure to be so qualified
could materially and adversely affect either or both of (A) the business,
properties, operations, prospects or condition (financial or otherwise) of
the party and (B) the ability of the party to perform its obligations under
any Transaction Document to which it is or may become a party.
(b) COMPLIANCE WITH LAWS. The covenanting party shall, and
shall cause its Subsidiaries to, comply in all respects with all Regulations
of each Governmental Body and all decisions, rulings, orders and awards of
each arbitrator applicable to it or its business, properties or operations in
connection with the Transactions.
(c) BEST EFFORTS. Upon the terms and subject to the
conditions provided in the Transaction Documents, the covenanting party
shall, and shall cause its Subsidiaries to, use its best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, and to assist
and cooperate with the other party hereto in doing all things necessary,
proper or advisable under applicable Regulations to ensure that the
conditions set forth in Article III and to the conclusion of the Transactions
are satisfied and to conclude and make effective, in the most expeditious
manner practicable, the Transactions including, without limitation, using its
best efforts to obtain all necessary Approvals.
(d) NOTIFICATION. The covenanting party shall, and shall
cause its Subsidiaries to, give prompt notice to the other parties to this
Agreement or any other Transaction Document, as the case may be, of (1) the
occurrence, or failure to occur, of any event that would be likely to cause
any representation or warranty of the covenanting party contained in the
Transaction Document to be untrue or inaccurate in any material respect at
any time from the date of this Agreement to the Second Closing Date and (2) any
failure of the covenanting party to perform or
C-29
<PAGE>
otherwise comply with, in any material respect, any covenant, condition or
agreement to be performed or complied with by it under the Transaction
Documents; which covenant of notification shall not limit the right of the
other party under Article III to require as a condition precedent to the
performance of its obligations under this Agreement the continuing accuracy
and performance of the representations and warranties and covenants of the
notifying party made in the Transaction Documents and to receive an
unqualified certificate with respect to the same.
(e) PUBLICITY AND REPORTS. Except as may be required by
applicable laws, court process or by obligations pursuant to any listing
agreement with a national securities exchange or on NASDAQ/Small Cap Market,
the covenanting party shall, and shall cause its Subsidiaries to, consult
with the other party before issuing any press release or making any public
statement with respect to the Transactions.
(f) CONFIDENTIALITY. The covenanting party shall, and shall
cause its Subsidiaries to, keep confidential information disclosed by any of
the other party, its Subsidiaries of its respective representatives to any of
the covenanting party, its Subsidiaries or its representatives, whether
before or after the date of this Agreement, in connection with the
Transactions or the discussions and negotiations preceding the execution of
the Transaction Documents, and use such information only as contemplated by
the Transaction Documents, except in each case to the extent that (1) the
information was known by the recipient when received or the information is or
hereafter becomes lawfully obtainable from other sources, (2) disclosure to a
Governmental Body having jurisdiction over the parties is necessary or
appropriate, (3) disclosure may otherwise be required by applicable
Regulations or (4) the duty as to confidentiality is waived in writing by the
other party. If this Agreement is terminated, each party shall use
reasonable efforts to return upon written request from the other party all
documents (and reproductions of those documents) received by it or its
representatives from the other party (and, in the case of reproductions, all
reproductions made by the receiving party) that include information not
within the exceptions contained in the preceding sentence, unless the
recipients provide assurances reasonably satisfactory to the requesting party
that the documents have been destroyed.
(g) REPORTING REQUIREMENTS. The covenanting party shall, and
shall cause its Subsidiaries to, furnish to the other party:
(i) ADVERSE EVENTS. Promptly after the occurrence, or
failure to occur, of any such event, information with respect to
any event (A) which could have a Material Adverse Effect, (B)
which, if known as of the date of this Agreement, would have been
required to be disclosed to the other party or (C) which would be
likely to cause any representation or warranty contained in any
Transaction Document with respect to the covenanting party or such
Subsidiary to be untrue or inaccurate in any material respect at
any time from the date of this Agreement to the Second Closing
Date;
C-30
<PAGE>
(ii) ACCESS TO INFORMATION. Afford to the other party, and to
the officers, employees, financial advisors, attorneys, accountants
and other representatives of the other party, reasonable access
during normal business hours to all its properties, books,
contracts commitments, personnel and records; furnish as promptly
as practicable to the other party and its representatives such
information with respect to the business, properties, operations,
prospects or conditions (financial or otherwise) of the Subject
Company and its Subsidiaries as they may from time to time
reasonably request; and
(iii) GENERAL INFORMATION. Such other information
respecting the condition or operations, financial or otherwise, of
any of the Subject Company and its Subsidiaries as the other party
may from time to time reasonably request.
(h) MAINTENANCE OF RECORDS. The Subject Company shall, and
shall cause its Subsidiaries to, keep adequate records and books of account
reflecting all its financial transactions, keep minute books containing
accurate records of all meetings and accurately reflecting all corporate
action of its shareholders and its Board of Directors (including committees)
and keep stock books and ledgers correctly recording all transfers and
issuances of all capital stock.
(i) MAINTENANCE OF PROPERTIES. The Subject Company shall,
and shall cause its Subsidiaries to, maintain, keep and preserve all its real
property and personal property used or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted.
(j) CONDUCT OF BUSINESS. Except as otherwise contemplated by
the Transaction Documents, the Subject Company shall, and shall cause its
Subsidiaries to, continue to engage in an efficient and economical manner
solely in a business of the same general type as conducted by it on the date
of this Agreement in the ordinary course, consistent with past practices; and
use its best efforts to preserve the business of the Company and its
Subsidiaries and to preserve the goodwill of customers, suppliers and others
having business relations with the Company and its Subsidiaries.
(k) MAINTENANCE OF INSURANCE. The Subject Company shall, and
shall cause its Subsidiaries to, maintain insurance such that the
representations and warranties stated in Section 4.20 shall at all times
remain true.
(l) PAYMENT OF TAXES. The Subject Company shall, and shall
cause its Subsidiaries to, timely file all Tax Returns that are required to
be filed by it and pay before they become delinquent all Taxes due pursuant
to those Tax Returns or any assessment received by it or otherwise required
to be paid, except Taxes being contested in good faith by appropriate
proceedings and for which adequate reserves or other provisions are
maintained, and except for the filing of such Tax Returns as to which the
failure to file could not, individually or in the aggregate, have
C-31
<PAGE>
a Materially Adverse Effect.
SECTION 5.3. NEGATIVE COVENANTS. Each party covenants and agrees,
with respect to itself and, in the case of Group, with respect to Interwest,
as follows, and shall not enter into any agreement or take any other action
inconsistent with the following, in each case until the conclusion of the
Second Closing (the Company or Interwest, as the case may be, being referred
to in this Section 5.3 as a "SUBJECT COMPANY"):
(a) CHARTER DOCUMENTS. The Subject Company shall not, and
shall not permit any of its Subsidiaries to, amend its articles of
incorporation or its bylaws.
(b) CAPITALIZATION. The Subject Company shall not, and shall
not permit any of its Subsidiaries to, issue any shares of capital stock or
other Equity Securities other than Permitted Issuances.
(c) MERGERS, ETC. Except as shall have been previously
agreed in writing by the parties, which writing makes reference to this
Agreement, the Subject Company shall not, and shall not permit any of its
Subsidiaries to, merge or consolidate with any person, sell, lease, license
or otherwise dispose of all or substantially all of its assets (whether now
owned or hereafter acquired) to any person or acquire all or substantially
all of the assets or the business of any person, in each case whether in one
transaction or in a series of transactions, or to effect any other Business
Consolidation Transaction, except that a Consolidated Subsidiary may merge
into or transfer assets to the Subject Company or a Wholly-Owned Consolidated
Subsidiary.
(d) SETTLE LITIGATION. The Subject Company shall not, and
shall not permit any of its Subsidiaries to, settle or compromise any
litigation (whether or not commenced prior to the date of this Agreement) or
settle, pay or compromise any claims not required to be paid (which are not
payable or reimbursable under policies of insurance maintained by or on
behalf of any of the Company and its Subsidiaries), individually in an amount
in excess of $25,000 and in the aggregate in an amount in excess of $100,000,
other than in consultation and cooperation with the other party, and, with
respect to any such settlement, with the prior written consent of the other
party.
(e) COMPANY COVENANTS. The Company shall not:
(i) subject to clause (z) of the proviso to Section 5.1(b)(2),
withdraw or modify the Recommendations; and
(ii) take any action which would cause the Common Stock to no
longer be listed on NASDAQ/Small Cap Market or registered pursuant
to Section 13 or 15(d) of the Exchange Act.
C-32
<PAGE>
SECTION 5.4. ADDITIONAL AFFIRMATIVE COVENANTS.
(a) FURTHER ASSURANCES. Promptly upon request by the other
party, each party shall, and shall cause its Subsidiaries to, correct any
defect or error that may be discovered in any Transaction Document or in the
execution or acknowledgment of any Transaction Document and execute,
acknowledge, deliver, file, re-file, register and re-register, any and all
such further acts, certificates, assurances and other instruments as the
requesting party may require from time to time in order (1) to carry out more
effectively the purposes of each Transaction Document, (2) to enable the
requesting party to exercise and enforce its rights and remedies and collect
any payments and proceeds under each Transaction Document and (3) to better
transfer, preserve, protect and confirm to the requesting party the rights
granted or now or hereafter intended to be granted to the requesting party
under each Transaction Document or under each other instrument executed in
connection with any Transaction Document.
(b) HART-SCOTT-RODINO. If the conversion of any principal
amount of the Note shall not be exempt from the Hart-Scott-Rodino Act, each
party shall from time to time use its best efforts to comply with any
applicable requirements under the Hart-Scott-Rodino Act relating to filing
and furnishing information to the Department of Justice and the Federal Trade
Commission, including, but not limited to, the following:
(i) assisting in the preparation and filing of the "Antitrust
Improvements Act Notification and Report Form for Certain Mergers and
Acquisitions" and taking all other action required by 16 C.F.R. Parts
801-803 (or any successor form or Regulation);
(ii) complying with any additional request for documents or
information made by the Department of Justice or the Federal Trade
Commission or by a court; and
(iii) causing all affiliated persons of the "ultimate parent
entity" of the party within the meaning of the Hart-Scott-Rodino Act to
cooperate and assist in the filing and compliance. Each party shall
exchange information as may reasonably be requested by the other in
connection with the matters referred to in this Section 5.4(b).
(c) TAX MATTERS. Group shall include the income of
Interwest (including any deferred income triggered into income by Reg.
Section 1.1502-13 and Reg. Section 1.1502-14 and any excess loss
accounts taken into income under Reg. Section 1.1502-19) on Group's
consolidated federal income Tax Returns for all periods through the
Second Closing Date and pay any federal income Taxes attributable to
such income. Interwest shall furnish Tax information to Group for
inclusion in Group's federal consolidated income Tax Return for the
period which includes the Second Closing Date in accordance with
Interwest's past custom and practice. Interwest's income shall be
apportioned to the period up to and include the Second
C-33
<PAGE>
Closing Date and the period after the Second Closing Date by closing the
books of Interwest as of the end of the Second Closing Date. The Company
shall indemnify Group for any additional tax owed by Group (including tax
owed by Group due to this indemnification payment) resulting from any
transaction not in the ordinary course of business occurring on the Second
Closing Date after the Company's purchase of the Interwest Common Stock.
(d) DESIGNATION OF DIRECTORS. Group shall have the right to
designate not less than one person to be elected as a Class I director, Class
II director and Class III director.
ARTICLE VI
TERMINATION
SECTION 6.1. TERMINATION.
(a) The obligations of the parties under Section 1.1(a) and
Article V with respect to the First Closing may be terminated at any time
prior to the conclusion of the First Closing, and the obligations of the
parties under Sections 1.1(b) and Article V with respect to the Second
Closing may be terminated at any time prior to the conclusion of the Second
Closing, in each case by:
(i) the mutual consent of the Company and Group;
(ii) the Company, if (A) the conditions to be satisfied by Group
set forth in Sections 3.1, 3.2 and 3.3 shall not have been met with
respect to the First Closing by May 31, 1996 or with respect to the
Second Closing by September 30, 1996 and (B) the Company shall have paid
in full to Group all amounts then owed to Group pursuant to Section
6.2(c), if any;
(iii) the Company, if a representation, warranty or covenant of
Group set forth in a Transaction Document is breached or violated by
Group in any material respect;
(iv) Group, if the conditions to be satisfied by the Company set
forth in Sections 3.1, 3.2 and 3.3 shall not have been met with respect
to the First Closing by May 31, 1996 or with respect to the Second
Closing by September 30, 1996;
(v) Group, if a representation, warranty or covenant of the
Company set forth in a Transaction Document is breached or violated by
the Company in any material respect;
(vi) Group, if the Company shall have modified or amended in any
respect materially adverse to Group or withdrawn its approval of any of
the Recommendations;
C-34
<PAGE>
PROVIDED, HOWEVER, that any communication of the
Company that advises that the Company has received a Transaction
Proposal or is engaging in an activity permitted by clauses (x) or (y)
of the proviso to the first sentence of Section 5.1(b)(2) with respect
to a Transaction Proposal and that takes no action or position with
respect to the Transactions or any Transaction Proposal shall not be
deemed to be a withdrawal, modification or amendment of the
Recommendations or the Company's approval thereof; and, PROVIDED,
FURTHER, that a "stop-look-and-listen" communication with respect to the
Transactions of the nature contemplated in Rule 14d-9(e) under the
Exchange Act made by the Company as a result of a Transaction Proposal
(whether or not a tender offer), without more, shall not be deemed to be
a modification or amendment of the Recommendations or the Company's
approval thereof that is materially adverse to Group if, within ten
business days after the date of such communication, the Company shall
have reaffirmed its Recommendations;
(vii) the Company, if there shall have occurred a Subsequent
Event with respect to any of Interwest and its Subsidiaries and Group
shall have paid in full to the Company all amounts then owed to the
Company pursuant to Section 6.2; or
(viii) Group, if there shall have occurred a Subsequent Event
with respect to the Company and its Subsidiaries;
(b) Any termination of the obligations of the parties shall
be made by written agreement or by written notice from the terminating party
to the other parties.
(c) The termination of the obligations of the parties under
this Section 6.1 shall not relieve any party of any liability for a breach of
any warranty, covenant or agreement, or for any misrepresentation, under this
Agreement, or be deemed to constitute a waiver of any available remedy
(including specific performance if available) for any breach or
misrepresentation.
SECTION 6.2. EXPENSES AND FEES.
(a) COLLECTION EXPENSES. In addition to the other
provisions of this Section 6.2, the Company shall promptly, but in no event
later than two business days following written notice thereof, together with
related bills or receipts, reimburse Group for all reasonable out-of-pocket
costs, fees and expenses, including, without limitation, the reasonable fees
and disbursements of counsel and the expenses of litigation, incurred in
connection with collecting Expenses and any other fees due under this
Agreement or any of the other Transaction Documents as a result of any
willful breach by the Company of its obligations under this Section 6.2.
(b) OTHER EXPENSES. Except as otherwise provided in this
Section 6.2, whether or not the Transactions are concluded, all costs and
expenses incurred in connection with the Transaction Documents and the
Transactions shall be paid by the party incurring such expenses.
C-35
<PAGE>
Notwithstanding the foregoing, the costs and expenses of preparing and
distributing the Proxy Statement and obtaining and complying with the
antitrust requirements of any Governmental Body shall be paid by the Company.
(c) SUBSEQUENT EVENT FEE. If a Subsequent Event shall occur
on or before the date that is 90 days after the date of this Agreement (and
prior to the Second Closing Date), the responsible party shall pay to the
other party $400,000 promptly following the public announcement of such
Subsequent Event.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NOTICES. All notices, requests and other
communications to any party or under any Transaction Document shall be in
writing. Communications may be made by telecopy or similar writing. Each
communication shall be given to the party at its address stated on the
signature pages of this Agreement or at any other address as the party may
specify for this purpose by notice to the other party. Each communication
shall be effective (1) if given by telecopy, when the telecopy is transmitted
to the proper address and the receipt of the transmission is confirmed, (2)
if given by mail, 72 hours after the communication is deposited in the mails
properly addressed with first class postage prepaid or (3) if given by any
other means, when delivered to the proper address and a written
acknowledgment of delivery is received.
SECTION 7.2. NO WAIVERS; REMEDIES; SPECIFIC PERFORMANCE.
(a) No failure or delay by any party in exercising any right,
power or privilege under any Transaction Document shall operate as a waiver
of the right, power or privilege. A single or partial exercise of any right,
power or privilege shall not preclude any other or further exercise of the
right, power or privilege or the exercise of any other right, power or
privilege. The rights and remedies provided in the Transaction Documents
shall be cumulative and not exclusive of any rights or remedies provided by
law.
(b) In view of the uniqueness of the Transactions and the
business, properties, operations, prospects and condition (financial and
otherwise) of the Company, Interwest and their respective Subsidiaries,
neither party would have an adequate remedy at law for money damages in the
event that any of the Transaction Documents is not performed in accordance
with its terms, and therefore each party agrees that the other party shall be
entitled to specific enforcement of the terms of each Transaction Document in
addition to any other remedy to which it may be entitled, at law or in equity.
C-36
<PAGE>
SECTION 7.3. AMENDMENTS, ETC. No amendment, modification,
termination, or waiver of any provision of any Transaction Document, and no
consent to any departure by a party to a Transaction Document from
any provision of the Transaction Document, shall be effective unless it shall
be in writing and signed and delivered by the other parties to the
Transaction Document, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
SECTION 7.4. SUCCESSORS AND ASSIGNS.
(a) Each party may assign to a Wholly-Owned Subsidiary
thereof its rights and delegate its obligations under this Agreement before a
Closing; such assignee shall accept those rights and assume those obligations
for the benefit of the other party in writing in form reasonably satisfactory
to the other party. Thereafter, without any further action by any person, all
references in this Agreement to the "Company" or "Group", as the case may be,
and all comparable references, shall be deemed to be references to the
transferee, but such assignor shall not be released from any obligation or
liability under this Agreement.
(b) Except as provided in Section 8.4(a), no party to this
Agreement may assign its rights under the Transaction Document. Any
delegation in contravention of this Section shall be void AB INITIO and shall
not relieve the delegating party of any obligation under this Agreement.
(c) The provisions of each Transaction Document shall be
binding upon and inure to the benefit of the parties to the Transaction
Document and their respective successors and permitted assigns.
SECTION 7.5. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise
specified, all accounting terms shall be interpreted, all accounting
determinations shall be made, all records and books of account shall be kept
and all financial statements required to be prepared or delivered shall be
prepared in accordance GAAP, applied on a basis consistent (except for
changes approved by the Company's independent public accountants) with the
latest audited financial statements referred to in Section 4.5.
SECTION 7.6. GOVERNING LAW. Each Transaction Document shall be
governed by and construed in accordance with the internal laws of the State
of Colorado. All rights and obligations of the Company and Group shall be in
addition to and not in limitation of those provided by applicable law.
SECTION 7.7. COUNTERPARTS; EFFECTIVENESS. Each Transaction Document
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if
C-37
<PAGE>
all signatures were on the same instrument.
SECTION 7.8. SEVERABILITY OF PROVISIONS. Any provision of any
Transaction Document that is prohibited or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of the
prohibition or unenforceability without invalidating the remaining provisions
of the Transaction Document or affecting the validity or enforceability of
the provision in any other jurisdiction.
SECTION 7.9. HEADINGS AND REFERENCES. Article and section headings
in any Transaction Document are included in the Transaction Document for the
convenience of reference only and do not constitute a part of the Transaction
Document for any other purpose. References to parties and articles and
sections in any Transaction Document are references to the parties to or the
articles and sections of the Transaction Document, as the case may be, unless
the context shall require otherwise.
SECTION 7.10. ENTIRE AGREEMENT. Except as otherwise specifically
provided in this Section, the Transaction Documents embody the entire
agreement and understanding of the respective parties and supersede all prior
agreements or understandings with respect to the subject matters of those
documents. All references to this Agreement herein and in all opinions,
certificates and other documents delivered pursuant to or otherwise delivered
in connection with this Agreement shall be deemed to refer to this Agreement
as amended by the Letter Agreement.
SECTION 7.11. SURVIVAL. Except as otherwise specifically provided
in any Transaction Document, and notwithstanding any investigation or notice
to the contrary or any waiver by any other party of a related condition
precedent to the performance by the other party of an obligation under the
Transaction Document, (1) each representation and warranty of each party to
the Transaction Document contained in or made pursuant to the Transaction
Document shall survive each Closing and remain in full force and effect until
the date that is the first anniversary of the Second Closing Date or, if the
Second Closing Date shall then not have occurred, the date that is the first
anniversary of the First Closing Date and (2) the other party may assert or
commence an Action against the party with respect to the breach of any such
representation or warranty of the party on or before such date and may
maintain any such Action thereafter. Each covenant or agreement of a party
to a Transaction Document required to be performed on or after a Closing
shall remain in full force and effect thereafter in accordance with its terms.
SECTION 7.12. NON-EXCLUSIVE JURISDICTION. Each party (1) agrees
that any Action with respect to any Transaction Document may be brought in
the courts of the State of Colorado or of the United States of America for
the District of Colorado, (2) accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of those courts and
(3) irrevocably
C-38
<PAGE>
waives any objection, including, without limitation, any
objection to the laying of venue or based on the grounds of FORUM NON
CONVENIENS, which it may now or hereafter have to the bringing of any Action
in those jurisdictions; PROVIDED, HOWEVER, that any party may assert in an
Action in any other jurisdiction or venue each mandatory defense, third-party
claim or similar claim that, if not so asserted in such Action, may
thereafter not be asserted by such party in an original Action in the courts
referred to in clause (1) above.
SECTION 7.13. WAIVER OF JURY TRIAL. Each party waives any right to
a trial by jury in any Action to enforce or defend any right under any
Transaction Document or any amendment, instrument, document or agreement
delivered, or which in the future may be delivered, in connection with any
Transaction Document and agrees that any Action shall be tried before a court
and not before a jury.
SECTION 7.14. AFFILIATE. Nothing contained in the Transaction
Documents shall constitute Group an "affiliate" of any of the Company and its
Subsidiaries within the meaning of Rule 13e-3 under the Exchange Act.
SECTION 7.15. NON-RECOURSE. No recourse under any of the
Transaction Documents shall be had against any "controlling person" (within
the meaning of Section 20 of the Exchange Act) of any party or the
shareholders, directors, officers, employees, agents and Affiliates of the
party or such controlling persons, whether by the enforcement of any
assessment or by any legal or equitable proceeding, or by virtue of any
Regulation, it being expressly agreed and acknowledged that no personal
liability whatsoever shall attach to, be imposed on or otherwise be incurred
by such controlling person, shareholder, director, officer, employee, agent
or Affiliate, as such, for any obligations of the party under this Agreement
or any other Transaction Document or for any claim based on, in respect of or
by reason of such obligations or their creation.
___________________________
C-39
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Purchase Agreement as of the date first written above in Denver, Colorado.
INTERNET COMMUNICATIONS CORPORATION
By: /s/
-------------------------------------
Name:
Title:
Address: 7100 East Belleview Avenue
Suite 201
Greenwood Village, Colorado 80111
Telecopy: (303) 770-0588
INTERWEST GROUP, INC.
By: /s/
-------------------------------------
Name:
Title:
Address: 12201 East Arapahoe Road
Suite C10
Englewood, Colorado 80112
Telecopy: (303) 792-0227
C-40
<PAGE>
DEFINITION ANNEX
"ACTION" against a person means an action, suit, investigation,
complaint or other proceeding pending against or affecting the person or its
property, whether civil or criminal, in law or equity or before any
arbitrator or Governmental Body.
"ADDITIONAL SHARES" has the meaning stated in Section 1.1(b)(1) of
this Agreement.
"AFFILIATE" of a person means any other person (1) that directly or
indirectly controls, is controlled by or is under common control with, the
person or any of its Subsidiaries, (2) that directly or indirectly
beneficially owns or holds 5.0% or more of any class of voting stock of the
person or any of its Subsidiaries or (3) 5.0% or more of the voting stock of
which is directly or indirectly beneficially owned or held by the person or
any of its Subsidiaries. The term "CONTROL" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a person, whether through the ownership of voting securities,
by contract or otherwise.
"AMENDMENT" means the amendment to the articles of incorporation of
the Company substantially in the form of EXHIBIT C attached hereto.
"APPROVAL" means an authorization, consent, approval or waiver of,
clearance by, notice to or registration or filing with, or any other similar
action by or with respect to a Governmental Body or any other person and the
expiration or termination of all prescribed waiting, review or appeal periods
with respect to any of the foregoing.
"BENEFICIAL OWNERSHIP" has the meaning assigned to that term in
Section 13(d) of the Exchange Act.
"BEST EFFORTS" means the use of all reasonable efforts, including,
without limitation, the expenditure of amounts reasonably related to the
objective sought to be achieved, with respect to matters and actions over
which the person has or could reasonably be expected to exert any control or
influence.
"BUSINESS COMBINATION TRANSACTION" has the meaning stated in
Section 5.1(b)(2)(A) of this Agreement.
"BUSINESS DAY" means any day excluding Saturday, Sunday and any day
which is
C-41
<PAGE>
a legal holiday under the laws of the State of Colorado or is a day on which
banking institutions located in such state are authorized or required by law
or other governmental action to close.
"CAPITALIZED LEASE" means any lease that is or should be
capitalized and appear on the balance sheet of the lessee.
"CLOSING DATE" means the First Closing Date or the Second Closing
Date, as the context may require.
"CLOSINGS" has the meaning stated in Section 2.3 of this Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" means Internet Communications Corporation, a Colorado
corporation, and its successors.
"COMPANY COMMON STOCK" has the meaning stated in Section 1.1 of this
Agreement.
"COMPANY SHARES" means, collectively, the Conversion Shares and the
Additional Shares.
"CONSOLIDATED" means, as applied to any financial or accounting
term, the term determined on a consolidated basis for a person and its
Subsidiaries, excluding intercompany items and minority interests.
"CONSOLIDATED SUBSIDIARY" of a person at any date means any
Subsidiary of the person or other entity the accounts of which would be
consolidated with those of the person in its consolidated financial
statements as of that date.
"CONVERSION SHARES" has the meaning stated in Section 1.1(a)(1) of
this Agreement.
"DEBT" of a person at any date means, without duplication, the sum
of (1) all obligations of the person (A) for borrowed money, (B) evidenced by
bonds, debentures, notes or other similar instruments, (C) to pay the
deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, (D) as lessee under
Capitalized Leases, (E) under letters of credit issued for the account of the
person and (F) arising under acceptance facilities, plus (2) all Debt of
others Guaranteed by the person, plus (3) all Debt of others secured by a
Lien on any asset of the person and whether or not such Debt is assumed by
the person.
C-42
<PAGE>
"DOLLARS" AND "$" refer to United States dollars and other lawful
currency of the United States of America from time to time in effect.
"EQUITY SECURITIES" of a person means the capital stock of the
person and all other securities convertible into or exchangeable or
exercisable for any shares of its capital stock, all rights to subscribe for
or to purchase, all options for the purchase of, and all calls, commitments
or claims of any character relating to, any shares of its capital stock and
any securities convertible into or exchangeable or exercisable for any of the
foregoing.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, and the related rules and regulations thereunder.
"FIRST CLOSING" has the meaning stated in Section 2.1 of this
Agreement.
"FIRST CLOSING DATE" has the meaning stated in Section 2.1 of this
Agreement.
"FIRST CLOSING TRANSACTIONS" has the meaning stated in Section 2.1
of this Agreement.
"GAAP" means generally accepted accounting principles as in effect
in the United States of America from time to time.
"GOVERNMENTAL BODY" means any agency, bureau, commission, court,
department, official, political subdivision, tribunal or other
instrumentality of any government, whether federal, state, county or local,
domestic or foreign.
"GROUP" means Interwest Communications C.S. Corporation, a Colorado
corporation, and its successors.
"GUARANTEE" by any person means any obligation, contingent or
otherwise, of the person directly or indirectly guaranteeing any Debt of any
other person or in any manner providing for the payment of any Debt of any
other person or the investment of funds in any other person or otherwise
protecting the holder of the Debt against loss (whether by agreement to
indemnify, to lease assets as lessor or lessee, to purchase assets, goods,
securities or services, or to take-or-pay or otherwise), but the term
"GUARANTEE" does not include endorsements for collection or deposit in the
ordinary course of business. The term "GUARANTEE" used as a verb has a
correlative meaning.
"HART-SCOTT-RODINO ACT" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended and related rules, regulations and
published interpretations thereunder.
"HOLDER" means Group, and its successors, as payee under the Note.
C-43
<PAGE>
"INTERWEST" has the meaning stated in Section 1.1(b)(2).
"INTERWEST COMMON STOCK" has the meaning stated in Section 1.1(b)(2)
of this Agreement.
"KNOWLEDGE" with respect to a representation or warranty of a party
contained in any Transaction Document means, after due inquiry by the
representing party of each of the following persons, the actual knowledge of
any of the officers or other employees of the representing party having
managerial responsibility for the portion of the operations, assets or
liabilities of the representing party and its Subsidiaries with respect to
which such knowledge of the person is being represented.
"LIEN" means any mortgage, deed of trust, lien (statutory or
otherwise), pledge, hypothecation, charge, deposit arrangement, preference,
priority, security interest or encumbrance of any kind (including, but not
limited to, any conditional sale agreement or other title retention
agreement, any Capitalized Lease or financing lease having substantially the
same economic effect as the foregoing and the filing of or agreement to give
any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction to evidence any of the foregoing).
"MATERIAL ADVERSE EFFECT" means, with respect to a circumstance or
event subject to a representation, warranty, covenant or other agreement of a
person or any of its Subsidiaries in any Transaction Document that includes a
reference therein to the possible occurrence of a Material Adverse Effect,
whether considered individually or together in the aggregate with all other
circumstances or events that are the subject of the same representation,
warranty, covenant or other agreement, a material adverse effect on the
business, properties, operations, prospects, condition (financial or
otherwise) or capitalization of the person and its Subsidiaries, taken as a
whole, or the ability of the person to perform its obligations under any
Transaction Document to which it is or may become a party.
"MATERIAL CONTRACT" means an agreement referred to in Section 4.15.
"NASDAQ/SMALL CAP MARKET" has the meaning stated in Section
5.1(a)(1)(D) of this Agreement.
"NOTE" has the meaning stated in Section 1.1(a)(1).
"NOTE CONVERSION PRICE" has the meaning stated in Section 1.1(a)(1)
of this Agreement.
"NPL" has the meaning stated in Section 4.23(b)(3) of this
Agreement.
"OUTSTANDING OPTIONS" has the meaning stated in Section 4.14(a)(2)
of this
C-44
<PAGE>
Agreement.
"PERMITTED ISSUANCES" has the meaning stated in Section 1.1(b)(1)
of this Agreement.
"PERMITTED LIENS" with respect to a person means, collectively,
Liens the existence of which, without regard to the giving of notice, the
passage of time or the existence or occurrence of any other condition, do not
permit the holder of any Debt of the person of any of its Subsidiaries in an
amount greater than $10,000 individually or $25,000 in the aggregate to cause
such Debt to become due and payable or to seek to enforce or realize upon the
rights of the holder in or with respect to property or assets of such person
or such Subsidiary, as the case may be, that secure such Debt.
"PERSON" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
Governmental Body.
"PROPERTY" means any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"PROPRIETARY RIGHTS" means all copyrights, uncopyrighted works,
trademarks, trademark rights, service marks, trade names, trade name rights,
patents, patent rights, unpatented inventions, licenses, permits, trade
secrets, know-how, inventions, computer software, seismic data and
intellectual property rights and other proprietary rights together with
applications and licenses for, and the goodwill of the business relating to,
any of the foregoing.
"PROXY STATEMENT" has the meaning stated in Section 5.1(b)(1) of
this Agreement.
"RECOMMENDATIONS" has the meaning set forth in Section 4.19 of this
Agreement.
"RECORD DATE" means the date determined by the Board of Directors
of the Company with respect to which holders of Common Stock at such date
will be entitled to vote with respect to Transaction Documents and the
Transactions at the Shareholders Meeting.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement between the Company and Group to be dated as of the First Closing
Date, substantially in the form attached hereto as EXHIBIT B.
"REGULATION" means (1) any applicable law, rule, regulation,
judgment, decree, ruling, order, award, injunction, recommendation or other
official action of any Governmental Body and (2) any official change in the
interpretation or administration of any of the foregoing by the Governmental
Body or by any other Governmental Body or other person responsible for the
interpretation or administration of any of the foregoing.
C-45
<PAGE>
"SEC DOCUMENTS" has the meaning stated in Section 4.19(d) of this
Agreement.
"SEC FINANCIAL STATEMENTS" has the meaning set forth in Section
4.19(d) of this Agreement.
"SECOND CLOSING" has the meaning stated in Section 2.2 of this
Agreement.
"SECOND CLOSING DATE" has the meaning stated in Section 2.2 of this
Agreement.
"SECOND CLOSING TRANSACTIONS" has the meaning stated in Section 2.2
of this Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and
the related rules and regulations thereunder.
"SHAREHOLDERS MEETING" has the meaning stated in Section 5.1(b)(1)
of this Agreement.
"SMITH" means Robert L. Smith, an officer and director of Interwest.
"STATE" means the State of Colorado.
"SUBSEQUENT EVENT" means, with respect to a party (the "AFFECTED
PARTY"), any of the following, in each case whether or not any shall have
exercised and delivered, or exercised any rights or performed any obligations
under, any of the Transaction Documents:
(1) the affected party or any of its Subsidiaries, without
having received the prior written consent of the other party, shall have
entered into an agreement with respect to a Business Combination
Transaction, or the Board of Directors of the affected party shall have
recommended that the shareholders of the affected party approve or accept
any Business Combination Transaction;
(2) the affected party or any of its Subsidiaries, without
having received the prior written consent of the other party, shall have
authorized, recommended, proposed or publicly announced its intention to
authorize, recommend or propose, an agreement with respect to a Business
Combination Transaction, or the Board of Directors of the affected party
shall have publicly withdrawn or modified, or publicly announced its intent
to withdraw or modify, the Recommendations;
(3) any person other than the other party or any Affiliate of
the other party shall have acquired beneficial ownership or the right to
acquire beneficial ownership of 30% or more of the outstanding shares of
common stock of the affected party then issued and outstanding; or
C-46
<PAGE>
(4) any person shall have proposed a Business Combination
Transaction (A) that the Board of Directors of the affected party
determines in its good faith judgment is more favorable to the affected
party's shareholders than the Transactions and (B) as a result of which the
Board of Directors of the affected party concludes in good faith that
termination of the Transaction Documents is necessary or appropriate in
order for the Board of Directors of the affected party to act in a manner
which is consistent with its fiduciary obligations under applicable law.
"SUBSIDIARY" of a person means (i) any corporation or other entity
of which securities or other ownership interests having ordinary voting power
to elect not less than 50% of the Board of Directors or other persons
performing similar functions are at the time directly or indirectly owned by
the person or (ii) a partnership in which the person or a Subsidiary of the
person is, at the date of determination, a general or limited partner of such
partnership, but only if the person or its Subsidiary is entitled to receive
more than fifty percent of the assets of such partnership upon its
dissolution.
"TAXES" means all taxes, charges, fees, levies, duties, imposts,
withholdings, restrictions, fines, interest, penalties, additions to tax or
other assessments or charges, including, but not limited to, income, excise,
property, withholding, sales, use, gross receipts, value added and franchise
taxes, license recording, documentation and registration fees and custom
duties imposed by any Governmental Body.
"TAX RETURN" means a report, return or other information required
to be filed by a person with or submitted to a Governmental Body with respect
to Taxes, including, where permitted or required, combined or consolidated
returns for any group of entities that includes the person.
"TERMINATION FEE" has the meaning stated in Section 6.2(d) of this
Agreement.
"TRANSACTION DOCUMENTS" means, collectively, means this Agreement,
the Note, the Registration Rights Agreement, the Amendment and all other
instruments and documents executed and delivered by any person in connection
with the conclusion of one or more of the transactions contemplated thereby.
"TRANSACTIONS" means, collectively, the transactions undertaken
pursuant to or otherwise contemplated by, the Transaction Documents,
including, without limitation, the First Closing Transactions and the Second
Closing Transactions.
"TRANSFER" means a sale, an assignment, a lease, a license, a
grant, a transfer or other disposition of an asset or any interest of any
nature in an asset. The term "TRANSFER" used as a verb has a correlative
meaning.
C-47
<PAGE>
"WHOLLY-OWNED SUBSIDIARY" of a person means any Subsidiary all of
the shares of capital stock or other ownership interests of which, except
directors' qualifying shares, are at the time directly or indirectly owned by
the person.
C-48
<PAGE>
Exhibit A
to
Appendix C
INTERNET COMMUNICATIONS CORPORATION
CONVERTIBLE PROMISSORY NOTE
DUE DECEMBER 31, 1996
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE
WITH SAID ACT. THIS NOTE AND SUCH SHARES ARE ALSO SUBJECT TO THE RESTRICTIONS
CONTAINED IN A REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 29, 1996, A COPY OF
WHICH IS ON FILE AT THE OFFICE OF THE SECRETARY OF THE COMPANY.
$900,000.00 Englewood, Colorado
May 29, 1996
FOR VALUE RECEIVED, INTERNET COMMUNICATIONS CORPORATION, a Colorado
corporation (the "COMPANY"), promises to pay to the order of INTERWEST GROUP,
INC. or its assigns (the "HOLDER"), on December 31, 1996 (or such earlier date
on which the principal amount hereof shall be payable in accordance with the
terms hereof, the "MATURITY DATE"), the principal amount of NINE HUNDRED
THOUSAND AND NO/100 DOLLARS ($900,000.00).
The unpaid principal amount of this Note shall be prepaid in full on
the date that is 30 days after the earlier to occur of (1) the failure of
shareholders of the Company, at a meeting thereof duly called, noticed and
convened, to approve the Transaction Documents and the Transactions and (2) the
termination of the Share Exchange Agreement by Group pursuant to Section 6.1(a)
of the Share Exchange Agreement.
The Company also promises to pay interest on the unpaid principal
amount hereof, from the date hereof until paid in full, (a) at the rate of 8.0%
per annum from the date hereof to and including July 28, 1996 or, if the Second
Closing Date shall have occurred on or before July 28, 1996, to and including
August 27, 1996, and (b) at the rate of 12.5% per annum thereafter. Interest on
this Note shall be payable in arrears on and to the last calendar day of each
month, upon any payment or conversion of this Note (to the extent accrued on the
amount being paid or converted) and at maturity (whether at stated maturity, on
the date of any required prepayment, upon acceleration or otherwise) of this
Note. Interest shall be computed on the basis of a year of twelve 30-day
months. Upon the occurrence and during the continuation of
<PAGE>
an Event of Default (as defined below), interest shall accrue at the rate that
is 3.5% per annum greater than the rate otherwise applicable and interest shall
be payable on demand.
SECTION 1. SHARE EXCHANGE AGREEMENT. This Note is the "Note"
referred to in the Share Exchange Agreement dated as of May 29, 1996 between the
Company and Interwest Group, Inc. (as amended or modified from time to time, the
"SHARE EXCHANGE AGREEMENT"), to which reference is hereby made for a more
complete statement of the terms and conditions under which the indebtedness
evidenced hereby was incurred and is to be repaid. Terms not otherwise defined
herein have the respective meanings assigned in the Share Exchange Agreement.
No reference herein to the Share Exchange Agreement and no provision of this
Note or the Share Exchange Agreement shall alter or impair the obligations of
the Company, which are absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the currency
herein prescribed.
SECTION 2. PAYMENT.
(a) All payments of principal and interest in respect of this
Note shall be made in lawful money of the United States of America in same day
funds at the office of the Holder located at 12201 East Arapahoe Road, Suite
C10, Englewood, Colorado 80112, or at such other place as shall be designated in
writing by the Holder. Until notified in writing of the transfer or assignment
of this Note, the Company shall be entitled to deem the Holder or any subsequent
permitted assignee of this Note as the owner and holder of this Note. Each of
the Holder and any subsequent assignee of this Note agrees, by its acceptance
hereof, that before disposing of this Note or any part hereof it will make a
notation hereon of all principal payments previously made hereunder and of the
date to which interest hereon has been paid; PROVIDED, HOWEVER, that the failure
to make a notation of any payment made on this Note shall not limit or otherwise
affect the obligations of the Company hereunder with respect to payments of
principal of or interest on this Note.
(b) Whenever any payment on this Note shall be stated to be due
on a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest on this Note.
(c) No principal amount of this Note may be paid before such
principal amount is due, whether at stated maturity, by acceleration or
otherwise, except pursuant to the conversion hereof in accordance with
Section 5.
2
<PAGE>
SECTION 3. EVENTS OF DEFAULT. If any of the following conditions
or events ("EVENTS OF DEFAULT") shall occur:
(a) FAILURE TO MAKE PAYMENTS WHEN DUE. Failure to pay any
amount of principal of this Note when due (whether at stated maturity, on the
date of any required prepayment or upon acceleration, or otherwise), or failure
to pay interest or any other amount due under this Note on or before the fifth
day after the date due; or
(b) DEFAULT IN OTHER AGREEMENTS. (i) Failure of the Company or
any of its Subsidiaries (as such term is defined in the Share Exchange
Agreement) to pay when due any principal of or interest on any Debt (other than
this Note) (A) in the aggregate amount of $50,000 beyond the end of any grace
period provided therefor or (B) in any amount beyond 60 days after the end of
any grace period provided therefor; or (ii) breach or default by the Company or
any of its Consolidated Subsidiaries with respect to any other material term of
(A) any evidence of any Debt or (B) any loan agreement, mortgage, indenture or
other agreement relating to such Debt, if the effect of such breach or default
is to cause, or to permit the holder or holders of that Debt (or a trustee on
behalf of such holder or holders) to cause, that Debt to become or be declared
due and payable prior to its stated maturity or the stated maturity of any
underlying obligation, as the case may be (upon the giving or receiving of
notice, lapse of time, both, or otherwise); or (iii) termination of the Share
Exchange Agreement pursuant to paragraph (5) of Section 6.1(a) thereof; or
(c) BREACH OF WARRANTY. Any representation, warranty,
certification or other statement of the Company made in any Transaction Document
or in any statement or certificate at any time given in writing pursuant hereto
or thereto or in connection therewith shall be false in any material respect on
the date as of which made and such default shall not have been remedied or
waived within 30 days after the earlier of (i) the Company's obtaining knowledge
of such default or (ii) receipt by the Company of notice from the Holder of such
default; PROVIDED, HOWEVER, that if such default cannot be cured solely by the
payment of money and the cure of such default requires a period in excess of 30
days, and if the Company is diligently and continuously prosecuting such cure,
then such default shall not be an Event of Default unless the Company fails to
cure such default within 90 days after the Company's obtaining knowledge or
notice thereof, as the case may be; or
(d) FAILURE OF ENFORCEABILITY. Any Transaction Document shall,
at any time, cease to be in full force and effect or shall be declared null and
void by a court of competent jurisdiction, or the validity or enforceability
thereof shall be contested by the Company, in each case for any reason other
than the failure of the Holder to take any action within its control; or
(e) OTHER DEFAULTS UNDER TRANSACTION DOCUMENTS. The Company
shall default in any material respect in the performance of or compliance with
any term contained in any Transaction Document, other than any such term
referred to in any other clause of this subsection, and such default shall not
have been remedied or waived within 30 days after the
3
<PAGE>
earlier of (i) the Company's obtaining knowledge of such default or (ii)
receipt by the Company of notice from the Holder of such default; PROVIDED,
HOWEVER, that if such default cannot be cured solely by the payment of money
and the cure of such default requires a period in excess of 30 days, and if
the Company is diligently and continuously prosecuting such cure, then such
default shall not be an Event of Default unless the Company fails to cure
such default within 90 days after the Company's obtaining knowledge or notice
thereof, as the case may be; or
(f) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) A
court having jurisdiction in the premises shall enter a decree or order for
relief in respect of the Company, in an involuntary case under Title 11 of the
United States Code entitled "Bankruptcy" as now and hereafter in effect, and
any successor statute, (the "BANKRUPTCY CODE") or under any other applicable
bankruptcy, insolvency or similar law now or hereafter in effect, which decree
or order is not stayed; or any other similar relief shall be granted under any
applicable federal or state law; or (ii) an involuntary case shall be commenced
against the Company under the Bankruptcy Code or under any other applicable
bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or
order of a court having jurisdiction in the premises for the appointment of a
receiver, liquidator, sequestrator, trustee, custodian or other officer having
similar powers over the Company or over all or a substantial part of its
property, shall have been entered; or there shall have occurred the involuntary
appointment of an interim receiver, trustee or other custodian of the Company
for all or a substantial part of its property; or a warrant of attachment,
execution or similar process shall have been issued against any substantial part
of the property of the Company, and any such event described in this clause (ii)
shall continue for 60 days unless dismissed, bonded or discharged; or
(g) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) The
Company shall have an order for relief entered with respect to it, in connection
with, or shall commence, a voluntary case under the Bankruptcy Code or under any
other applicable bankruptcy, insolvency or similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an involuntary
case, or to the conversion of an involuntary case to a voluntary case, under any
such law, or shall consent to the appointment of or taking possession by a
receiver, trustee or other custodian for all or a substantial part of its
property; or the Company shall make any assignment for the benefit of creditors;
or (ii) the Company shall be unable, or shall fail generally, or shall admit in
writing its inability, to pay its debts as such debts become due; or the Board
of Directors (or any committee thereof) of the Company shall adopt any
resolution or otherwise authorize any action to approve any of the actions
referred to in clause (i) above or this clause (ii); or
(h) JUDGMENTS AND ATTACHMENTS. Any money judgment, writ or
warrant of attachment or similar process involving in the aggregate at any time
an amount in excess of $10,000 (not adequately covered by insurance as to which
a solvent and unaffiliated insurance company has acknowledged coverage) shall be
entered or filed against the Company or any of their respective assets and shall
remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or
in any event later than five days prior to the date of any proposed sale
thereunder); it being understood and agreed that, in the event the Company posts
a bond
4
<PAGE>
pursuant to this Section 3(h), such bond shall not be considered Debt of
the Company for purposes of this Note; or
(i) DISSOLUTION. Any order, judgment or decree shall be entered
against the Company decreeing the dissolution or split up of the Company and
such order shall remain undischarged or unstayed for a period in excess of 30
days; or
(j) EMPLOYEE BENEFIT PLANS. There shall occur one or more
Employee Plan Events which individually or in the aggregate results in or might
reasonably be expected to result in liability of the Company or any of its ERISA
Affiliates in excess of $10,000 on or before the Maturity Date; or there shall
exist an amount of unfunded benefit liabilities (as defined in
Section 4001(a)(18) of ERISA), individually or in the aggregate for all Employee
Plans (excluding for purposes of such computation any Employee Plans with
respect to which assets exceed benefit liabilities and all Multiemployer Plans),
which exceeds $10,000;
then, (A) upon the occurrence of any Event of Default described in Section 3(f)
or 3(g), each of (1) the unpaid principal amount of and accrued interest on this
Note and (2) all other Obligations shall automatically become immediately due
and payable, without notice, presentment, demand, protest or other requirements
of any kind, all of which are hereby expressly waived by the Company, and
(B) upon the occurrence and during the continuance of any other Event of
Default, the Holder may, by written notice to the Company, declare all or any
portion of the amounts described in clauses (1) and (2) above to be, and the
same shall forthwith become, immediately due and payable.
SECTION 4. REMEDIES.
(a) Upon the occurrence and during the continuation of an Event
of Default, all or any one or more of the rights, powers, privileges and other
remedies available to the Holder against the Company under this Note (including,
without limitation, the conversion of this Note pursuant to Section 5) or any of
the other Transaction Documents, or at law or in equity, may be exercised by the
Holder at any time and from time to time, whether or not all or any portion of
the obligations hereunder shall be declared due and payable. Any such actions
taken by the Holder shall be cumulative and concurrent and may be pursued
independently, singly, successively, together or otherwise, at such time and in
such order as the Holder may determine in its sole discretion, to the fullest
extent permitted by law, without impairing or otherwise affecting the other
rights and remedies of the Holder permitted by law, equity or contract or as set
forth herein or in the other Transaction Documents.
(b) The rights, powers and remedies of the Holder under this
Note shall be cumulative and not exclusive of any other right, power or remedy
which the Holder may have against the Company pursuant to the Share Exchange
Agreement, this Note or the other Transaction Documents or existing at law or in
equity or otherwise. The rights, powers and remedies of the Holder may be
pursued singly, concurrently or otherwise, at such time and in such order as the
Holder may determine in its sole discretion. No delay or omission to exercise
5
<PAGE>
any remedy, right or power accruing upon an Event of Default shall impair any
such remedy, right or power or shall be construed as a waiver thereof, but any
such remedy, right or power may be exercised from time to time and as often as
may be deemed expedient. A waiver of any Event of Default with respect to the
Company shall not be construed to be a waiver of any subsequent Event of Default
by the Company or to impair any remedy, right or power consequent thereon.
(c) The remedies set forth in this Section 4 are subject to the
provisions of Section 8.
SECTION 5. CONVERSION.
(a) OPTIONAL CONVERSION FOLLOWING MATURITY DATE. This Note may
be converted into shares of Common Stock, as follows:
(1) If the principal amount hereof and all interest accrued thereon
shall not have been paid in full on the Maturity Date (whether at stated
maturity, on the date of any required prepayment, upon acceleration or
otherwise), then, during the period commencing on the day following the
Maturity Date and ending at the close of business on the date that is 45
days after the Maturity Date, and subject to and upon compliance with the
provisions of this Section 5, at the option of the Holder, this Note or any
portion of the principal amount hereof which is $1,000 or an integral
multiple thereof, may be converted at the principal amount thereof into
shares of Common Stock, as said shares shall be constituted on the date on
which this Note shall be surrendered for conversion and notice given in
accordance with the provisions of this Section (the "CONVERSION DATE"), at
the Conversion Price (as defined below) in effect at the Conversion Date.
(2) In order to exercise the conversion privilege, the Holder shall
surrender this Note to the Company at its executive offices, together with
the conversion notice in the form attached hereto as Exhibit A (or similar
separate written notice) duly executed, and, if so required by the Company,
accompanied by instruments of transfer, in form satisfactory to the
Company, duly executed by the Holder or by its duly authorized attorney in
writing. As promptly as practicable after the surrender of this Note for
conversion as aforesaid, the Company shall deliver at its executive office
to such Holder, or on its written order, a certificate or certificates for
the number of full shares of Common Stock deliverable upon the conversion
of this Note or portion thereof (the "CONVERSION SHARES") and a check or
cash in respect of any fraction of a share of Common Stock otherwise
deliverable upon such conversion, all as provided in this Section 5,
together with a Note in principal amount equal to the unconverted and
unredeemed portion, if any, of this Note so converted. Such conversion
shall be deemed to have been effected on the date on which such notice
shall have been received at said executive offices and this Note shall have
been surrendered as aforesaid, and the person or persons in whose name or
names any certificate or certificates for Conversion Shares
6
<PAGE>
shall be deliverable upon such conversion shall be deemed to have become
on said date the holder or holders of record of the shares represented
thereby; PROVIDED, HOWEVER, that any such surrender on any date when the
stock transfer books of the Company shall be closed shall constitute the
person or persons in whose name or names the certificates are to be
delivered as the record holder or holders thereof for all purposes on the
next succeeding day on which such stock transfer books are open, but such
conversion shall be at the Conversion Price in effect on the date of such
surrender. Subject to the foregoing, no payment or adjustment shall be
made for dividends on any Shares that shall be delivered upon the
conversion of this Note.
(3) Notwithstanding any other provision hereof, (A) if the conversion
of any principal amount of this Note is to be made in connection with a
Business Combination Transaction, the exercise of the conversion privilege
may at the election of the Holder be conditioned upon the conclusion of
such transaction, in which case such exercise shall not be deemed to be
effective until the conclusion of such transaction and (B) if the issuance
of any Conversion Shares pursuant to the conversion of any principal amount
of this Note is not exempt from the applicable requirements under the Hart-
Scott-Rodino Act, the exercise of the conversion privilege shall be
conditioned upon the compliance by the Company, the Holder and all other
persons with such requirements, in which case such exercise shall not be
deemed to be effective until all such requirements are satisfied. The
Holder may by written notice withdraw any such exercise of such conversion
privilege before the effectiveness thereof. Any such exercise or withdrawal
shall not impair or otherwise affect the other rights and remedies of the
Holder permitted by law, equity or contract or as set forth herein or in the
other Transaction Documents.
(b) FRACTIONAL INTERESTS. The Company shall not be required to
deliver fractions of shares of Common Stock upon conversions of this Note. If
any fractional interest in a share of Common Stock would be deliverable upon the
conversion of this Note, the Company shall make an adjustment therefor in cash
equal to the average market price per share (determined as provided below) of
the Common Stock on the Conversion Date.
(c) MECHANICAL ADJUSTMENTS. The number of Conversion Shares
issuable upon the conversion of this Note and the Conversion Price shall be
subject to adjustment from time to time, as follows:
(1) If the Company shall at any time pay a dividend on its Common
Stock in shares of its Common Stock (including, if applicable, shares of
Common Stock held by the Company in treasury or by a Subsidiary), subdivide
its outstanding shares of Common Stock into a larger number of shares or
combine its outstanding shares of Common Stock into a smaller number of
shares or otherwise effect a reclassification or recapitalization of the
Common Stock, then in each such case the number of Conversion Shares
thereafter issuable upon conversion of this Note shall be adjusted so that
this Note shall thereafter be convertible into the number of Conversion
Shares equal to the number of shares of Common Stock which the Holder would
have held after the occurrence of
7
<PAGE>
any of the events described above had this Note been exercised in full
immediately prior to the occurrence of such event. An adjustment made
pursuant to this paragraph (1) shall become effective retroactively to
the related record date in the case of a dividend and shall become effective
on the related effective date in the case of a subdivision, combination,
reclassification or recapitalization.
(2) Except with respect to Permitted Issuances, if the Company or a
Subsidiary shall at any time issue or sell shares of Common Stock at a
purchase price per share of Common Stock (the value of any consideration,
if other than cash, to be determined in good faith by the Board of
Directors) less than the Average Market Price per share (determined as
provided below) of the Common Stock on the date of issuance or sale (for
the purpose of this paragraph (2), the "ADJUSTMENT DATE"), then in each
such case, the number of Conversion Shares thereafter issuable upon
conversion of this Note after such Adjustment Date shall be determined by
multiplying the number of Conversion Shares issuable upon conversion of
this Note on the date immediately preceding such Adjustment Date by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such date of issuance or sale and the number
of additional shares of Common Stock so issued or sold, and the denominator
of which shall be the sum of the number of shares of Common Stock
outstanding on such date of issuance or sale and the number of shares of
Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at such Average Market Price. For the
purposes of this paragraph (2), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the
Company or by a Subsidiary.
(3) If the Company or a Subsidiary shall at any time issue or sell
Derivative Securities (as defined below) providing for the purchase of
shares of Common Stock upon the conversion, exchange or exercise thereof at
a price per share of Common Stock (taking into account any consideration
received by the Company upon the issuance or sale of such Derivative
Securities and any additional consideration to be received upon the
conversion, exchange or exercise thereof, the value of such consideration,
if other than cash, to be determined in good faith by the Board of
Directors) less than the Average Market Price per share (determined as
provided below) of the Common Stock on the date of issuance or sale (for
the purpose of this paragraph (3), the "ADJUSTMENT DATE"), then in each
such case, the number of Conversion Shares thereafter issuable upon
conversion of this Note after such Adjustment Date shall be determined by
multiplying the number of Conversion Shares issuable upon conversion of
this Note on the date immediately preceding such Adjustment Date by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such Adjustment Date and the number of
additional shares of Common Stock so offered for subscription or purchase
upon the conversion, exchange or exercise of such Derivative Securities,
and the denominator of which shall be the sum of the number of shares of
Common Stock outstanding on such Adjustment Date and the number of shares
of Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at
8
<PAGE>
such Average Market Price. Such adjustment shall be made whenever any such
Derivative Securities are issued, and shall become effective on the date of
issuance retroactive to the Adjustment Date. If all the shares of Common
Stock so offered for subscription or purchase are not delivered upon the
final conversion, exchange or exercise of such Derivative Securities, then,
upon the final conversion, exchange or exercise of such Derivative
Securities, or the expiration, cancellation or other termination thereof,
the number of Conversion Shares issuable upon conversion of this Note shall
thereafter be readjusted to the number of Conversion Shares which would have
been in effect had the numerator and the denominator of the foregoing
fraction and the resulting adjustment been made based upon the number of
shares of Common Stock actually delivered upon the conversion, exchange or
exercise of such Derivative Securities, or the expiration, cancellation or
other termination thereof rather than upon the number of shares of Common
Stock so offered for subscription or purchase. If the purchase price
provided for in any Derivative Securities, the additional consideration,
if any, payable upon the conversion, exchange or exercise of any Derivative
Securities or the rate at which any Derivative Securities are convertible
into or exchangeable or convertible into Common Stock shall change at any
time (including, without limitation, at the time of or after such
conversion, exchange or exercise), the number of Conversion Shares issuable
upon conversion of this Note in effect at the time of such change shall be
readjusted to the number of Conversion Shares issuable upon conversion of
this Note which would have been in effect at such time had such Derivative
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, on
the related Adjustment Date, and such readjustment shall become effective
on the date of such change retroactive to the Adjustment Date; PROVIDED,
that no such readjustment shall have the effect of decreasing the number of
Conversion Shares issuable upon the conversion of this Note by an amount in
excess of the amount of the adjustment initially made with respect to the
issuance or sale of the Derivative Securities. For the purposes of this
paragraph (3), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company or by a
Subsidiary.
(4) If the Company shall at any time declare or pay a dividend or
other distribution on its Common Stock other than a stock dividend payable
solely in shares of Common Stock or a cash dividend paid out of current
earnings (the value of any such dividend or other distribution, if other
than cash, to be determined in good faith by the Board of Directors), then
in each such case, the number of Conversion Shares thereafter issuable upon
conversion of this Note after the declaration date therefor (for the
purpose of this paragraph (4), the "ADJUSTMENT DATE") shall be determined
by multiplying the number of Conversion Shares issuable upon conversion of
this Note on the date immediately preceding such Adjustment Date by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such Adjustment Date and the number of
additional shares of Common Stock which the aggregate value of such
dividend or distribution would purchase at such Average Market Price and
the denominator of which shall be the sum of the number of shares of Common
Stock
9
<PAGE>
outstanding on such Adjustment Date. For the purposes of this paragraph
(4), the number of shares of Common Stock at any time outstanding shall
not include shares held in the treasury of the Company or by a Subsidiary.
(5) If the Company or a Subsidiary shall at any time purchase shares
of Common Stock at a price per share of Common Stock (the value of any
consideration, if other than cash, to be determined in good faith by the
Board of Directors) less the Average Market Price per share (determined as
provided below) of the Common Stock on the date of such purchase (for the
purpose of this paragraph (5), the "ADJUSTMENT DATE"), then in each such
case, the number of Conversion Shares thereafter issuable upon conversion
of this Note after such Adjustment Date shall be determined by multiplying
the number of Conversion Shares issuable upon conversion of this Note on
the date immediately preceding such Adjustment Date by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding on such Adjustment Date and the number of additional shares of
Common Stock which the aggregate purchase price of the total number of
shares so purchased would purchase at such Average Market Price and the
denominator of which shall be the sum of the number of shares of Common
Stock outstanding on such Adjustment Date and the number of shares of
Common Stock so purchased. For the purposes of this paragraph (5), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company or by a Subsidiary.
(6) In case of any capital reorganization or any reclassification
(other than a change in par value) of the capital stock of the Company, or
of any exchange or conversion of the Common Stock for or into securities of
another corporation, or in case of the consolidation or merger of the
Company with or into any other person (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock) or in case of any sale or conveyance of
all or substantially all of the assets of the Company, the person formed by
such consolidation or resulting from such capital reorganization,
reclassification or merger or which acquires such assets, as the case may
be, shall make provision such that this Note shall thereafter be
convertible into the kind and amount of shares of stock, other securities,
cash and other property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance, as the case may be, by a holder of the shares of Common Stock
equal to the number of Conversion Shares issuable upon conversion of this
Note immediately prior to the effective date of such capital
reorganization, reclassification of capital stock, consolidation, merger,
sale or conveyance, assuming (1) such holder of Common Stock of the Company
is not a person with which the Company consolidated or into which the
Company merged or which merged into the Company or to which such sale or
transfer was made as the case may be ("CONSTITUENT ENTITY"), or an
affiliate of a constituent entity, and (2) such person failed to exercise
his rights of election, if any, as to the kind or amount of securities,
cash and other property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance and, in any case appropriate
10
<PAGE>
adjustment (as determined by the Board of Directors) shall be made in the
application of the provisions herein set forth with respect to rights and
interests thereafter of the Holder, to the end that the provisions set forth
herein (including the specified changes in and other adjustments of the
number of Conversion Shares issuable upon conversion of this Note) shall
thereafter be applicable, as near as reasonably may be, in relating to any
shares of stock or other securities or other property thereafter deliverable
upon conversion of this Note.
(7) For the purposes of this Section 5:
(A) "AVERAGE MARKET PRICE" per share of Common Stock on any date
means the average of the daily Closing Prices for the fifteen (15)
consecutive Trading Days commencing twenty (20) Trading Days before
the date of declaration or authorization by the Board of Directors of
the Company of such issuance or distribution;
(B) "CLOSING PRICE" means the last reported sales price, regular
way, per share of Common Stock on such day, or if no such sale takes
place on such day, the average of the closing bid and asked prices,
regular way, in each case, as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on a national securities exchange, or, if shares
of such stock are not listed or admitted to trading on a national
securities exchange, on the NASDAQ/National Market System or the
NASDAQ/Small Cap market, as the case may be, or, if such last sales
price or closing bid and asked prices are not so reported, the average
of the closing bid and asked prices as furnished by any New York Stock
Exchange member firm selected from time to time by the Board of
Directors for such purpose, or if no such prices are available, the
fair market value of the Common Stock as determined in good faith by
the Board of Directors;
(C) "DERIVATIVE SECURITIES" means securities convertible into or
exchangeable or convertible into shares of Common Stock, rights or
warrants to subscribe for or purchase shares of Common Stock, options
for the purchase of, or calls, commitments or other claims of any
character relating to, shares of Common Stock or any securities
convertible into or exchangeable for any of the foregoing; and
(D) "PERMITTED ISSUANCES" means the issuance of shares of Common
Stock after the date of this Note (i) pursuant to the exercise of
Outstanding Options, in each case in accordance with the terms thereof
as of the date of this Note, (ii) pursuant to the conversion of this
Note and (iii) with the approval of Holder, which approval may be
granted, withheld, conditioned or delayed in its sole discretion.
11
<PAGE>
(8) If any shares of Common Stock or Derivative Securities are issued
or sold or deemed to have been issued or sold for cash, the consideration
received therefor shall be deemed to be the net amount received by the
Company therefor. In case any shares of Common Stock or Derivative
Securities are issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall
be the fair value of such consideration, except where such consideration
consists of marketable securities, in which case the amount of
consideration received by the Company shall be the market price thereof as
of the date of receipt. In case any shares of Common Stock or Derivative
Securities are issued to the owners of the non-surviving entity in
connection with any merger or other business combination in which the
Company is the surviving entity, the amount of consideration therefor shall
be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such shares of
Common Stock or Securities, as the case may be. The fair value of any
consideration other than cash or marketable securities shall be determined
jointly by the Company and the Holder. If such parties are unable to reach
agreement within a reasonable period of time, such fair value shall be
determined by an appraiser jointly selected by the Holder, whose
determination shall be final and binding on the Company and the Holder.
The fees and expenses of such appraiser shall be paid by the Company.
(9) If the Company takes a record of the holders of Common Stock for
the purpose of entitling them (A) to receive a dividend or other
distribution on its Common Stock or (B) to subscribe for or purchase shares
of Common Stock or Derivative Securities, then such record date shall be
deemed to be the date of the payment or distribution of such dividend or
other distribution or the date of issuance and sale of any shares of Common
Stock deemed to have been issued or sold in connection thereto.
(10) All calculations under this Section 5 shall be made to the
nearest one-thousandth of a share of Common Stock.
(11) The price payable by the Holder for the issuance of Conversion
Shares by the Company upon conversion of this Note (the "CONVERSION PRICE")
is $3.00 per Conversion Share at the date of this Note. Whenever the
number of Conversion Shares issuable upon the conversion of this Note is
adjusted or readjusted pursuant to paragraphs (1) through (10), inclusive,
above, the Conversion Price payable upon conversion of this Note shall be
adjusted or readjusted by multiplying the Conversion Price immediately
prior to the related Adjustment Date by a fraction, the numerator of which
shall be the number of Conversion Shares purchasable upon the conversion of
this Note immediately preceding such Adjustment Date, and the denominator
of which shall be the number of Conversion Shares so purchasable
immediately thereafter; PROVIDED that no such readjustment pursuant to
paragraph (3) above with respect to the conversion, exchange or exercise,
or expiration, cancellation or other termination, of any Derivative
Securities shall have the effect of increasing the Conversion Price by an
amount in excess of the
12
<PAGE>
amount of the adjustment initially made in respect of the issuance or sale
of such Derivative Securities.
(12) If any event occurs of the type contemplated by the provisions of
this Section 5 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the
Company's board of directors shall make an appropriate adjustment in the
number of Conversion Shares issuable upon conversion of this Note and the
Conversion Price so as to protect the rights of the Holder under this Note.
(13) For the purpose of this Section 5, the term "SHARES OF COMMON
STOCK" means (A) the class of stock designated as the Common Stock of the
Company at the date of this Note or (B) any other class of stock resulting
from successive changes or reclassification of such shares consisting
solely of changes in par value, or from par value to no par value, or from
no par value to par value. In the event that at any time, as a result of
an adjustment made pursuant to paragraphs (1) through (4), inclusive,
above, the Holder shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the number of such
other shares so receivable upon conversion of this Note and the Conversion
Price shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to
the Conversion Shares contained in paragraphs (1) through (4), inclusive,
above, and the provisions of Sections 5(d), 5(e) and 5(f), inclusive, with
respect to the Conversion Shares, shall apply on like terms to any such
other shares.
(14) Notwithstanding anything herein to the contrary, there shall be
no adjustment in the number of Conversion Shares or in the Conversion Price
in respect of Permitted Issuances.
(15) In case of any consolidation or merger of the Company with or
into another entity (whether or not the Company is the surviving entity) or
in case of any sale, transfer or lease of all or substantially all of the
assets of the Company, the Company or such successor or purchasing entity,
as the case may be, shall execute with the Holder an agreement that the
Holder shall have the right thereafter upon payment of the Conversion Price
in effect immediately prior to such action to purchase upon conversion of
this Note the kind and amount of shares and other securities, cash and
property that the Holder would have owned or would have been entitled to
receive after the happening of such consolidation, merger, sale, transfer,
lease or conveyance had this Note been exercised in full immediately prior
to such action, and if the successor or purchasing entity is not a
corporation, such person shall provide appropriate tax indemnification with
respect to such shares or other securities and property so that upon
conversion of this Note, the Holder would have the same benefits it
otherwise would have had if such successor or purchasing person were a
corporation. Such agreement shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in
paragraphs (1) through (14), inclusive, above. The
13
<PAGE>
provisions of this paragraph (15) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(d) TIME OF ADJUSTMENTS. Each adjustment required by Section
5(c) shall be effective as and when the event requiring such adjustment occurs.
(e) NOTICE OF ADJUSTMENT. Whenever the number of Conversion
Shares purchasable upon the conversion of this Note or the Conversion Price is
adjusted as herein provided, the Company shall promptly mail by first class
mail, postage prepaid, to each Holder a certificate of a firm of independent
public accountants selected by the Board of Directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number of
Conversion Shares purchasable upon the conversion of this Note and the
Conversion Price after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made. Such certificate shall be conclusive evidence of the
correctness of such adjustment.
(f) NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section
5(c), no adjustment in respect of any dividends declared or paid on the Common
Stock shall be made during the term of this Note or upon the conversion of this
Note.
(g) TAXES. The issue of stock certificates on conversions of
this Note shall be made without charge to the Holder for any tax in respect of
the issue thereof. The Company shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares in any name other than that of the Holder, and the Company
shall not be required to issue or deliver any such stock certificate unless and
until the person or persons requesting the issue thereof shall have paid to the
Company the amount of such tax or shall have established to the satisfaction of
the Company that such tax has been paid.
(h) RESERVATION OF SHARES. The Company shall at all times
reserve and keep available out of the aggregate of its authorized but unissued
shares or its issued shares held in its treasury, or both, for the purpose of
effecting the conversion of this Note, such number of its duly authorized shares
of Common Stock as shall from time to time be sufficient to effect the
conversion, exchange or exercise of outstanding securities of the Company
convertible into or exchangeable or exercisable for any shares of the Common
Stock, all rights to subscribe for or to purchase, all options for the purchase
of, and all calls, commitments or claims of any character relating to, any
shares of Common Stock and any securities convertible into or exchangeable or
exercisable for any of the foregoing.
(i) REGISTRATION OR APPROVAL. If any shares of Common Stock
reserved or to be reserved for the purpose of conversion of this Note require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly delivered upon conversion,
including, without limitation, the Hart-Scott-Rodino-Act, then the
14
<PAGE>
Company covenants that it will in good faith and as expeditiously as possible
endeavor to secure such registration or approval, as the case may be.
(j) VALIDLY ISSUED, ETC. The Company covenants that all shares
of Common Stock which may be delivered upon conversion of this Note shall upon
delivery be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue or delivery thereof.
(k) NOTICE. In the event:
(1) that the Company shall pay any dividend or make any distribution
to the holders of shares of Common Stock otherwise than in cash charged
against capital surplus, consolidated net earnings or retained earnings of
the Company and its Subsidiaries; or
(2) that the Company shall offer for subscription or purchase, pro
rata, to all of the holders of shares of Common Stock any additional shares
of stock of any class or any securities convertible into or exchangeable
for stock of any class; or
(3) of any reclassification or change of outstanding shares of the
class of Common Stock issuable upon the conversion of this Note (other than
a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or of
any merger or consolidation of the Company with, or merger of the Company
into, another corporation (other than a merger or consolidation in which
the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable
upon conversion of this Note), or of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially
as an entirety or of any Business Combination Transaction;
then, and in any one or more of such events, the Company will give to the Holder
written notice thereof at least fifteen days prior to (A) the record date fixed
with respect to any of the events specified in (1) and (2) above, and (B) the
effective date of any of the events specified in (3) above. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
such dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
(l) SPECIFIC PERFORMANCE. The Company acknowledges that the
failure of the Company to perform its obligations under this Section 5 will not
be compensable by the payment of monetary damages and hereby waives any defense
to a claim by the Holder that the provisions of this Section 5 be specifically
enforced.
15
<PAGE>
SECTION 6. LEGENDS.
(a) Each certificate for Conversion Shares and any certificate
issued in exchange therefor or on conversion or upon transfer, except
certificates issued in connection with a sale registered under the Securities
Act of 1933, as amended, and except as provided below, shall bear the legends to
the following effects:
1. "The shares represented by this certificate have not been
registered under the Securities Act of 1933 and may not be offered, sold,
transferred or otherwise disposed of except in compliance with said Act."
2. "The shares represented by this certificate are subject to
restrictions set forth in the Registration Rights Agreement dated as of May
29, 1996, a copy of which is on file in the office of the Secretary of the
Company."
(b) The legend stated in Section 6(a)(1) shall be removed by
delivery of one or more substitute certificates without such legend if the
holder thereof shall have delivered to the Company a copy of a letter from the
staff of the Securities and Exchange Commission or an opinion of counsel, in
form and substance reasonably satisfactory to the Company, to the effect that
the legend is not required for purposes of the Securities Act of 1933, as
amended.
(c) The legend stated in Section 6(a)(2) shall be removed at
such time as the Warrant Shares are no longer subject to the Registration Rights
Agreement referenced therein.
SECTION 7. COSTS AND EXPENSES. The Company promises to pay all
costs and expenses, including reasonable attorneys' fees incurred in the
collection and enforcement of this Note. The Company and any endorsers of this
Note hereby consent to renewals and extensions of time at or after the maturity
hereof, without notice, and hereby waive diligence, presentment, protest, demand
and notice of every kind and, to the full extent permitted by law, the right to
plead any statute of limitations as a defense to any demand hereunder.
SECTION 8. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF COLORADO.
SECTION 9. SEVERABILITY OF PROVISIONS. Any provision of this Note
that is prohibited or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of this Note or
affecting the validity or enforceability of the provision in any other
jurisdiction.
SECTION 10. HEADINGS AND REFERENCES. Headings in this Note are
included for the convenience of reference only and do not constitute a part of
this Note for any other
16
<PAGE>
purpose. References to sections in this Note are
references to the sections of this Note, unless the context shall require
otherwise.
SECTION 11. NON-EXCLUSIVE JURISDICTION. Each of the Company and
the Holder, by acceptance hereof, (1) agrees that any legal action with respect
to this Note may be brought in the courts of the State of Colorado or of the
United States of America for the District of Colorado, (2) accepts for itself
and in respect of its property, generally and unconditionally, the jurisdiction
of those courts, and (3) irrevocably waives any objection, including, without
limitation, any objection to the laying of venue or based on the grounds of
FORUM NON CONVENIENS, which it may now or hereafter have to the bringing of any
legal action in those jurisdictions; PROVIDED, HOWEVER, that each of the Company
and the Holder may assert in a legal action in any other jurisdiction or venue
each defense, third-party claim or similar claim that, if not so asserted in
such legal action, may thereafter not be asserted by such party in an original
legal action in the courts referred to in clause (1) above.
SECTION 12. WAIVER OF JURY TRIAL. Each of the Company and the
Holder, by acceptance hereof, waives any right to a trial by jury in any legal
action to enforce or defend any right under this Note or any amendment,
instrument, document or agreement delivered, or which in the future may be
delivered, in connection with this Note and agrees that any legal action shall
be tried before a court and not before a jury.
SECTION 13. NO RECOURSE AGAINST OTHERS. A director, officer,
employee or stockholder, as such, of the Company shall not have any liability
for any obligations of the Company under this Note or for any claim based on, in
respect of or by reason of, such obligations or its creation. The Holder by
accepting this Note waives and releases all such liability. The waiver and
release are part of the consideration for the issue of this Note.
17
IN WITNESS WHEREOF, the Company has caused this Note to be duly
executed and delivered by its officer thereunto duly authorized as of the date
and at the place first written above.
INTERNET COMMUNICATIONS CORPORATION
By:
Name:
Title:
18
<PAGE>
EXHIBIT A
[FORM OF CONVERSION NOTICE]
TO INTERNET COMMUNICATIONS CORPORATION
The undersigned owner of this Note hereby irrevocably exercises the
option to convert this Note, or portion hereof (which is $1,000 or an integral
multiple thereof) below designated, into shares of Common Stock of the Company
in accordance with the terms of this Note, and directs that the shares issuable
and deliverable upon the conversion, together with any check in payment for
fractional shares and a Note representing any unconverted principal amount
hereof, be issued and delivered to the registered holder hereof unless a
different name has been indicated below. If shares are to be issued in the name
of a person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect hereto.
Dated:
A-1
<PAGE>
Exhibit B
to
Appendix C
FORM OF
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of May 29, 1996 between INTERNET
COMMUNICATIONS CORPORATION, a Colorado corporation (the "COMPANY"), and
INTERWEST GROUP, INC., a Colorado corporation (the "STOCKHOLDER").
Terms not otherwise defined herein have the meanings stated in the
Share Exchange Agreement (as defined below).
RECITALS
A. The Company and the Stockholder have executed and delivered the
Share Exchange Agreement dated as of May 29, 1996 (the "SHARE EXCHANGE
AGREEMENT"), pursuant to which, among other things, (1) on the date hereof, the
Stockholder is purchasing the Note from the Company and hereafter may, if the
principal amount of and interest accrued on the Note shall not be paid in full
at the maturity thereof (whether at stated maturity, on the date of any required
prepayment or upon acceleration), acquire the Conversion Shares upon the
conversion of the Note and (2) on the Second Closing Date, if the same shall
occur, the Stockholder will acquire the Additional Shares from the Company. The
Conversion Shares and the Additional Shares are collectively referred to as the
"REGISTRABLE SHARES".
B. The Company and the Stockholder desire to enter into this
Agreement to provide for the registration under the Securities Act of the
disposition of the Registrable Shares and certain other matters.
AGREEMENT
The parties agree as follows:
SECTION 1. REGISTRATION RIGHTS.
(a) From and after second anniversary of the First Closing Date
on one or more occasions when the Company shall have received the written
request of the Stockholder, any pledgee of Registrable Shares from the
Stockholder or holders of at least 100,000 Registrable Shares in the aggregate
(as such number of shares may be adjusted in the event of any change in
B-1
<PAGE>
the Registerable Shares by reason of stock dividends, split-ups, reverse split-
ups, mergers, recapitalizations, subdivisions, conversions, exchanges of shares
or the like) that shall have been acquired directly or indirectly from the
Stockholder and to which rights under this Section 1(a) shall have been assigned
pursuant to Section 11(a), in each case in a transaction or series of
transactions not constituting a Rule 144 Transaction (as defined in
Section 1(h)) (each such person, when requesting registration under this Section
1(a) or under Section 1(b) and thereafter in connection with any such
registration, being hereinafter referred to as a "REGISTERING STOCKHOLDER"), as
expeditiously as practicable the Company shall register not less than 50,000
Registrable Shares (as such number may be adjusted) specified by the Registering
Stockholder in a Registration Statement (as defined in Section 1(h)). If the
requested registration pursuant to this Section 1(a) shall involve an
underwritten offering, the Registering Stockholder initiating a request for
registration of Registrable Shares pursuant to this Section 1(a) shall select
(with the consent of the Company, not to be unreasonably withheld) the managing
underwriter in connection with the offering and any additional investment
bankers and managers to be used in connection with the offering.
Notwithstanding anything to the contrary in the foregoing:
(1) the Company shall not be required to prepare and file pursuant to
this Section 1(a) more than five Registration Statements; PROVIDED that a
Registration Statement shall be deemed not to have been prepared and filed
if the same does not become effective; PROVIDED, FURTHER, that if 10% or
more of the Registrable Shares requested to be registered by the
Registering Stockholder initiating a request for registration of
Registrable Shares pursuant to this Section 1(a) are excluded from any
registration in accordance with Section 1(a)(2), there shall be provided
one additional registration under this Section (1)(a)(1) in respect of each
such exclusion; and
(2) if a requested registration pursuant to this Section 1(a) shall
involve an underwritten offering, and if the managing underwriter shall
advise in writing the Company and the Registering Stockholders that, in its
opinion, the number of Registrable Shares of any class proposed to be
included in the registration (including securities of the Company which are
proposed to be offered by persons other than Registering Stockholders)
exceeds the number which would have an adverse effect on the offering,
including the price at which the Registrable Shares can be sold, the
Company will include in the registration the maximum number of securities
which it is so advised can be sold without the adverse effect, allocated as
follows:
(A) FIRST, all Registrable Shares owned by Registering
Stockholders and requested to be included in such registration (if
necessary, allocated pro rata among all Registering Stockholders on
the basis of the relative number of Registrable Shares each such
Registering Stockholder has requested to be included in the
registration); and
(B) SECOND, any other securities proposed to be included in the
registration.
B-2
<PAGE>
(b) From and after the first anniversary of the First Closing Date, if the
Company shall determine to register or qualify by a registration statement filed
under the Securities Act and under any applicable state securities laws, any
offering of any Equity Securities of the Company, whether pursuant to Section
1(a) or otherwise, the Company shall give notice of such determination to each
potential Registering Stockholder and each other person having rights with
respect to the registration under the Securities Act of the disposition of
securities of the Company (each such potential Registering Stockholder and each
such other person, being hereinafter referred to as a "TRANSACTION REGISTERING
STOCKHOLDER") about which the Company has knowledge; it being understood that
without prior notice to the Company, the Company shall not be deemed to have
knowledge of the existence of any pledgee of Registrable Shares. The Company
shall, as expeditiously as possible and in good faith, include in the
registration statement such Registrable Shares (the "TRANSACTION REGISTRABLE
SHARES"), as those persons shall specify by notice received by the Company not
later than 30 days after the giving of the notice by the Company (each person so
notifying the Company being hereinafter referred to as a "PIGGY-BACK
STOCKHOLDER"). Notwithstanding anything in the foregoing to the contrary,
(1) the Company shall not be required to include any shares owned by
Piggy-Back Stockholders in a registration statement on Form S-4 or S-8 (or
any successor form) or a registration statement filed in connection with an
exchange offer or other offering of securities solely to the then existing
shareholders of the Company; and
(2) if a registration pursuant to this Section 1(b) involves an
underwritten offering, the Company shall select the managing underwriter
for the offering and any additional investment bankers and managers to be
used in connection with the offering, and if the managing underwriter
advises the Company in writing that, in its opinion, the number of
securities requested to be included in the registration is so great as
would adversely affect the offering, including the price at which the
Registrable Shares can be sold, the Company will include in the
registration the maximum number of securities which it is so advised can be
sold without the adverse effect, allocated as follows:
(A) FIRST, all securities proposed to be registered by the
Company for its own account;
(B) SECOND, all securities proposed to be registered by the
Company pursuant to the exercise by any person other than a Registering
Stockholder of a right to request the registration of securities of Common
Stock in accordance with an agreement substantially similar to the
provisions of Section 1(a);
(C) THIRD, all Transaction Registrable Shares requested to be
included in the registration under Section 1(b) of this Agreement (if
necessary, allocated pro rata among all requesting Transaction Registering
Stockholders, on the basis of the relative number of Transaction
Registrable Shares, each Transaction Registering Stockholder has requested
to be included in the registration); and
B-3
<PAGE>
(D) FOURTH, any other securities proposed to be registered by
the Company other than for its own account, including, without limitation,
securities proposed to be registered by the Company pursuant to the
exercise by any person other than a Registering Stockholder of any right in
accordance with an agreement substantially similar to this Section 1(b);
PROVIDED, HOWEVER, that in no event will the number of Registrable Shares
included in the Registration pursuant to this Section 1(b)(2) be reduced to less
than 10% of the aggregate number of securities included in the registration.
(c) The Company shall provide each Registering Stockholder, each
underwriter participating in any disposition pursuant to such registration and
their respective representatives reasonable opportunity for due diligence in
connection with each registration of Registrable Shares of the Registering
Stockholder pursuant to this Section 1.
(d) At the request of one or more of the Registering Stockholders or
the Company in connection with any registration pursuant to this Section 1, the
Company and the requesting Registering Stockholders shall enter into an
appropriate underwriting agreement with respect to the Registrable Shares of the
Registering Stockholders containing terms and provisions customary in agreements
of that nature, including provisions with respect to expenses substantially the
same as those set forth in Section 2 and provisions with respect to
indemnification and contribution substantially the same as those set forth in
Section 3.
(e) Notwithstanding anything herein to the contrary, the Company shall not
be required to include in any registration pursuant to this Section 1 any
Registrable Shares owned by a Registering Stockholder (1) if the Company shall
deliver to the Registering Stockholder an opinion, satisfactory in form, scope
and substance to the Registering Stockholder and addressed to the Registering
Stockholder by legal counsel satisfactory to the Registering Stockholder, to the
effect that the distribution of Registrable Shares proposed by the Registering
Stockholder is exempt from registration under the Securities Act and all
applicable state securities laws or (2) if such Registering Stockholder or any
underwriter of Registrable Shares shall fail to furnish to the Company the
information in respect of the distribution of the shares that may be required
under this Agreement to be furnished by the Registering Stockholder or the
underwriter to the Company.
(f) Upon written notice to each Registering Stockholder, the Company may
postpone effecting a registration pursuant to this Section 1 on one occasion
during any period of nine consecutive months, may require other holders of
shares registered pursuant to this Section 1 to refrain from disposing of the
shares under the registration or may require Transaction Registering
Stockholders to refrain from otherwise disposing of any shares of Equity
Securities of the Company owned by them (whether pursuant to Rule 144 under the
Securities Act or otherwise), in each case for a reasonable time specified in
the notice but not exceeding 90 days (which period may not be extended or
renewed), if (1) an investment banking firm of recognized
B-4
<PAGE>
national standing shall advise the Company and the Registering Stockholders in
writing that effecting the registration or disposition would materially and
adversely affect an offering of Equity Securities of the Company the preparation
of which had then been commenced or (2) the Company is in possession of material
non-public information the disclosure of which during the period specified in
such notice the Company believes would not be in the best interests of the
Company.
(g) In the event the registration of Registrable Shares shall be required
by this Section 1:
(1) Each Registering Stockholder shall furnish, and shall cause each
underwriter of the Registrable Shares of the Registering Stockholder to be
distributed pursuant to the registration to furnish, to the Company in
writing promptly upon the request of the Company the additional information
regarding the Registering Stockholder or the underwriter, the contemplated
distribution of the Registrable Shares and the other information regarding
the proposed distribution by the Registering Stockholder and the
underwriter that shall be required in connection with the proposed
distribution by the applicable securities laws of the United States of
America and the states thereof in which the Registrable Shares are
contemplated to be distributed. The information furnished by any
Registering Stockholder or any underwriter shall be certified by the
Registering Stockholder or the underwriter, as the case may be, and shall
be stated to be specifically for use in connection with the registration.
(2) The Company shall prepare and file with the Securities and Exchange
Commission the Registration Statement, including the Prospectus (as defined
in Section 1(h)), under the Securities Act and as required under any
applicable state securities laws, on the form that is then required or
available for use by the Company to permit each Registering Stockholder,
upon the effective date of the Registration Statement, to use the
Prospectus in connection with the contemplated distribution by the
Registering Stockholder of the Registrable Shares so registered. If any
Registration Statement refers to any Registering Stockholder by name or
otherwise as the holder of any securities of the Company, then the
Registering Stockholder shall have the right to require, in the event that
such reference to the Registering Stockholder by name or otherwise is not
required by the Securities Act or any similar federal statute then in
force, the deletion of the reference to the Registering Stockholder. The
Company shall deliver to each Registering Stockholder, without charge, one
executed copy of the Registration Statement and each amendment or post-
effective amendment thereof and one copy of each document incorporated
therein by reference. If the registration shall have been initiated solely
by the Company or shall not have been initiated by the Registering
Stockholder, the Company shall not be obligated to prosecute the
registration, and may withdraw the Registration Statement at any time prior
to the effectiveness thereof, if the Company shall determine in good faith
not to proceed with the offering of securities included in the Registration
Statement. In all other cases, the Company shall use its best efforts to
cause the
B-5
<PAGE>
Registration Statement to become effective and, as soon as practicable
after the effectiveness thereof, shall deliver to each Registering
Stockholder evidence of the effectiveness and a reasonable supply of copies
of the Prospectus. In addition, if necessary for resale by the Registering
Stockholders, the Company shall qualify or register in such states as may
be reasonably requested by each Registering Stockholder the Registrable
Shares of the Registering Stockholder that shall have been included in the
Registration Statement; PROVIDED that the Company shall not be obligated to
file any general consent to service of process or to qualify as a foreign
corporation in any state in which it is not subject to process or qualified
as of the date of the request.
(3) The Company shall use its best efforts to cause the Registration
Statement and the Prospectus to remain effective or current, as the case
may be, including the filing of necessary amendments, post-effective
amendments and supplements, and shall furnish copies of such amendments,
post-effective amendments and supplements to the Registering Stockholders,
so as to permit distributions by the Registering Stockholders during the
respective contemplated periods of distribution, but in no event longer
than six consecutive months from the effective date of the Registration
Statement; PROVIDED that the period shall be increased by the number of
days that any Registering Stockholder shall have been required by Section
1(f) to refrain from disposing of the Registrable Shares owned by the
Registering Stockholder in the distribution. During such respective
contemplated periods of distribution, the Company shall comply with the
provisions of the Securities Act applicable to it with respect to the
disposition of all Registrable Shares that shall have been included in the
Registration Statement in accordance with the intended methods of
disposition by the Registering Stockholders set forth in the Registration
Statement, the Prospectus or the supplement, as the case may be. The
Company shall not be deemed to have used its best efforts to cause the
Registration Statement to remain effective during the applicable period if
it voluntarily takes any action (other than an action required under
applicable law) that would result in the Registering Stockholders not being
able to dispose of the Registrable Shares during that period in accordance
with the intended methods of disposition. The Company shall notify each
Registering Stockholder, at any time when a prospectus with respect to the
Registrable Shares is required to be delivered under the Securities Act,
when the Company becomes aware of the happening of any event as a result of
which the Prospectus (as then in effect) contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements therein (in the case of the Prospectus or any preliminary
prospectus, in light of the circumstances under which they were made) not
misleading and, as promptly as practicable thereafter, prepare and file
with the Securities and Exchange Commission an amendment or supplement to
the Registration Statement or the Prospectus so that, as thereafter
delivered to the purchasers of such Registrable Shares, such Prospectus
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company
shall make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible
B-6
<PAGE>
moment. Notwithstanding anything in the foregoing to the contrary, the
Company may at any time upon notice to each Registering Stockholder
terminate the effectiveness of the Registration Statement or upon notice to
any Registering Stockholder withdraw from the Registration Statement the
Registrable Shares of the Registering Stockholder if, in the opinion of
counsel for the Company, there shall have arisen any legal impediment to
the offer of the Registrable Shares made by the Prospectus or if any legal
action or administrative proceeding shall have been instituted or
threatened or any other claim shall have been made relating to the offer
made by the Prospectus or against any of the parties involved in the offer;
PROVIDED that, promptly after those matters shall be resolved to the
satisfaction of counsel for the Company, pursuant to this Section 1 the
Company shall cause the registration of Registrable Shares formerly covered
by the Registration Statement that were removed from registration by the
action of the Company.
(4) If requested by any Registering Stockholder or an underwriter,
the Company shall as promptly as practicable prepare and file with the
Securities and Exchange Commission an amendment or supplement to the
Registration Statement or the Prospectus containing such information as the
Registering Stockholder or the underwriter requests to be included therein,
including, without limitation, information with respect to the Registrable
Shares being sold by the Registering Stockholder to the underwriter, the
purchase price being paid therefor by such underwriter and other terms of
the underwritten offering of the Registrable Shares to be sold in such
offering.
(5) Each Registering Stockholder shall report to the Company distributions
made by the Registering Stockholder of Registrable Shares pursuant to the
Prospectus and, upon written notice by the Company that an event has
occurred as a result of which an amendment or supplement to the
Registration Statement or the Prospectus is required, the Registering
Stockholder shall cease further distributions pursuant to the Prospectus
until notified by the Company of the effectiveness of the amendment or
supplement. Each Registering Stockholder shall distribute Registrable
Shares only in accordance with the manner of distribution contemplated by
the Prospectus with respect to the Registrable Shares. Each Registering
Stockholder, by participating in a registration pursuant to this Section 1,
acknowledges that the remedies of the Company at law for failure by the
Registering Stockholder to comply with the undertaking contained in this
Section 1(g) would be inadequate and that the failure would not be
adequately compensable in damages and would cause irreparable harm to the
Company, and therefore agrees that undertakings made by the Registering
Stockholder in this Section 1(g) may be specifically enforced.
(6) The Company shall deliver to the Registering Stockholders, their
counsel and the underwriters, if any, of Registrable Shares owned by
Registering Stockholders to be distributed pursuant to such registration,
the certificates, opinions of counsel and comfort letters that are
customarily delivered in connection with underwritten public offerings.
B-7
<PAGE>
(7) The Company shall cooperate with each Registering Stockholder and
each underwriter to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legends) representing Registrable
Shares to be sold under the Registration Statement, and enable such
Registrable Shares to be in such denominations and registered in such names
as the Registering Stockholder or the underwriter may request.
(8) The Company shall use its best efforts to comply with all applicable
rules and regulations of the Securities and Exchange Commission, and make
available to its securityholders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve months, but not
more than eighteen months, beginning with the first calendar month after
the effective date of the Registration Statement, which earnings statement
shall satisfy the provisions of Section 11(a) of the Securities Act.
(9) The Company shall take all action required to cause the
Registrable Shares to be listed on each national securities exchange on
which the Common Stock shall then be listed, if any, and to be qualified
for inclusion in the National Association of Securities Dealers Automated
Quotation/Small Cap market ("NASDAQ/SMALL CAP").
(h) For the purposes of this Section 1, the following terms shall have the
following meanings:
(1) "REGISTRATION STATEMENT" means a registration statement filed by the
Company in accordance with Section 1(g)(2), including exhibits and
financial statements thereto, in the form in which it shall become
effective and, in the event of any amendment thereto after the effective
date of the registration statement, also means (from and after the
effectiveness of the amendment) the registration statement as so amended;
(2) "RULE 144 TRANSACTION" means a transaction involving the sale of
Registrable Shares to a person other than an affiliate of the Company under
circumstances in which all of the applicable conditions of Rule 144 or Rule
144A (or any similar provisions then in force) under the Securities Act are
satisfied; and
(3) "PROSPECTUS" means the prospectus relating to the Registrable Shares
owned by the Registering Stockholders included in a Registration Statement
and, in the event of any amendment or supplement to the prospectus after
the effective date of the Registration Statement, also means (from and
after the effectiveness of the amendment or the filing with the Securities
and Exchange Commission of the supplement) the prospectus as so amended or
supplemented and, if a prospectus relating to the Registrable Shares shall
be filed with the Securities and Exchange Commission pursuant to Rider 424
under the Securities Act, such prospectus.
B-8
<PAGE>
SECTION 2. EXPENSES.
(a) The Company shall bear all expenses of the following in connection
with the registration of Registrable Shares pursuant to Section 1, whether or
not any related Registration Statement shall become effective:
(1) preparing, printing and filing each Registration Statement and
Prospectus and each qualification or notice required to be filed under
federal and state securities laws or the rules and regulations of the
National Association of Securities Dealers, Inc. (the "NASD") in connection
with a registration pursuant to Section 1;
(2) all fees and expenses of complying with federal and state
securities laws and the rules and regulations of the NASD;
(3) furnishing to each Registering Stockholder one executed copy of
the related Registration Statement and the number of copies of the related
Prospectus that may be required by Sections 1(g)(2) and 1(g)(3) to be so
furnished, together with a like number of copies of each amendment, post-
effective amendment or supplement;
(4) performing its obligations under Section 1(g)(6);
(5) printing and issuing share certificates, including the transfer
agent's fees, in connection with each distribution so registered; and
(6) preparing audited financial statements required by the Securities
Act and the rules and regulations thereunder to be included in the
Registration Statement and preparing audited financial statements for use
in connection with the registration other than audited financial statements
required by the Securities Act and the rules and regulations thereunder;
(7) internal expenses of the Company (including, without limitation,
all salaries and expenses of its officers and employees performing legal or
accounting duties);
(8) premiums or other expenses relating to liability insurance
required by the Company or underwriters of the Registering Stockholders;
(9) fees and disbursements of underwriters of the Registering
Stockholders customarily paid by issuers or sellers of securities;
(10) listing of the Registrable Shares on national securities
exchanges and inclusion of the Registrable Shares in NASDAQ/Small Cap; and
B-9
<PAGE>
(11) fees and expenses of any special experts retained by the Company
in connection with the registration.
(b) The Registering Stockholders shall bear all other expenses
incident to the distribution by the respective Registering Stockholders of their
Registrable Shares in connection with a registration pursuant to Section 1,
including without limitation the selling expenses of the Registering
Stockholders, commissions, underwriting discounts, insurance, fees of counsel
for the Registering Stockholders and their underwriters.
SECTION 3. INDEMNIFICATION
(a) The Company shall indemnify and hold harmless each
Registering Stockholder participating in a registration pursuant to Section 1,
each underwriter of any of the Registrable Shares owned by the Registering
Stockholder to be distributed pursuant to the registration, each partner in each
Registering Stockholder, the officers and directors of the Registering
Stockholder and the underwriter and each person, if any, who controls the
Registering Stockholder, each partner in each Registering Stockholder or the
underwriter within the meaning of Section 15 (or any successor provision) of the
Securities Act, and their respective successors, against all claims, losses,
damages and liabilities to third parties (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in the Registration Statement or the Prospectus or other
document incident thereto or any omission (or alleged omission) to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, and shall reimburse each such Registering
Stockholder and each other person indemnified pursuant to this Section 3(a) for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
PROVIDED that the Company shall not be liable in any case to the extent that any
such claim, loss, damage or liability arises out of or is based on any untrue
statement or omission based upon written information furnished to the Company by
any Registering Stockholder or underwriter for a Registered Stockholder
specifically for use in the Registration Statement or the Prospectus.
(b) Each Registering Stockholder, by participating in a
registration pursuant to Section 1, thereby agrees to indemnify and to hold
harmless the Company and its officers and directors and each person, if any, who
controls any of them within the meaning of Section 15 (or any successor
provision) of the Securities Act, and their respective successors, against all
claims, losses, damages and liabilities to third parties (or actions in respect
thereof) arising out of or based upon any untrue statement (or alleged untrue
statement) of a material fact contained in the Registration Statement or the
Prospectus or other document incident thereto or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall reimburse the
Company and each other person indemnified pursuant to this Section 3(b) for any
legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or action;
PROVIDED that this Section 3(b) shall apply only if (and only to the extent
that)
B-10
<PAGE>
the statement or omission was made in reliance upon and in conformity with
information furnished to the Company in writing by the Registering Stockholder
specifically for use in the Registration Statement or the Prospectus; PROVIDED,
FURTHER, that in no event shall the liability of a Registering Stockholder
hereunder be greater in amount than the dollar amount of the proceeds received
by the Registering Stockholder upon the sale of the Registrable Shares giving
rise to such indemnification obligations.
(c) If any action or proceeding (including any governmental
investigation or inquiry) shall be brought or asserted against any person
indemnified under this Section 3, the indemnified person shall promptly notify
the indemnifying party in writing, and the indemnifying party shall assume the
defense of the action or proceeding, including the employment of counsel
satisfactory to the indemnified person and the payment of all expenses. The
indemnified person shall have the right to employ separate counsel in any action
or proceeding and to participate in the defense of the action or proceeding, but
the fees and expenses of that counsel shall be at the expense of the indemnified
person unless
(1) the indemnifying party shall have agreed to pay those fees and
expenses; or
(2) the indemnifying party shall have failed to assume the defense of
the action or proceeding or shall have failed to employ counsel reasonably
satisfactory to the indemnified person in the action or proceeding; or
(3) the named parties to the action or proceeding (including any
impleaded parties) include both the indemnified person and the indemnifying
party, and the indemnified person shall have been advised by counsel that
there may be one or more legal defenses available to the indemnified person
that are different from or additional to those available to the
indemnifying party (in which case, if the indemnified person notifies the
indemnifying party in writing that it elects to employ separate counsel at
the expense of the indemnifying party, the indemnifying party shall not
have the right to assume the defense of such action or proceeding on behalf
of the indemnified person; it being understood, however, that the
indemnifying party shall not, in connection with any one action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys at any time for the
indemnified person, which firm shall be designated in writing by the
indemnified person).
The indemnifying party shall not be liable for any settlement of any action or
proceeding effected without its written consent, but if settled with its written
consent, or if there be a final judgment for the plaintiff in any such action or
proceedings, the indemnifying party shall indemnify and hold harmless the
indemnified person from and against any loss or liability by reason of the
settlement or judgment.
B-11
<PAGE>
(d) If the indemnification provided for in this Section 3 is
unavailable to an indemnified person (other than by reason of exceptions
provided in this Section 3) in respect of losses, claims, damages, liabilities
or expenses referred to in this Section 3, then each applicable indemnifying
party, in lieu of indemnifying the indemnified person, shall contribute to the
amount paid or payable by the indemnified person as a result of the losses,
claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified person on the other in connection with the statements or omissions
which resulted in the losses, claims, damages, liabilities or expenses as well
as any other relevant equitable considerations. The relative fault of the
indemnifying party on the one hand and of the indemnified person on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the indemnifying
party or by the indemnified person and by these persons' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The parties agree that it would not be just and
equitable if contribution pursuant to this Section 3(d) were determined by pro
rata allocation or by any other method of allocation that does not take into
account the equitable considerations referred to in the immediately preceding
sentence. The amount paid or payable by a person as a result of the losses,
claims, damages, liabilities and expenses shall be deemed to include any legal
or other fees or expenses reasonably incurred by the person in connection with
investigating or defending any action or claim. Notwithstanding in the
foregoing to the contrary, no Registering Stockholder or underwriter shall be
required to contribute any amount in excess of the amount by which (1) in the
case of any Registering Stockholder, the net proceeds received by the
Registering Stockholder the sale of Registerable Shares or (2) in the case of an
underwriter, the total price at which the Registerable Shares purchased by it
and distributed to the public were offered to the public exceeds, in any such
case, the amount of any damages that the Registering Stockholder or underwriter,
as the case may be, has otherwise been required to pay by reason of any untrue
or alleged untrue statement or omission. No person guilty of fraudulent
representation (within the meaning of Section 11(f) of the Securities Act) shall
be entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation.
(e) Each Registering Stockholder participating in a registration
pursuant to Section 1 shall cause each underwriter of any of the Registrable
Shares owned by the Registering Stockholder to be distributed pursuant to the
registration to agree in writing on terms reasonably satisfactory to the Company
to indemnify and to hold harmless the Company and its officers and directors and
each person, if any, who controls any of them within the meaning of Section 15
(or any successors provision) of the Securities Act, and their respective
successors, against all claims, losses, damages and liabilities to third parties
(or actions in respect thereof) arising out of or based upon any untrue
statement (or alleged untrue statement) of a material fact contained in the
Registration Statement or the Prospectus or other document incident thereto or
any omission (or alleged omission) to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and to reimburse the Company and each other person indemnified pursuant to the
agreement for any legal or any other expense reasonably
B-12
<PAGE>
incurred in connection with investigating or defending any claim, loss, damage,
liability or action; PROVIDED that the agreement shall apply only if (and only
to the extent that) the statement or omission was made in reliance upon and in
conformity with information furnished to the Company in writing by the
underwriter specifically for use in the Registration Statement or the
Prospectus.
SECTION 4. TRANSFER RESTRICTIONS.
(a) The Stockholder acknowledges that the Company will issue and
sell the Shares in reliance upon the exemption afforded by Section 4(2) of the
Securities Act for transactions by an issuer not involving any public offering.
The Stockholder represents that (1) it will acquire the Registrable Shares for
investment and without any view toward distribution of any of the shares to any
other person, (2) it will not sell or otherwise dispose of the Registrable
Shares except in compliance with the registration requirements or exemption
provisions under the Securities Act.
(b) Except as provided to the contrary in this Section 4, each
certificate for Registrable Shares, and any certificate issued in exchange
therefor or upon conversion, exchange or transfer thereof, shall bear legends to
the effect stated in clauses (1) and (2) below:
(1) "The shares represented by this certificate have not been
registered under the Securities Act of 1933 and may not be offered, sold,
transferred or otherwise disposed of except in compliance with said Act."
(2) "The shares represented by this certificate are subject to the
restrictions contained in the Registration Rights Agreement dated as of
May 29, 1995, a copy of which is on file at the office of the Secretary of
the Company."
(c) The legend stated in Section 4(b)(1) shall be removed by
delivery of one or more substitute certificates without such legend if either
(1) the related certificates are issued in connection with a sale registered
under the Securities Act or (2) the holder thereof shall have delivered to the
Company a copy of a letter from the staff of the Securities and Exchange
Commission or an opinion of counsel, in form and substance reasonably
satisfactory to the Company, to the effect that the legend is not required for
purposes of the Securities Act.
(d) The legend stated in Section 4(b)(2) shall be removed by
delivery of one or more substitute certificates without such legend at such time
as the related securities are no longer subject to this Agreement.
SECTION 5. FILINGS. The Company shall make all filings with the
Securities and Exchange Commission required in order to make available to the
holders of Registrable Shares the exemption from the registration requirements
provided by Rule 144 (or any successor regulation) under the Securities Act.
B-13
<PAGE>
SECTION 6. MERGER, CONSOLIDATION, EXCHANGE, ETC. In the event,
directly or indirectly, (1) the Company shall merge with and into, or
consolidate with, or consummate a share exchange pursuant to the Colorado
Business Corporation Act (or successor provisions or statutes) with, any other
person, or (2) any person shall merge with and into, or consolidate, the Company
and the Company shall be the surviving corporation of such merger or
consolidation and, in connection with such merger or consolidation, all or part
of the Registrable Shares shall be changed into or exchanged for stock or other
securities of any other person, then, in each such case, proper provision shall
be made so that such other person shall be bound by the provisions of this
Agreement and the term "Company" shall thereafter be deemed to refer to such
other person.
SECTION 7. OTHER AGREEMENTS.
(a) The Company, on behalf of itself and its Affiliates (other
than a Registering Stockholder), agrees (1) not to effect any public sale or
distribution of any securities similar to the Registrable Shares being
registered pursuant to this Agreement or any securities convertible into or
exchangeable or exercisable for such Registrable Shares during the 14 days prior
to, and during the 90-day period beginning on, the effective date of the
Registration Statement (except (x) on Form S-4 or Form S-8 (or comparable form)
or (y) as part of the Registration Statement; PROVIDED that with respect to
clause (y) in the case of a registration pursuant to Section 1(a) the
Registering Stockholder initiating the registration consents to such inclusion),
or the commencement of a public distribution of Registrable Shares; (2) not to
enter into any agreement inconsistent with any provision of this Agreement; (3)
that any agreement entered into after the date of this Agreement pursuant to
which the Company issues or agrees to issue any privately placed securities
shall contain a provision under which holders of such securities agree not to
effect any public sale or distribution of any of the securities during the
periods described in clause (1) of this Section 7(a), in each case including a
sale in a Rule 144 Transaction (except as part of any such registration, if
permitted); PROVIDED that the provisions of this Section 7(a) shall not prevent
the conversion or exchange of any securities pursuant to their terms into or for
other securities.
(b) If and to the extent requested by the Company in the case of
a non-underwritten public offering and if and to the extent requested by the
managing underwriter in the case of an underwritten public offering, the
Registering Stockholder agrees not to effect any public sale or distribution of
any securities similar to the securities being registered or any securities
convertible into or exchangeable or exercisable for such securities during the
14 days prior to, and during the 90-day period beginning on, the effective date
of such registration statement (except as part of such registration agreement).
SECTION 8. NOTICES. All notices, requests and other communications
to any party under this Agreement shall be in writing. Communications may be
made by telecopy or similar writing. Each communication shall be given to the
party at its address stated on the signature pages of this Agreement or at any
other address as the party may specify for this purpose by
B-14
<PAGE>
notice to the other party. Each communication shall be effective (1) if given
by telecopy, when the telecopy is transmitted to the proper address and the
receipt of the transmission is confirmed, (2) if given by mail, 72 hours after
the communication is deposited in the mails properly addressed with first class
postage prepaid or (3) if given by any other means, when delivered to the proper
address and a written acknowledgement of delivery is received.
SECTION 9. NO WAIVERS; REMEDIES. No failure or delay by any party in
exercising any right, power or privilege under this Agreement shall operate as a
waiver of the right, power or privilege. A single or partial exercise of any
right, power or privilege shall not preclude any other or further exercise of
the right, power or privilege or the exercise of any other right, power or
privilege. The rights and remedies provided in this Agreement shall be
cumulative and not exclusive of any rights or remedies provided by law.
SECTION 10. AMENDMENTS, ETC. No amendment, modification, termination
or waiver of any provision of this Agreement, and no consent to any departure by
a party to this Agreement from any provision of this Agreement, shall be
effective unless it shall be in writing and signed and delivered by the other
party to this Agreement, and then it shall be effective only in the specific
instance and for the specific purpose for which it is given.
SECTION 11. SUCCESSORS AND ASSIGNS.
(a) The Stockholder may assign to any transferee of any principal
amount of the Parent Note or Registrable Shares its rights and delegate its
obligations under this Agreement; provided that such transferee assignee shall
accept those rights and assume those obligations for the benefit of the Company
in writing in form reasonably satisfactory to the Company. Thereafter, without
any further action by any person, all references in this Agreement to the
"Stockholder", and all comparable references, shall be deemed to be references
to the transferee, and the Stockholder shall be released from any obligation or
liability under this Agreement with respect to the Registrable Shares so
transferred.
(b) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties to this Agreement and their respective successors
and permitted assigns pursuant to Section 11(a).
SECTION 12. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Colorado. All
rights and obligations of the Company and the Stockholder shall be in addition
to and not in limitation of those provided by applicable law.
SECTION 13. COUNTERPARTS; EFFECTIVENESS. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if all signatures were on the same instrument.
B-15
<PAGE>
SECTION 14. SEVERABILITY OF PROVISIONS. Any provision of this
Agreement that is prohibited or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of the prohibition or
unenforceability without invalidating the remaining provisions of this Agreement
or affecting the validity or enforceability of the provision in any other
jurisdiction.
SECTION 15. HEADINGS AND REFERENCES. Section headings in this
Agreement are included for the convenience of reference only and do not
constitute a part of this Agreement for any other purpose. References to
parties and sections in this Agreement are references to the parties to or the
sections of this Agreement, as the case may be, unless the context shall require
otherwise.
SECTION 16. ENTIRE AGREEMENT. Except as otherwise specifically
provided in the following sentence, the Transaction Documents embody the entire
agreement and understanding of the respective parties and supersede all prior
agreements or understandings with respect to the subject matters of those
documents.
SECTION 17. SURVIVAL. Except as otherwise specifically provided in
this Agreement, each representation, warranty or covenant of each party to this
Agreement contained in or made pursuant to this Agreement shall survive the
Closing and remain in full force and effect, notwithstanding any investigation
or notice to the contrary or any waiver by any other party of a related
condition precedent to the performance by the other party of an obligation under
this Agreement.
SECTION 18. NON-EXCLUSIVE JURISDICTION. Each party (1) agrees that
any Action with respect to this Agreement may be brought in the courts of the
State of Colorado or of the United States of America for the District of
Colorado, (2) accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of those courts and (3) irrevocably waives any
objection, including, without limitation, any objection to the laying of venue
or based on the grounds of FORUM NON CONVENIENS, which it may now or hereafter
have to the bringing of any Action in those jurisdictions.
SECTION 19. WAIVER OF JURY TRIAL. Each party waives any right to a
trial by jury in any Action to enforce or defend any right under this Agreement
or any amendment, instrument, document or agreement delivered, or which in the
future may be delivered, in connection with this Agreement and agrees that any
Action shall be tried before a court and not before a jury.
SECTION 20. AFFILIATE. Nothing contained in this Agreement shall
constitute the Stockholder an "affiliate" of any of the Company and its
Subsidiaries within the meaning of Rule 13e-3 under the Exchange Act.
____________________________
B-16
<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Registration Rights Agreement as of the date first written above in Denver,
Colorado.
INTERNET COMMUNICATIONS CORPORATION
By:
--------------------------------------
Name:
Title:
Address: 7100 East Belleview Avenue
Suite 201
Englewood, Colorado 80111
Telecopy: (303) 770-0588
INTERWEST GROUP, INC.
By:
----------------------------------------
Name:
Title:
Address: 12201 East Arapahoe Road
Suite C10
Englewood, Colorado 80112
Telecopy: (303) 792-0227
B-17
<PAGE>
APPENDIX D
INTERNET COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
I. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
A. Introduction D-3
B. Pro Forma Combined Condensed Balance Sheet D-4
- Internet Communications Corporation as of April 30, 1996
- Interwest Communications C.S. Corporation as of March 31, 1996
C. Pro Forma Interim Combined Condensed Statement of Operations D-5
- Internet Communications Corporation for the Three
Months Ended April 30, 1996
- Interwest Communications C.S. Corporation for the
Three Months Ended March 31, 1996
D. Pro Forma Fiscal Combined Condensed Statement of Operations D-6
- Internet Communications Corporation for the Year
Ended January 31, 1996
- Interwest Communications C.S. Corporation for the
Year Ended December 31, 1995 (Recasted)
E. Notes to Pro Forma Financial Information D-7
II. INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF INTERWEST GROUP, INC.)
A. Report of Independent Public Accountants D-8
B. Consolidated Balance Sheets as of March 31, 1996 D-9
(Unaudited) and December 31, 1995
C. Consolidated Statements of Operations for the D-11
Three Months Ended March 31, 1996 (Unaudited) and the
Seven Months Ended December 31, 1995
D. Consolidated Statement of Stockholder's Equity D-12
for the Seven-Month Period Ended December 31, 1995 and
the Three-Month Period Ended March 31, 1996 (Unaudited)
E. Consolidated Statements of Cash Flows for the D-13
Three Months Ended March 31, 1996 (Unaudited) and the
Seven Months Ended December 31, 1995
F. Notes to the Consolidated Financial Statements D-15
</TABLE>
D-1
<PAGE>
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
III. INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
A. Independent Auditor's Report D-25
B. Combined Statements of Income and Retained D-26
Earnings for the Two Months Ended May 31, 1995, the
Three Months Ended March 31, 1995 (unaudited) and
for the Years Ended March 31, 1995 and 1994
C. Combined Statements of Cash Flows for the Two D-27
Months Ended May 31, 1995, the Three Months Ended
March 31, 1995 (unaudited) and for the Years Ended
March 31, 1995 and 1994
D. Notes to Combined Financial Statements D-28
</TABLE>
Financial statements of Internet are included in the Company's
Form 10-KSB and Form 10-QSB which accompany the Proxy document
as Appendixes E and F, respectively.
D-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTRODUCTION TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
On May 29, 1996, Internet Communications Corporation (Internet or the
Company) signed a Merger agreement with Interwest Communications C.S.
Corporation (Interwest) whereby Internet will issue 2,306,541 shares of
common stock (49% of the common stock outstanding after the transaction) to
acquire 100% of Interwest's outstanding common stock, subject to shareholder
approval. Interwest is a wholly owned subsidiary of Interwest Group, Inc.
(Group), a holding company for several diverse enterprises. Group effectively
acquired Interwest from its prior shareholder (an individual and his spouse)
on June 1, 1995 in a monetary purchase transaction. In conjunction with
Internet's acquisition of Interwest, Group has advanced Internet $900,000 in
the form of a promissory note, which if not paid when due on December 31,
1996, is convertible into common stock at $3.00 per share.
The attached pro forma combined condensed balance sheet combines the balance
sheets of Internet as of April 30, 1996 with Interwest as of March 31, 1996
(their respective quarter end), as if the merger had occurred on the balance
sheet dates. This merger will be treated for financial accounting purposes as
a purchase transaction.
The pro forma combined condensed statement of operations combines Internet's
and Interwest's three-month interim and year-end operations as if the merger
has occurred at the beginning of the period presented. Internet's fiscal
year-end is January 31, 1996. Interwest, prior to the acquisition by Group,
had a March 31 year-end, which changed to a calendar year-end as a result of
the acquisition by Group. Therefore, Interwest's operations for the 12 months
ended December 31, 1995, have been recasted to reflect a full fiscal year.
These statements are not necessarily indicative of future operations or the
actual results that would have occurred had the transaction been consummated
at the beginning of the period indicated. The pro forma combined financial
statements should be read in conjunction with the historical financial
statements and notes thereto which for Interwest are accompanying pro forma
information and for Internet are included in its Form 10-KSB and Form 10-QSB
accompanying the Proxy document as Appendixes E and F, respectively.
D-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
INTERNET INTERWEST
----------- ----------
APRIL 30, MARCH 31,
1996 1996 ADJUSTMENTS COMBINED
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 266,000 $ 842,000 $ 900,000 (a) $ 1,908,000
(100,000)(c)
Receivables 2,658,000 2,922,000 5,580,000
Inventory 1,182,000 1,085,000 2,267,000
Other 377,000 215,000 592,000
----------- ---------- ---------- -----------
4,483,000 5,064,000 800,000 (a) 10,347,000
PROPERTY AND EQUIPMENT, net 1,900,000 840,000 2,740,000
OTHER ASSETS, net 69,000 2,236,000 100,000 (c) 4,228,000
1,823,000 (b)
----------- ---------- ---------- -----------
TOTAL ASSETS $ 6,452,000 $8,140,000 $2,723,000 $17,315,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 1,100,000 $ 551,000 $ - $ 1,651,000
Accounts payable 1,656,000 1,293,000 - 2,949,000
Unearned income 672,000 996,000 - 1,668,000
Payable to affiliate - 356,000 900,000 (a) 1,256,000
Accrued expenses and other 304,000 644,000 - 948,000
----------- ---------- ---------- -----------
3,732,000 3,840,000 900,000 8,472,000
LONG-TERM DEBT - 230,000 - 230,000
OTHER - 179,000 - 179,000
MINORITY INTEREST - 230,000 - 230,000
----------- ---------- ---------- -----------
- 639,000 - 639,000
Common stock 5,202,000 3,726,000 1,758,000 (b) 10,686,000
Accumulated deficit (2,447,000) (65,000) 65,000 (b) (2,447,000)
Other (35,000) - - (35,000)
----------- ---------- ---------- -----------
2,720,000 3,661,000 1,823,000 8,204,000
----------- ---------- ---------- -----------
TOTAL LIABILITIES AND EQUITY $ 6,452,000 $8,140,000 $2,723,000 $17,315,000
----------- ---------- ---------- -----------
----------- ---------- ---------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
INTERNET INTERWEST
------------- -------------
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED PRO FORMA
APRIL 30, MARCH 31, --------------------------
1996 1996 ADJUSTMENTS COMBINED
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 3,614,000 $ 4,659,000 $ - $ 8,273,000
Cost of sales (2,548,000) (2,985,000) - (5,533,000)
----------- ----------- -------- -----------
GROSS MARGIN 1,066,000 1,674,000 - 2,740,000
OPERATING EXPENSES 1,234,000 1,745,000 15,000 (d) 2,994,000
----------- ----------- -------- -----------
LOSS FROM
OPERATIONS (168,000) (71,000) (15,000) (254,000)
Other (expense) income (29,000) (9,000) - (38,000)
----------- ----------- -------- -----------
LOSS BEFORE
INCOME TAXES (197,000) (80,000) (15,000) (292,000)
Income tax (expense) benefit 18,000 (18,000)(e) -
----------- ----------- -------- -----------
NET LOSS $ (197,000) $ (62,000) $(33,000) $ (292,000)
----------- ----------- -------- -----------
----------- ----------- -------- -----------
NET LOSS PER COMMON
SHARE $ (.08) $ N/A $ (.06)
----------- ----------- -----------
----------- ----------- -----------
AVERAGE NUMBER OF
SHARES OUTSTANDING 2,401,000 N/A 4,707,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
INTERNET INTERWEST
------------- -------------
FOR THE FOR THE
YEAR ENDED YEAR ENDED PRO FORMA
JANUARY 31, DECEMBER 31, --------------------------
1996 1995 ADJUSTMENTS COMBINED
------------- ------------- ----------- -----------
(RECASTED)
<S> <C> <C> <C> <C>
NET REVENUES $18,526,000 $15,621,000 $ - $34,147,000
Cost of sales 13,502,000 11,673,000 - 25,175,000
----------- ----------- --------- -----------
GROSS MARGIN 5,024,000 3,948,000 - 8,972,000
OPERATING EXPENSES 6,087,000 3,694,000 155,000 (d) 9,936,000
----------- ----------- --------- -----------
INCOME (LOSS) FROM
OPERATIONS (1,063,000) 254,000 (155,000) (964,000)
Other (expense) income (43,000) (24,000) - (67,000)
----------- ----------- --------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES (1,106,000) 230,000 (155,000)(d) (1,031,000)
Income tax (expense) benefit 128,000 (127,000) 127,000 (e) 128,000
----------- ----------- --------- -----------
NET INCOME (LOSS) $ (978,000) $ 103,000 $ (28,000) $ (903,000)
----------- ----------- --------- -----------
----------- ----------- --------- -----------
NET LOSS PER COMMON
SHARE $ (0.41) $ N/A $ (.19)
----------- ----------- -----------
----------- ----------- -----------
AVERAGE NUMBER OF SHARES
OUTSTANDING 2,397,000 N/A 4,704,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-6
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO PRO FORMA FINANCIAL INFORMATION
a. To reflect the note payable to Group of $900,000 from Internet made in
conjunction with the merger. This advance is for future working capital
and was not used to consummate the merger. Therefore, interest expense
for prior periods is not adjusted as both Internet and Interwest had
adequate lines-of-credit in prior periods.
b. To reflect the acquisition of Interwest by Internet, which is valued at
approximately $5,480,000. As the cost basis of Interwest assets
approximate the market value, an excess amount of purchase price over
net assets acquired (goodwill) of approximately $1,823,000 will be
recorded, plus cost of the share exchange. This amount is in addition to
approximately $1,400,000 of goodwill remaining on Interwest balance sheet
from its prior acquisition in June 1995 by Group.
c. To record estimated additional cost of the acquisition.
d. To reflect additional amortization of goodwill recorded in the transaction,
which will be amortized over 20 years.
e. To reduce income tax expense (benefit) based on combined pro forma losses.
D-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Interwest Communications
C.S. Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of INTERWEST
COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES (a Colorado corporation and
wholly owned subsidiary of Interwest Group, Inc.) as of December 31, 1995, and
the related consolidated statements of operations, stockholder's equity and cash
flows for the seven-month period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interwest Communications C.S.
Corporation and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the seven-month period then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
June 18, 1996.
D-8
<PAGE>
Page 1 of 2
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
------ ---------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 842,000 $ 143,000
Accounts receivable-
Unbilled 1,580,000 1,401,000
Trade and other 1,438,000 1,715,000
Allowance (96,000) (82,000)
Inventory 1,085,000 1,169,000
Prepaid expenses 122,000 86,000
Deferred tax assets 93,000 81,000
---------- ----------
Total current assets 5,064,000 4,513,000
---------- ----------
PROPERTY AND EQUIPMENT:
Machinery, equipment and other 609,000 555,000
Furniture and fixtures 353,000 336,000
Vehicles 290,000 272,000
Leasehold improvements 84,000 82,000
---------- ----------
1,336,000 1,245,000
Less- Accumulated depreciation (496,000) (436,000)
---------- ----------
840,000 809,000
---------- ----------
OTHER ASSETS:
Goodwill, net 1,383,000 1,408,000
Noncompete agreements, net 501,000 531,000
Other, net 352,000 344,000
---------- ----------
2,236,000 2,283,000
---------- ----------
$8,140,000 $7,605,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
D-9
<PAGE>
Page 2 of 2
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995
------------------------------------ ---------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,293,000 $1,428,000
Accounts payable--parent 356,000 422,000
Deferred revenue and deposits 996,000 387,000
Accrued salaries and wages 101,000 186,000
Other accrued liabilities 519,000 297,000
Income taxes payable 24,000 31,000
Revolving line of credit 330,000 272,000
Current maturities of long-term debt 221,000 182,000
---------- ----------
Total current liabilities 3,840,000 3,205,000
---------- ----------
LONG-TERM DEBT 230,000 293,000
---------- ----------
DEFERRED REVENUE 135,000 101,000
---------- ----------
NET DEFERRED TAX LIABILITIES 44,000 44,000
---------- ----------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 230,000 239,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 8)
STOCKHOLDER'S EQUITY:
Common stock, no par value; 100,000 shares
authorized, 40,000 shares issued and outstanding 3,635,000 3,635,000
Common stock, nonvoting, no par value; 10,000 shares
authorized, 1,000 shares issued and outstanding 91,000 91,000
Retained deficit (65,000) (3,000)
---------- ----------
Total stockholder's equity 3,661,000 3,723,000
---------- ----------
$8,140,000 $7,605,000
---------- ----------
---------- ----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
D-10
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
THREE MONTHS SEVEN MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1996 1995
---------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUE $4,659,000 $10,284,000
DIRECT LABOR AND MATERIALS 2,985,000 6,490,000
---------- -----------
Gross profit 1,674,000 3,794,000
DEPRECIATION AND AMORTIZATION 138,000 347,000
SELLING, GENERAL AND ADMINISTRATIVE 1,607,000 3,343,000
---------- -----------
Income (loss) from operations (71,000) 104,000
INTEREST EXPENSE (21,000) (62,000)
INTEREST INCOME 3,000 3,000
MINORITY INTEREST 9,000 (3,000)
---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (80,000) 42,000
INCOME TAX (EXPENSE) BENEFIT 18,000 (45,000)
---------- -----------
NET LOSS $ (62,000) $ (3,000)
---------- -----------
---------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
D-11
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1995 AND
THE THREE-MONTH PERIOD ENDED MARCH 31, 1996 (UNAUDITED)
<TABLE>
NONVOTING
COMMON STOCK COMMON STOCK RETAINED TOTAL
------------------- ----------------------- EARNINGS STOCKHOLDER'S
SHARES AMOUNT SHARES AMOUNT (DEFICIT) EQUITY
------- --------- -------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, May 31, 1995 1,000 $ - 40,000 $ 12,000 $ 1,614,000 $1,626,000
Fair value adjustments related to the
acquisition of the Company by
Interwest Group, Inc.:
Retained earnings - 39,000 - 1,575,000 (1,614,000) -
Purchase accounting adjustments - 52,000 - 2,048,000 - 2,100,000
------- --------- -------- ------------ ------------- ------------
BALANCES, June 1, 1995 1,000 91,000 40,000 3,635,000 - 3,726,000
Net loss - - - - (3,000) (3,000)
------- --------- -------- ------------ ------------- ------------
BALANCES, December 31, 1995 1,000 91,000 40,000 3,635,000 (3,000) 3,723,000
Net loss - - - - (62,000) (62,000)
------- --------- -------- ------------ ------------- ------------
BALANCES, March 31, 1996 (unaudited) 1,000 $91,000 40,000 $3,635,000 $ (65,000) $3,661,000
------- --------- -------- ------------ ------------- ------------
------- --------- -------- ------------ ------------- ------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
D-12
<PAGE>
Page 1 of 2
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
THREE SEVEN
MONTHS MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1996 1995
----------- -------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (62,000) $ (3,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Depreciation and amortization 138,000 347,000
Gain on sale of assets and other (6,000) (15,000)
Deferred income tax benefit (12,000) (27,000)
Minority interest (9,000) 3,000
(Increase) decrease in accounts receivable, net 112,000 (1,115,000)
Decrease in inventory 84,000 148,000
(Increase) decrease in prepaid expenses (36,000) 6,000
(Increase) decrease in other assets (27,000) 78,000
Increase in accounts payable and
accrued liabilities 2,000 161,000
Increase (decrease) in deferred revenue
and deposits 643,000 (121,000)
Increase (decrease) in accounts payable--parent (66,000) 422,000
Increase (decrease) in income taxes payable (7,000) 31,000
----------- -------------
Net cash provided by (used in)
operating activities 754,000 (85,000)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (100,000) (398,000)
Proceeds from sale of property and equipment 11,000 33,000
----------- -------------
Net cash used in investing activities (89,000) (365,000)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 20,000 6,000
Repayments of long-term debt (44,000) (219,000)
Borrowings under revolving line of credit 955,000 868,000
Repayments under revolving line of credit (897,000) (632,000)
----------- -------------
Net cash provided by financing activities 34,000 23,000
----------- -------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
D-13
<PAGE>
Page 2 of 2
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
THREE MONTHS SEVEN MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $699,000 $(427,000)
CASH AND CASH EQUIVALENTS, beginning of period 143,000 570,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $842,000 $ 143,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for interest $ 23,000 $ 58,000
----------- -----------
----------- -----------
Cash paid during the period for income taxes $ 4,000 $ 427,000
----------- -----------
----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Effective June 1, 1995, Interwest Group, Inc. (formerly known as West Hazmat
Companies, Inc.) acquired all of the outstanding common stock of Interwest
Communications C.S. Corporation and its related entities (see Note 1).
The cost of the purchase has been pushed down to the accompanying
financial statements and as a result of purchase accounting adjustments
there was a noncash increase in assets and stockholder's equity of
$2,100,000.
During the seven-month period ended December 31, 1995, the Company
transferred approximately $100,000 from inventory to property and
equipment.
The accompanying notes to financial statements
are an integral part of these statements.
D-14
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND MARCH 31, 1996 (UNAUDITED)
(1) OPERATIONS AND ACQUISITION
OPERATIONS
Interwest Communications C.S. Corporation ("Interwest C.S.") and subsidiaries
(the "Company") are engaged primarily in the business of selling, leasing,
installing, and maintaining telephone communication systems for various
customers primarily in the state of Colorado.
ACQUISITION
Effective June 1, 1995, Interwest Group, Inc. ("Interwest Group") (formerly
known as West Hazmat Companies, Inc.), a wholly owned subsidiary of the Anschutz
Company ("Anschutz"), purchased 100% of the common stock of the Company. The
purchase price, including acquisition costs, was approximately $3,726,000 and
consisted of cash of approximately $1,482,000 and a note payable issued to the
seller of approximately $2,244,000 which is reflected as a liability of
Interwest Group.
This acquisition was accounted for using the purchase method of accounting.
Goodwill of approximately $1,470,000 and noncompete agreements of $600,000 were
recorded in connection with the purchase and are being amortized on a straight-
line basis over fifteen and five years, respectively.
Unaudited pro forma revenue and net income for the year ended December 31,
1995, prepared as if the Company was purchased by Interwest Group on January 1,
1995, are $15,790,000 and $37,000, respectively.
D-15
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Interwest C.S.;
its 58.2% subsidiary, Work Telcom Services, Inc.; its 97% subsidiary,
Interwest Cable Network Systems, Inc.; its 51% subsidiary, Interwest
Communications Pueblo Corporation; and its 50% subsidiary, Omega Business
Communications Services, Inc. The minority interests of the above
subsidiaries are owned by the respective managers of each company and two of
the managers have the option to acquire a stated amount of additional shares
at a specified price, but the managers would still own less than 50% of their
respective entity. All material intercompany transactions and amounts have
been eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of the Company as of March 31, 1996,
presented herein have been prepared by the Company without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. The
financial statements reflect all adjustments (consisting of only normal
recurring accruals) which, in the opinion of management, are necessary to
present fairly the financial position, results of operations and cash flows of
the Company as of March 31, 1996, and for the period then ended.
ACCOUNTING ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires that management make certain estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
as of the balance sheet date and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
REVENUE RECOGNITION
The Company utilizes the percentage-of-completion method under which revenues
from long-term contracts are recognized by measuring the percentage of costs
incurred to date to estimated total
D-16
<PAGE>
costs for each contract. Contract costs include direct material and labor
costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs, and depreciation costs. Operating
costs are charged to expense as incurred. Provisions for estimated losses on
incomplete contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, may result in revisions to costs and income and are recognized
in the period in which the revisions are determined.
Following the acquisition by Interwest Group, the Company changed its method
of accounting for long term contracts from the completed contract method to
the percentage-of-completion method. The percentage of completion method is
considered preferable when an entity can reasonably estimate contract
revenues and expenses and the extent of progress toward completion, because a
proportionate share of contract revenues and expenses are recognized during
the period earned rather than at the completion of the contract.
If the Company had continued to use the completed contract method, the net
loss for the seven-month period ended December 31, 1995 and the three-month
period ended March 31, 1996 would have been approximately $370,000 and
$120,000, respectively.
DEFERRED REVENUE AND DEPOSITS
The Company has entered into maintenance and extended warranty contracts with
customers which require payment in advance. Revenue received in advance is
deferred and recognized on a straight-line basis over the lives of the
maintenance and extended warranty contracts which are one and five years,
respectively.
Deposits represent advance payments received from customers which are required
prior to the commencement of an installation project. At December 31, 1995 and
March 31, 1996, the Company has received and deferred approximately $255,000 and
$153,000, respectively, of unearned deposits from customers. In addition,
deposits at March 31, 1996 include a payment from a subcontractor for a
performance bond of $850,000 which was refunded subsequent to March 31, 1996
upon notification that the Company was not awarded a project they were proposing
on.
PROPERTY AND EQUIPMENT
Significant additions and improvements are capitalized at cost, while
maintenance and repairs which do not improve or extend the life of the
respective assets are charged to operations as incurred.
D-17
<PAGE>
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the related assets as follows:
Machinery, equipment and other 3-7 years
Furniture and fixtures 3-5 years
Vehicles 3-5 years
Leasehold improvements 5 years
CASH AND CASH EQUIVALENTS
All highly liquid cash investments with original maturity dates of three months
or less are classified as cash equivalents.
INTANGIBLES
Goodwill is being amortized on a straight-line basis over a period of 15 years.
Accumulated amortization at December 31, 1995 and March 31, 1996, is
approximately $62,000 and $87,000, respectively.
The Company is amortizing noncompete agreements on a straight-line basis over
the five year life of the agreements. At December 31, 1995 and March 31, 1996,
the related accumulated amortization is approximately $69,000 and $99,000,
respectively.
Other assets is comprised primarily of purchased customer lists which are being
amortized on a straight-line basis over five years. At December 31, 1995 and
March 31, 1996, the related accumulated amortization is approximately $56,000
and $74,000, respectively.
D-18
<PAGE>
The amortization expense for the seven months ended December 31, 1995 and the
three months ended March 31, 1996, for the above intangibles was approximately
$173,000 and $74,000, respectively.
INVENTORY
Inventory is stated at the lower of cost or market using the weighted average
cost method and is comprised primarily of telephone systems and related parts.
INCOME TAXES
Interwest C.S. and Interwest Cable Network Systems, Inc. are included in the
consolidated federal income tax return of Anschutz and the other subsidiaries
file their own federal income tax return. The income taxes of the Company are
computed by applying the asset and liability method to the Company as if it were
a separate taxpayer. The Company receives or makes cash payments to Anschutz
based upon the benefits or liabilities it generates.
The current provision for income taxes represents actual or estimated amounts
payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of: (a) temporary differences between the tax basis of assets and
liabilities and amounts reported in the consolidated balance sheets, and (b)
operating loss and tax credit carryforwards. The overall change in deferred tax
assets and liabilities for the period measures the deferred tax expense or
benefit for the period. Effects of changes in enacted tax laws on deferred tax
assets and liabilities are reflected as adjustments to tax expense in the period
of enactment. The measurement of deferred tax assets may be reduced by a
valuation
D-19
<PAGE>
allowance based on judgmental assessment of available evidence if deemed more
likely than not that some or all of the deferred tax assets will not be
realized.
(3) DEBT
Long-term debt at March 31, 1996 and December 31, 1995 consists of the
following:
<TABLE>
MARCH 31, DECEMBER 31,
1996 1995
--------- ---------
(UNAUDITED)
<S> <C> <C>
Note payable, due in 48 monthly installments of $4,751 including
interest at 9.25%, final payment due on May 1, 2000, unsecured $ 144,000 $ 145,000
Installment note for purchase of equipment, interest accrues at the
bank's prime rate, plus 1.5% (10.00% at December 31, 1995), payable
in 60 monthly payments of $4,167 plus interest, final payment due on
January 1, 1998, secured by equipment with a carrying value of
$59,000 at December 31, 1995 90,000 102,000
Note payable, due in 36 monthly installments of $3,000, including
interest at 6.66%, final payment due on November 1, 1997, unsecured 54,000 62,000
Note payable, due in 36 monthly installments of $2,059, including
interest at 8.00%, final payment due on June 1, 1998, unsecured 49,000 54,000
Note payable to a bank, due in 36 monthly installments of $3,051,
including interest at 9.75% rate, final payment due on February 1,
1998, unsecured 53,000 61,000
Notes payable, due in monthly installments from $216 to $854, including
interest from 8.00% to 14.06%, final payments due from August 12,
1996 to April 27, 1998, secured by vehicles with a carrying value of
$52,000 at December 31, 1995 61,000 51,000
--------- ---------
451,000 475,000
Less current maturities of long-term debt (221,000) (182,000)
--------- ---------
Long-term debt $ 230,000 $ 293,000
--------- ---------
--------- ---------
</TABLE>
D-20
<PAGE>
Annual maturities of long-term debt are as follows:
Year ending December 31-
1996 $182,000
1997 174,000
1998 57,000
1999 44,000
2000 18,000
----------
$475,000
----------
----------
The Company has outstanding borrowings of $272,000 and $330,000 under a $500,000
revolving line of credit with a bank at December 31, 1995 and March 31, 1996,
respectively. Interest accrues at the bank's prime rate plus 1% (9.5% at
December 31, 1995), and is payable monthly. All outstanding principal and
accrued interest is due on July 11, 1996. The line of credit is secured by all
funds in the bank's custody and the Company's accounts receivable and inventory
balances.
In June 1996, the Company paid the outstanding balance and terminated this line
of credit agreement.
In April 1996, the Company along with Interwest Group and affiliates entered
into a $4.3 million revolving line of credit agreement and the Company is
jointly and severally liable under the agreement. This agreement includes a
provision that should the Company's ownership change by more than 49%, it will
be considered an event of default.
Under the provisions of certain debt agreements, the Company is required to
maintain compliance with certain financial covenants, among other restrictions,
including a trading ratio which is based on the ratio of various fixed assets to
accounts payable, accrued expenses and principal outstanding on the loan, and a
maximum borrowings ratio based on accounts receivable and inventory.
D-21
<PAGE>
(4) INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1995, are as follows:
Current:
Allowance for doubtful accounts $ 31,000
Deferred revenue 50,000
-----------
Current deferred tax asset $ 81,000
-----------
-----------
Noncurrent:
Amortization of noncompetes $ 18,000
Deferred revenue 38,000
Customer lists 38,000
Accelerated depreciation for tax and other (138,000)
-----------
Noncurrent deferred tax liabilities, net $ (44,000)
-----------
-----------
Components of the income tax expense are as follows:
SEVEN
MONTHS
ENDED
DECEMBER 31,
1995
--------
Current expense $ 72,000
Deferred benefit (27,000)
----------
Income tax expense $ 45,000
----------
----------
The income tax expense for the seven month period ended December 31, 1995 is
reconciled to the amount computed by applying the statutory federal tax rate to
income as follows:
Income tax expense per federal statutory rate $15,000 35%
State income taxes, net of federal deduction 1,000 3%
Goodwill amortization 22,000 52%
Nondeductible meals and entertainment 5,000 12%
Other nondeductible expenses 2,000 5%
--------- -------
$45,000 107%
--------- -------
--------- -------
D-22
<PAGE>
(5) COMMITMENTS
The Company has several operating leases for office space, vehicles and
equipment, which expire at various times through 2001. In addition, the Company
leases its Colorado Springs office and operations facility from a related party
under an operating lease agreement which expires on May 31, 2000. Rent expense,
related to the operating leases, for the seven months ended December 31, 1995
was $141,000. Aggregate minimum annual rentals under such leases are as
follows:
Year ending December 31-
1996 $ 337,000
1997 300,000
1998 260,000
1999 235,000
2000 182,000
Thereafter 80,000
------------
$1,394,000
------------
------------
(6) RETIREMENT AND BONUS PLANS
The Company has established a 401(k) retirement plan covering substantially all
of their employees who have been employed with the Company for one year and who
are at least 21 years of age. Each employee's contribution up to a maximum of
10% is matched 50% by the Company. The Company may also make additional cash
contributions at the discretion of the Board of Directors. Employees are fully
vested in employer contributions after they complete six years of service.
Contributions of $38,000 were made for the seven months ended December 31, 1995.
The Company awards bonuses to certain management personnel which are based on
various performance factors and are awarded at the discretion of the Company's
management. Subsequent to March 31, 1996, the Company awarded and paid bonuses
of approximately $35,000 which will be expensed over the remaining nine months
of 1996.
D-23
<PAGE>
(7) RELATED PARTY TRANSACTIONS
At December 31, 1995 and March 31, 1996, the Company owed approximately $422,000
and $356,000 to Interwest Group primarily for cash draws and for its share of
insurance which is provided by Anschutz and allocated to the Company.
(8) CONTINGENCIES
The Company is a party to three employment related legal and or administrative
proceedings which have arisen out of the ordinary course of business. Although
the ultimate resolution of these matters is uncertain, management believes that
the actions are without merit and that the outcome will not have a material
adverse effect on the Company's financial position or results of operations.
The Company has not recorded any liability amounts related to these matters.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments include cash and cash equivalents, accounts receivable,
accounts payable and other accrued liabilities. The carrying amounts for these
financial instruments approximate fair value due to the short-term maturity of
these instruments. Debt is also a financial instrument and based upon the
difference in prevailing interest rates when the debt was issued and the
prevailing interest rates at December 31, 1995, the carrying values approximate
fair values.
D-24
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Interwest Communications C.S. Corporation
Colorado Springs, CO
We have audited the combined balance sheets (not separately included herein)
of Interwest Communications C.S. Corporation and affiliates as of May 31,
1995, March 31, 1995 and 1994 and the accompanying related combined
statements of income, retained earnings, and cash flows for the two months
ended May 31, 1995 and the years ended March 31, 1995 and 1994. These
combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the combined
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the combined balance sheets referred to above present fairly,
in all material respects, the combined financial position of Interwest
Communications C.S. Corporation and affiliates as of May 31, 1995, March 31,
1995 and March 31, 1994 and the results of their operations and their cash
flows for the two months ended May 31, 1995 and the years ended March 31,
1995 and March 31, 1994 in conformity with generally accepted accounting
principles.
Hilderbrand & Associates, P.C.
Certified Public Accountants
Colorado Springs, Colorado
August 11, 1995
D-25
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
TWO MONTHS THREE MONTHS
ENDED ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31, MARCH 31,
---------- ----------- --------------------------
1995 1995 1995 1994
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $1,966,000 $3,371,000 $12,075,000 $12,219,000
Cost of Sales 1,102,000 2,176,000 7,011,000 7,189,000
---------- ---------- ----------- -----------
GROSS PROFIT 864,000 1,195,000 5,064,000 5,030,000
SELLING, GENERAL AND ADMINISTRATIVE 865,000 1,044,000 4,212,000 3,912,000
---------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (1,000) 151,000 852,000 1,118,000
Other Income (Expense), net 29,000 (2,000) - (23,000)
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 28,000 149,000 852,000 1,095,000
Provision (Benefit) for Income Taxes
Current 17,000 82,000 344,000 379,000
Deferred (9,000) (8,000) (30,000) 5,000
---------- ---------- ----------- -----------
8,000 74,000 314,000 384,000
---------- ---------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS 20,000 75,000 538,000 711,000
Minority Interests in Income (10,000) (21,000) (71,000) (84,000)
---------- ---------- ----------- -----------
NET INCOME 10,000 96,000 467,000 627,000
RETAINED EARNINGS AT BEGINNING PERIOD 1,603,000 1,507,000 1,136,000 509,000
---------- ---------- ----------- -----------
RETAINED EARNINGS AT END OF PERIOD $1,613,000 $1,603,000 $ 1,603,000 $ 1,136,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-26
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
TWO MONTHS THREE MONTHS
ENDED ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31, MARCH 31,
---------- ----------- --------------------------
1995 1995 1995 1994
---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,000 $ 96,000 $ 467,000 $ 627,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Minority interests in net income
of consolidated subsidiary and
combined affiliates 10,000 (21,000) 71,000 84,000
Depreciation and amortization 40,000 45,000 118,000 157,000
Provision for bad debts 5,000 39,000 83,000 94,000
Deferred tax expense (benefit) (9,000) (8,000) (31,000) 5,000
(Increase) decrease in:
Receivables 100,000 377,000 (134,000) (1,452,000)
Inventories (524,000) (18,000 (194,000) 59,000
Prepaid expenses (20,000) (5,000) (48,000) (21,000)
Deposits and other (10,000) - 1,000 (3,000)
Increase (decrease) in:
Accounts payable 318,000 (44,000) 228,000 88,000
Accrued liabilities (91,000) (64,000) 9,000 365,000
Deposits on uncompleted
contracts 45,000 (302,000) 211,000 (26,000)
Deferred revenues 29,000 (147,000) 22,000 (62,000)
Warranty reserves 18,000 (69,000) 69,000 -
--------- --------- --------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (79,000) (121,000) 872,000 (85,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collection on installment sales 9,000 9,000 16,000 15,000
Purchase of property and equipment (36,000) (48,000) (157,000) (49,000)
Proceeds from sales of property
and equipment - 6,000 9,000 -
Loans to minority interest
shareholder - - - (37,000)
Purchases of intangible assets (42,000) - (30,000) -
--------- --------- --------- -----------
NET CASH USED IN INVESTING ACTIVITIES (69,000) (33,000) (162,000) (71,000)
CASH FLOWS FROM FINANCING ACTIVITY:
Proceeds from short term debt - - - 480,000
Payments on short term debt - - - (507,000)
Proceeds from long term debt - 91,000 91,000 -
Payments on long term debt (36,000) (87,000) (150,000) (114,000)
--------- --------- --------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (36,000) 4,000 (59,000) (141,000)
--------- --------- --------- -----------
NET INCREASE (DECREASE) IN CASH (184,000) (150,000) 651,000 (297,000)
CASH, at beginning of year 754,000 904,000 103,000 400,000
--------- --------- --------- -----------
CASH, at end of year $ 570,000 $ 754,000 $ 754,000 $ 103,000
--------- --------- --------- -----------
--------- --------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-27
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION - Interwest Communications C.S. Corporation (Interwest
C.S.), Work Telcom Services, Inc. (Work Telcom), Interwest Communications
Pueblo Corporation (Interwest Pueblo), and Interwest Sound Communications,
Inc. (Interwest Sound) are incorporated under the laws of the Sate of
Colorado. The companies are affiliated through common ownership and
management and are engaged primarily in the business of selling, leasing,
installing, and maintaining telephone communication systems.
PRINCIPLES OF COMBINATION - The combined financial statements include
the consolidated accounts of Interwest C.S. and its 58.2% subsidiary, Work
Telcom and the affiliated companies of Interwest Pueblo and Interwest
Sound. The sole shareholder of Interwest C.S. owns 51% of the outstanding
common stock of Interwest Pueblo and his spouse owns 75% of the outstanding
common stock of Interwest Sound. The minority interests of Work Telcom,
Interwest Pueblo, and Interwest Sound are owned by the respective manager
of each company. All material intercompany transactions and balances have
been eliminated.
REVENUE RECOGNITION - Interwest C.S., Work Telcom, and Interwest Pueblo
are on the completed contract method under which revenues and costs are
recognized at the time a contract is completed, unless it becomes apparent
that a contract will result in a loss, then such loss is provided for
currently. Accordingly, inventory and labor costs are deferred along with
related billings until such time as the contract is complete. Interwest
C.S., Work Telcom, and Interwest Pueblo also have maintenance agreements
with customers. Revenue received in advance is deferred and recognized over
the terms of the maintenance agreements.
Interwest Sound is on the percentage-of-completion method under which
revenues from contracts are recognized by measuring the percentage of costs
incurred to date to estimated total costs for each contract. That method is
used because management considers total cost to be the best available
measure of progress on the contracts. Contract costs include direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs, and
depreciation costs. Operating costs are charged to expense as incurred.
Provisions for estimated losses on incomplete contracts are made in the
period in which such losses are determined. Changes in job performance,
job conditions, and estimated profitability, may result in revisions to
costs and income and are recognized in the period in which the revisions
are determined.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - Bad debts are recognized by the
establishment of an allowance for expected losses on receivables that may
become uncollectible.
PROPERTY AND EQUIPMENT - Depreciation for property and equipment owned
by the companies is computed on a straight-line basis over the estimated
life of the related asset, which range from three to ten years.
Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred.
D-28
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
INCOME TAXES - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
RECLASSIFICATION - Certain reclassifications have been made to the combined
financial statements to present them on a consistent basis between periods.
Such reclassifications had no material effect on net income.
UNAUDITED INFORMATION - The statements of operations and cash flows for
the three months ended March 31, 1995 were taken from the Company's
books and records without audit. However, in the opinion of management,
such information includes all adjustments (consisting only of normal
accruals) which are necessary to properly reflect the results of
operations of the Company for the three months ended March 31, 1996.
Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted
accounting principals for the interim period has been condensed or
omitted. The results of operations for the three months ended March 31,
1995 is not necessarily indicative of the results to be expected for the
full year.
2. CASH FLOW INFORMATION:
Cash paid for interest and income taxes consisted of:
TWO MONTHS THREE MONTHS FOR THE
ENDED ENDED YEARS ENDED
MAY 31, MARCH 31, MARCH 31,
---------- ----------- --------------------
1995 1995 1995 1994
---------- ----------- -------- -------
(UNAUDITED)
Interest $2,000 $23,000 $ 24,000 $31,000
------ ------- -------- -------
------ ------- -------- -------
Income Taxes $ - $32,000 $375,000 $24,000
------ ------- -------- -------
------ ------- -------- -------
Non-cash investing and financing activities consisted of:
Two Months Ended May 31, 1995:
Purchase of vehicles and equipment with financing through bank
loans of $156,000. Purchase of inventory and customer lists through
notes payable for $261,000.
Three Months Ended March 31, 1995:
Purchase of vehicles and equipment with financing through bank
loans and capital lease arrangement at $52,000.
Year Ended March 31, 1995:
Purchase of vehicles and equipment with financing through bank
loans and capital lease arrangements of $66,000.
Year Ended March 31, 1994:
Purchase of customer list through note payable for $98,000.
D-29
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
3. INCOME TAX PROVISION:
The provisions for incomes taxes for the years ended March 31, 1995 and
1994 approximate the expected statutory rate for Federal income taxes after
considering the effects of the surtax exemption and state taxes. Also, in
fiscal 1994, the Company realized a tax benefit of approximately $23,000
from the utilization of a net operation loss carryforward.
4. PROFIT SHARING PLAN:
The Companies have established a profit-sharing plan covering substantially
all of their employees. The plan is a defined contribution plan that
qualifies under Internal Revenue Code Section 401(k). The companies will
match an employee's contribution $.50 for every dollar contributed, and
will also make additional contributions as cash flows permit. The
employers' matching contribution expenses were as follows:
TWO MONTHS FOR THE
ENDED YEARS ENDED
MAY 31, MARCH 31,
---------- --------------------
1995 1995 1994
---------- -------- -------
Interwest C.S. and Work Telcom $7,000 $37,000 $34,000
Interwest Pueblo 1,000 8,000 7,000
Interwest Sound 1,000 3,000 4,000
------ ------- -------
$9,000 $48,000 $45,000
------ ------- -------
------ ------- -------
The Companies also made profit sharing contributions for the years ending
March 31, 1995 and 1994 of $-0- and $75,000, respectively.
5. LEASES:
PROPERTY LEASED TO OTHERS - Interwest C.S. lease various equipment, to
others, with various terms and renewal options. The operating method is
used to report revenue from those leasing activities and the cost of those
leased assets, less related accumulated depreciation is carried on the
Company's balance sheet.
PROPERTY LEASED FROM OTHERS - Interwest C.S. leases its corporate offices
and operations facilities in Colorado Springs under operating leases
expiring on March 31, 1996 from its sole shareholder. Interwest C.S. is
responsible for all taxes, maintenance and insurance on the property. Rent
expense for both years ending March 31, 1995 and 1995 was $48,000 each year
and $8,000 for the two months ended May 31, 1995. Interwest C.S. also
leases its operations facility in Denver under an operating lease which
expires
D-30
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
September 30, 1995. Interwest Pueblo leases its operations facility in
Pueblo under a three year operating lease expiring March 1, 1997.
At March 31, 1995, future minimum lease payments by year were as follows:
CAPITAL OPERATING
YEAR ENDED MARCH 31, LEASES LEASES
-------------------- ------- ---------
1996 $15,000 $74,000
1997 14,000 10,000
------- -------
Total future minimum lease payments $29,000 $84,000
------- -------
------- -------
6. SUBSEQUENT EVENTS:
On June 1, 1995, the sole shareholder of Interwest C.S. and 51% shareholder
of Interwest Pueblo sold his common stock in those companies to Interwest
Group, Inc. (formerly West Hazmat Companies, Inc.).
D-31
<PAGE>
APPENDIX E
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 OR 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For Fiscal year ended JANUARY 31, 1996
-------------------------------------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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
incorporation or organization Identification Number)
7100 E. BELLEVIEW AVE., SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
- - - - -----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 770-7600
--------------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------
(Title of Class)
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 April 22, 1996, 2,400,686 shares of Common Stock, no par value, were
outstanding. The aggregate market value of the Common Stock held by
non-affiliates of the Registrant on that date was approximately $6,184,528.
Total revenues for the fiscal year ended January 31, 1996 is $18,528,000
------------
Documents incorporated by reference: May 3,1996 Proxy Statement (Part III)
-------------------------------------
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (S 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X ]
Page 1 of 32 pages. Exhibits are indexed on page 18.
-----
(Complete Copy)
APPENDIX E
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
THE COMPANY
Internet Communications Corporation ("Internet" or "the Company") is a
multi-faceted telecommunications company providing a broad range of data
communications equipment, services and carrier circuits to business and
individual clients. These clients are engaged in the fields of retail,
banking, education, insurance, libraries, health care and other business
enterprises. To meet its purpose of being a single source supplier of all
necessary products and services, the Company maintains three divisions.
These divisions include the design and monitoring of communication networks;
the resale, installation and maintenance of telecommunications equipment;
and the lease and sale of dedicated, high speed fiber optic circuits.
Network design services include the customized design and monitoring of
a communications network which allows the high speed transmission of data,
voice, fax and video within a defined geographical area. This division also
provides the technical support necessary to effectively install and maintain
the efficient operation of the network and its individualized component
parts. As each customer is unique in their requirements for data transmission
and requires the integration of a wide range of complex technologies,
Internet seeks to create a telecommunications network which is unique to that
customer and their industry.
As an integral part of providing data communications services, Internet,
by contractual agreement, resells, installs, maintains, and repairs data
communications equipment manufactured by such companies as Tellabs
Operations, Inc. ("Tellabs"), 3Com Corporation, Cisco, Wellfleet, Network
Equipment Technologies (NET), Premisys, Motorola ICG (formerly Codex Corp.),
Gandalf Technologies, Inc., Racal-Datacom, Inc., and Scitec. This division
enables Internet to directly provide the customers with equipment which it
feels is the most compatible to operate within their
3
<PAGE>
individually designed systems and most economical for their communications
needs. These products consist of modems, multiplexers, network control and
interchange devices, and frame relay and ISDN access devices.
Internet has non-exclusive agreements with long distance carriers such as
WilTel, Inc., Sprint, QWEST, ICG, MCI and AT&T. Pursuant to the agreements
with these companies, Internet resells and/or leases these fiber optic
carrier circuits to its customers for the local and long distance
transmission of voice, data, fax, and video communications. These circuits,
also known as dedicated lines, provide the means by which data transmissions
are carried throughout the United States and the various locations within a
customer's communications network.
In the past, Internet maintained a software development division which
developed various software products related to its core business of
communication networks. Sales of the Company's software products have not
been significant during the past two years, nor are they expected to be in
the future. As further discussed in Software Design and Development
included elsewhere herein, the Company experienced a substantial write-down
of software development costs in fiscal 1995. As a result, the Company
intends to refocus its efforts towards its core business of selling and
supporting telecommunications products. The Company currently does not have
definitive commitments for software development, however, it may on a limited
basis develop software if it can be done with reasonable assurance that such
development can be done profitably. The Company will also continue to
provide software maintenance and support for its customers, based on contract
terms discussed later in this section.
The Company's headquarters and principal offices are located at 7100
East Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111. Its
telephone number is (303) 770-7600.
INDUSTRY OVERVIEW AND MARKET NICHE
Formerly, the telecommunications industry was a monopoly controlled by
AT&T which required consumers to use a single
4
<PAGE>
provider for a wide range of communications needs for the transmission over
phone lines of voice, data, fax, and video information. Such transmissions
require the use of data circuits which are telephone lines engineered to
allow data transmission and specialized communications equipment which are
commonly referred to as modems, data service units, pads, switches, and
multiplexers.
In addition, AT&T provided all long distance telephone line service,
dedicated data and voice circuits and local exchange service through a series
of wholly-owned or majority-owned local monopolies. After years of
anti-trust litigation with the Department of Justice, AT&T divested itself,
in January 1984, of 22 Bell Operating Companies which now provide only local
exchange service. AT&T was permitted to continue as a supplier of both
intrastate and interstate long distance service and dedicated lines.
Recent legal and business decisions have introduced elements of significant
change into the telecommunications industry. Major access providers
(telephone service providers, cable providers, wireless providers, and
others) have undertaken significant investment programs resulting in mergers
and consolidations, new service offerings from traditional access providers,
and in general confusion in the marketplace. While these firms may not be
direct competitors, their actions do introduce an element of uncertainty and
opportunity into the industry environment.
The industry in which Internet competes is comprised primarily of
single-source, one dimensional equipment suppliers and/or resellers. These
companies typically resell data communications equipment to customers based
on price discounts not matched by the manufacturer. Unlike the Company, they
frequently do not provide the range of "value-added" services such as design,
installation, maintenance, repair or related services such as network
management or carrier circuits.
Internet, being a multiple-source provider, is able to approach each
customer's communications needs from a network design perspective. Internet
begins by evaluating a customer's individual business information requirements,
and then designs a comprehensive
5
<PAGE>
communications network that best meets those requirements. Internet
thereafter recommends and supplies the necessary equipment, software and
dedicated circuits that best perform within their overall network design.
PRINCIPAL DIVISIONS
NETWORK MANAGEMENT SERVICES
The design of a customer's communications network is provided as part of
the sales proposal at no additional cost and it is this aspect of the
Company's business that gives it the ability to provide a value-added service
within the telecommunications industry. Because communications networks
require the integration and installation of a wide range of complex
technologies, the Company's customers which include commercial enterprises,
government agencies, banks, educational institutions, insurance companies
and others are increasingly turning to outside firms which have the expertise
and experience to design and create a customized data communication network.
To meet this demand, Internet offers network system analysis, network
system design, and network management services. Network analysis involves
providing customers with technical communications system consulting services.
Network design involves providing a comprehensive, customized, communications
system based on each customer's specific needs. Network management involves
providing trained communications technicians who monitor and evaluate both
the overall performance of a customer's entire network as well as each
individual component of the system. Network management also assists in the
future reconfiguration and the addition of new equipment to a network as well
as tracking performance for long-term network growth. Internet's network
management facilities operate 24 hours a day, seven days a week at the
Company's office in the Denver metropolitan area. A trained communications
technician is present at Internet's facilities at all times.
COMMUNICATIONS EQUIPMENT: DIRECT SALES
Internet's management and engineers are constantly evaluating
6
<PAGE>
products, services, and newly available industry technology. In order to
supply the best performing communications equipment to its customers,
negotiations with potential suppliers are continually in process. Internet
believes it is able to provide technologically advanced products at a cost
below its competitors because it is a value-added reseller and has
non-exclusive dealer agreements with suppliers. This enables the Company to
offer products below the manufacturer's list price by offering discounts and
making up any lost margins by selling other services such as data circuits
and equipment maintenance and installation.
By offering a selection of equipment from a variety of sources Internet
can provide customers with the best communications equipment to fit their
particular needs and their specially designed communications network.
The multiplexers, modems and switching devices manufactured by
Internet's suppliers are utilized within a communications network to
interface signal transmissions within the network; convert digital signals
into analog and visa versa for transmission over dedicated circuits between
two or more user locations, and allocate and breakdown various signals
between user locations and within the overall network.
Pursuant to Internet's agreements with its suppliers, Internet receives
preferential pricing, credit and delivery terms by virtue of being a
value-added integrator/reseller and maintaining certain inventory levels.
Typically, the agreements are for a twelve month period and are automatically
renewed annually unless an earlier termination occurs by either party on 30
to 60 days notice. The agreements are non-exclusive and allow Internet the
right to sell the manufacturers' products throughout the United States.
In February, 1994, the Company formed a joint venture with Inacom Corp.,
Omaha, Nebraska, for the purpose of opening an office in Minneapolis,
Minnesota for direct sales of both companies' products and services. Late in
1994, the joint venture expanded its operations into Milwaukee, Wisconsin and
Omaha, Nebraska. The joint venture proved to be an unprofitable undertaking
for the Company. Effective June 1, 1995, the joint venture was dissolved, and
the
7
<PAGE>
Company integrated the joint venture's remaining operation (the Minneapolis
office) into Internet.
COMMUNICATIONS EQUIPMENT: INDIRECT SALES
Internet signed a one-year agreement in early 1992 with Tellabs which
granted the Company master distribution rights to sell Tellabs 300 Series
products to other distributors located in the Western United States. In
January 1993, Tellabs and Internet entered into a subsequent agreement which
replaced and expanded the 1992 agreement in the area of technological
development. In the Product Development, Supply and License Agreement (the
"Agreement"), Tellabs granted Internet primary responsibility for ongoing
development of the 300 Series packet-switching products in exchange for
near-exclusive domestic distribution rights for the reseller channel.
Pursuant to the Agreement, all value-added resellers located in the United
States purchasing the Tellabs 300 Series products must now order and purchase
these products directly from Internet. Internet maintains sufficient
quantities of inventory to deliver the product as it is ordered by these
resellers. The Agreement is for a period of four years, expiring in late
1996. Under this agreement, the Company was to make a substantial financial
commitment in the development and maintenance of software for Tellabs'
products. As discussed under Software Design and Development, included
elsewhere herein, the Company completed development in early 1995 of the
software development, but realized in late 1994 that the market for the
product had deteriorated substantially. This resulted in a substantial
write-down of the software development by the Company in 1994 resulting in a
significant fiscal 1995 loss. The Company retains the existing distribution
rights and will provide software support and maintenance for the 300 Series
products at a level requiring a significantly lower financial obligation to
the Company.
The Company added several new product lines into the Indirect Sales
channel in fiscal 1995 and fiscal 1996. Those products are manufactured by
such companies as Premisys, Cisco, Scitec, Gandalf and N E T.
COMMUNICATIONS EQUIPMENT: INSTALLATION, MAINTENANCE AND REPAIR
8
<PAGE>
In addition to merely reselling communications equipment, Internet
offers its customers installation, maintenance, and repair services. The
Company's field engineers perform all equipment installations whether on site
in Colorado or elsewhere in the United States. Equipment maintenance is
provided on site in Colorado and other locations throughout the United States
by Internet technicians or by way of subcontracts with Codex, Tellabs, AT&T
and other independent service companies. Internet also fulfills warranty
requirements on products sold by the Company (which generally involve
replacement of defective parts), as well as offering extended maintenance
agreements during and after expiration of the manufacturer's original
warranty.
DEDICATED LINE SERVICES
Internet provides to its customers, at reduced rates, circuits for long
distance data transmissions to and from cities throughout the United States.
Internet purchases high speed T1-Fiber Optic circuits from major carriers
such as WilTel which run to major cities and carry up to 24 data circuits per
line. T1 circuits are an AT&T developed standard for digital transmission of
voice, data and video at an extremely high speed rate of transmission.
Internet presently has installed T1 circuits in Colorado Springs, Dallas,
Chicago, Kansas City, Houston, Los Angeles, San Francisco, Las Vegas,
Phoenix, Detroit, Washington D.C., Casper, Billings, Salt Lake City, Omaha,
Oklahoma City, Eau Claire, Atlanta, Orlando, Charlotte, Seattle, Minneapolis,
Helena, Cheyenne, New York City, Boise, Portland, and Albuquerque.
SOFTWARE DESIGN AND DEVELOPMENT
As previously discussed, effective January 1993, the Company signed the
Agreement with Tellabs, a manufacturer of data communications equipment,
whereby the Company became a national distributor of the Tellabs 300 Series
packet-switching products and has granted the Company a non-exclusive license
for the use of its technology during the four-year term of the Agreement. The
Company is obligated to provide technical development and enhancements of the
manufacturer's products in the form of sustaining engineering. The Company is
obligated to spend each year 12% of the total
9
<PAGE>
revenues from sales of the manufacturer's products for the prior year. Due to
declining sales of this technology, this is not considered to be a
significant continuing obligation.
During the past two years the Company has met this commitment and
capitalized significant costs related to software development. During the
fourth quarter of fiscal 1995 the Company re-evaluated the net realizability
of its capitalized software. At that time it was determined that due to
technological changes in the market as well as delays in completing
development, the projected market for its software product was substantially
lower than previously anticipated. While the Company completed the software
development subsequent to year-end, the related capitalized costs were in
excess of the anticipated future profit from the sale of the product. In
conjunction with the completion of the software, the Company has closed its
software development office and written down certain specialized computer
equipment to its estimated net realizable value. This has resulted in a
write-off of $1,475,000 of cost in fiscal 1995, a substantial portion of
which had previously been capitalized during that year.
The Company may, as some future time, determine to develop new software
products. However, such development efforts would expect to be on a limited
basis.
SALES AND MARKETING
Internet's sales and marketing functions are currently staffed by four
(4) sales managers and seventeen (17) account executives. Internet's direct
sales account executives initially contact potential customers from referrals
from other customers or by direct mail or telephone. Follow-up meetings are
then scheduled to evaluate and provide recommendations as to system design
and equipment necessary to effectively operate within their network.
Indirect sales representatives work directly with resellers located in a
defined geographic region. Many of these resellers have been referred to
Internet as a result of their past association with the product manufacturer.
New resellers are solicited by the sales representatives in areas where the
product
10
<PAGE>
is not currently available. Internet has indirect account executives located
in Los Angeles and New Jersey.
RECENT DEVELOPMENTS
In January, 1996, Internet established two new product groups - LAN
(Local Area Network) and Internet Services. The LAN group was formed to
address customer needs in local area network design, consulting,
installation, and maintenance. The Internet Services group was formed to
take advantage of customer requests for access and services related to the
"internet". Both product offerings are considered to be complimentary
offering which further leverage Internet's relationship with its customers.
CUSTOMERS
No single customer accounted for more than 10% of sales in the fiscal
year ended January 31, 1996.
SEASONALITY
The sales of the Company are not seasonal to any significant extent.
Sales may decrease or increase at various times throughout a year due to
customers delaying purchases while waiting for new product announcements and
increasing purchases subsequent to such announcements.
BACKLOG
The Company receives orders and is awarded contracts for the sale and
installation of network systems to be installed in the future. As of January
31, 1996, there were fifty-three (53) orders received from various customers
which will account for approximately $315,000 in future sales. Substantially
all of these orders are expected to be shipped and installed before April 30,
1996.
In addition, the Company has on-going contracts with customers that
range from one (1) to five (5) years for network management,
11
<PAGE>
maintenance service and data circuits which provides monthly recurring
revenue to the Company. The total monthly revenue provided by these
contracts was $673,000 per month as of January 31, 1996.
COMPETITION
The Company competes with numerous dealers and distributors in the Rocky
Mountain Region and the United States for the original sale of data
communications products. The Company's management believes that these
distributors and dealers do not pose serious competition to Internet's
business because management knows of no other competitor providing
comprehensive, value-added services such as network analysis, design, and
management, as well as providing dedicated lines. However, it is possible
that larger companies with more capital and technical personnel available to
it will in the future come into direct competition with the Company. Also,
the Company competes with the direct manufacturers' local sales
representatives. However, these sales representatives typically focus on
larger accounts and sell only products of the manufacturers they represent,
prohibiting the flexibility and cost savings of combining products of
numerous manufacturers.
With respect to the sale and lease of dedicated lines, several major
carriers presently represent the Company's greatest competition--including
AT&T, MCI, and Sprint. Heavily regulated by the Federal Communications
Commission ("FCC"), these companies derive most of their revenues through
long distance dial tone services to businesses and residences. These
companies also actively market dedicated data and voice circuits. In
addition, WilTel, ACI, ITT, and WTCI, offer dedicated circuits in both the
voice and data environments. These carriers typically offer their circuits at
a price below AT&T, MCI, and Sprint, and closer to the Company's pricing,
representing intense competition. However, management believes these carriers
do not offer products and services such as network management, equipment or
training.
GOVERNMENT REGULATION
The Company's operations are subject to regulation by the
12
<PAGE>
Federal Communications Commission ("FCC") under the Communications Act of
1934, as amended. The FCC establishes the prices that the Company and the
other intercity carriers competing with AT&T are able to charge customers.
In August 1982, the FCC substantially deregulated non-facilities-based,
territorial resale carriers such as the Company, and no longer requires
certification of these type of carriers or the filing of tariffs. The
Company and other such carriers will, however, still be subject to the duty
to provide service upon reasonable request, as well as not to engage in
discriminatory activities. While the FCC has elected not to exercise its
authority to regulate the rates and services of the Company, the FCC may
elect to do so in the future. To the extent the FCC should elect to regulate
territorial resale carriers, the Company's rates and the services it could
render would be established and controlled by the FCC. This could have the
effect of reducing the rates the Company could charge and therefore reduce
operating revenues as well as limiting the services it currently offers to
its customers.
The Company's ability to provide intrastate dedicated line service is
also subject to regulation in each state by the appropriate state regulatory
agency. Colorado's and other states' publicly utility commissions permit
certain re-sellers and certified carriers such as Internet to carry
intrastate long distance and dedicated line traffic without regulation. Only
the local exchange companies such as U.S. West are permitted to carry
intrastate (local) traffic.
EMPLOYEES
On March 31, 1996, the Company employed seventy (70) full-time
employees, including three (3) executive officers, twenty-one (21) in sales
and marketing, thirty (30) in network operations and technical services,
twenty (21) in accounting and administration and three (3) in product
development. The Company has non-compete and confidentiality agreements with
its sales account executives and engineers.
13
<PAGE>
Item 2. DESCRIPTION OF PROPERTIES
The Company leases approximately 26,000 square foot facility located at
7100 East Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111.
The Company currently pays rental of approximately $31,000 per month. The
Company also leases 2,000 square feet of general office space in Edina,
Minnesota at a cost of $900 per month.
Internet's software development office in Boulder, Colorado was closed
in March, 1995. A sub-lease agreement with another tenant was negotiated
which offset the majority of the cost of Internet's lease. Both the lease and
the related sub-lease expired in March, 1996.
Item 3. LEGAL PROCEEDINGS
Internet is not a party to, nor is any of Internet's property subject
to, any material legal proceedings. Internet knows of no legal proceedings
contemplated or threatened against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ending January 31, 1996.
14
<PAGE>
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRINCIPAL MARKET OR MARKETS. Internet's Common Stock is traded on the
NASDAQ Small-Cap Market under the symbol INCC. In the previous years and
prior to June 13, 1994, Warrants to purchase Common Stock were traded under
the symbol INCCW. All Warrants not exercised by June 13, 1994 expired under
their own terms on that date.
The following table represents the range of high and low bid prices for
the Common Stock and Warrants for the eight fiscal quarters ended January 31,
1996.
QUARTER ENDED
-----------------------------------------------------------
APR. 30, 94 JUL. 31, 94 OCT. 31, 94 JAN. 31, 95
----------- ----------- ----------- -----------
Security High Low High Low High Low High Low
Common 9.88 5.63 6.00 3.13 6.63 3.88 8.25 3.63
Warrants 4.13 .44 .63 .03 N/A N/A N/A N/A
QUARTER ENDED
-----------------------------------------------------------
APR. 30, 95 JUL. 31, 95 OCT. 31, 95 JAN. 31, 95
----------- ----------- ----------- -----------
Security High Low High Low High Low High Low
Common 6.75 4.25 6.50 3.90 7.75 4.12 6.50 3.50
Warrants N/A N/A N/A N/A N/A N/A N/A N/A
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK AND WARRANTS. As of April
15, 1996, there were 174 record holders and an additional estimated 2,500
beneficial holders of Internet's Common Stock.
(c) DIVIDENDS. Internet has paid no cash dividends on its Common Stock and has
no present intention of paying cash dividends in the foreseeable future,
although there exists no restrictions that limit Internet's ability to pay
dividends. It is the present policy of the Board of Directors to retain all
earnings to provide
15
<PAGE>
for the growth of the Company. Payment of cash dividends in the future will
depend upon, among other things, the Company's future earnings, requirements
for capital improvements and financial condition.
16
<PAGE>
Item 6. 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
financial statements.
FINANCIAL CONDITION
The financial condition of the Company at January 31, 1996 as compared
to the previous year is discussed below. All known significant trends and
events in financial condition, liquidity and capital resources are also
discussed below.
The company's cash position has decreased by $256,000 (including the decline
in marketable securities) from the prior year. The current ratio was 1.20 as
of January 31, 1996 as compared to 1.64 for the prior year. Working capital
was $892,000 as of January 31, 1996 and had declined from $2,052,000 for the
prior year. While revenues increased by 13.3% over the prior year, the
balance of net trade receivables declined by 1.8% due to collection efforts
by Company personnel.
Inventory increased from $738,000 as January 31, 1995 to $1,398,000 at
January 31, 1996. This increase was due to stocking of new equipment lines,
extended manufacturer lead times, and delays in customer delivery. Trade
accounts payable increased by $495,000 over the prior fiscal year to
$2,523,000 as of January 31, 1996. This resulted from increased activity from
a 13.3% increase in revenues, increased inventory balances, and a dispute
with a vendor over the accuracy of its billings to the company. Deferred
revenues increased by 23.3% to $662,000. This balance reflected one month of
advanced billings on the company's multi-year customer services and circuits
contracts.
During fiscal year ended January 31, 1996, working capital was most
significantly affected by the current year's operating loss of $977,000 and
expenditures for capital equipment of $873,000 and leasehold improvements of
$141,000. The Company increased its use
17
<PAGE>
of its lines of credit during the fiscal year. The balance drawn as of
January 31, 1996 was $1,000,000 up from $350,000 at the previous year-end.
The total credit facility is $1,750,000 of which $450,000 is held as
collateral for a performance bond on a significant customer contract. During
the year, the Company was in violation of loan agreement covenants. However,
the lender has waived those violations and extended the line of credit to
June 30, 1996. It is management's opinion that the Company has adequate
working capital and bank credit to fund its on-going operations.
During the fiscal year, the Company elected to dissolve its joint venture
with Inacom by buying the joint venture's operations. All customers were
transferred to the Company; all offices except for Minneapolis were closed,
and operations were streamlined. The results of the joint venture increased
the Company's operating loss by $209,000 over the life of the joint venture.
RESULTS FROM OPERATIONS
Revenues for the year ended January 31, 1996 ("1995") increased by 13.3% over
the prior year. The table below shows revenue results by categories:
1995 1994 % CHANGE
------- ------- --------
Equipment revenues $ 9,899 $ 9,532 3.9%
Data circuit revenues 5,585 4,546 22.9%
Equipment services revenues 2,328 1,871 24.4%
Network management revenues 630 378 66.7%
Other revenues 86 23 273.9%
------- -------
Total Revenues $18,528 $16,350 13.3%
The growth in services revenues which include data circuit revenues,
equipment services revenues, and network management revenues results from an
increasing emphasis on the sale of services by the Company. These revenues
grew to $8,543,000 during
18
<PAGE>
the current fiscal year, an increase of 25.7% over the prior fiscal year.
29% of customers buying services in 1995 increased their purchase of services
in 1996.
During Fiscal Year 1996, the Company was organized into two main sales
organizations - a direct sales force focusing on selling equipment and
services to direct end-user sales and an indirect sales force focusing on
equipment-only sales to resellers. During the fiscal year, the Company's
direct sales group generated equipment and services revenues of $15,064,000,
an increase of 16.9% over the prior year. The indirect sales force generated
equipment-only revenues of $3,033,000, a decrease of 12.5%. The decrease in
indirect sales force revenue is attributable to increased price pressure from
resellers and competition in the marketplace.
In Fiscal 1995, the Company formed a strategic sales group targeting
complimentary product relationships with system integrators and a national
accounts program. Neither the strategic sales nor the national accounts sales
groups provided sufficient revenues to justify continued investment, and as a
result those groups were disbanded during the fourth quarter.
Cost of Sales increased by 12.6% over the prior year. This was due to
increased revenue activity. Overall gross margin percentage increased to
27.1% for fiscal year 1996 as compared to 26.6% for fiscal year 1995. This
results from the increase in services revenues which generally have a higher
gross margin.
Selling expenses increased by $340,000 or 18.6% from the prior fiscal year.
The expense growth resulted from increased headcount relating to a number of
sales programs which were begun early in the fiscal year and subsequently
shut down due to lack of revenue generation. Expense levels also increased
due to normal commissions expenses related to higher revenue levels.
General and Administrative expenses increased by 28.5% or $680,000 to
$3,066,000 for fiscal year ended January 31, 1996. The expense growth
related a number of factors including higher headcount and salary costs of
$353,000 incurred in anticipation of higher revenue
19
<PAGE>
levels and increased depreciation and amortization relating to capital
equipment purchases and office space remodeling and rent ($79,000).
Additional increases were reported in professional services and insurance
costs ($53,000), public company expenses ($36,000), and bad debt expense
($42,000). Expenses increased in numerous other categories due to increased
levels of revenue and general operations activities.
The Company recorded a $61,000 loss for its share of the joint venture
operations during the fiscal year just ended. The joint venture was
dissolved on May 31, 1995 with Internet Communications taking control of all
operations. All offices, except for Minneapolis, were closed. All customer
contracts and relationships were transferred to Internet Communications.
Software Development and Maintenance expenses included the write- off of
capitalized software expenses and the down-sizing of the Company's software
development program. In the prior fiscal year, the Company re-evaluated the
net realizability of its capitalized software in light of product development
schedules and changing market requirements and wrote down its investment by
$1,475,000 to $50,000. During the fiscal year ended January 31, 1996, the
Company determined that there were no distinguishable revenues which could be
attributed to the capitalized software and that the remaining asset which
then totaled $137,000 should be written off to expense. The Company continues
to provide technical support for specific product lines of Tellabs equipment
with targeted resources.
In the third and fourth quarter, the Company took steps to reduce the growth
of operating expenses. Total headcount of the company was reduced from a
high of 96 employees (including the Inacom joint venture) to 73 employees on
January 31, 1996. Non-productive programs were canceled. The organizational
structure was simplified and focused on key tasks.
OUTLOOK
Company management believes that Internet Communications is in a high growth
marketplace in which data, voice, and video networks are of strategic
importance to commercial and governmental
20
<PAGE>
enterprises. The Company recognizes the significant impact on the
marketplace, customer satisfaction, and on the Company statement of
operations of value-added services. In Fiscal Year 1997 (ending January 31,
1997), marketing and sales programs will be directed at growing the services
products of the Company. Significant resources will be devoted to consulting,
training, network management, and network maintenance services. Important
revenue-generation programs will instituted around local area network (LAN)
capabilities and internet access services for commercial customers. The sale
of communications equipment will continue to be an important source of
revenues, but the Company will emphasize "systems" sales in which a variety
of long-term services are perceived as the higher value components of the
system.
The Company will select business opportunities, combining an entrepreneurial
bias for action with disciplined business planning and an expectation for
results. Expenses will be managed aggressively, seeking to optimize the
balance between growth and profitability. The Company expects to seek
outside investment in order to strengthen its working capital and to fund
geographic and product-line growth.
Item 7. FINANCIAL STATEMENTS
Information with respect to this item is contained in the financial
statements appearing on Item 13 in Part IV of this Report. Such information
is incorporated herein by reference.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE>
PART III
The information required by Part III, Items 9, 10, 11 and 12 of Form
10-KSB is incorporated herein by reference to Registrant's definitive Proxy
Statement to be filed in connection with the Annual Meeting of Shareholders
to be held in May 1996.
PART IV
Item 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statements are filed as part of this Report:
PAGE
----
Index to Financial Statements F-1
Independent Auditors' Reports F-2
Balance Sheets, January 31, 1996 F-3
Statements of Operations, For the
Years Ended January 31, 1996 and 1995 F-4
Statement of Stockholders' Equity, For the Period
from February 1, 1994 through January 31, 1996 F-5
Statements of Cash Flows, For the
Years Ended January 31, 1996 and 1995 F-6
Notes to Financial Statements F-7
2. There are no Financial Statement Schedules required to be filed as part
of this Report.
22
<PAGE>
3. EXHIBITS:
(a) None
(b) None
(c) No reports on Form 8-K were filed during the quarter ending January 31,
1996.
23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 under-signed, thereunto duly authorized.
INTERNET COMMUNICATIONS CORPORATION
Date: April 30, 1996 By: ----------------------------
Thomas C. Galley, President
and Principal Executive
Officer
Date: April 30, 1996 By: ----------------------------
Benjamin T. Kelly,
Principal Financial Officer
and Treasurer
SIGNATURES
Date: April 30, 1996 By: ----------------------------
Thomas C. Galley, Director
22
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Date: April 30, 1996 By: ----------------------------
Arnell J. Galley, Director
Date: April 30, 1996 By: ----------------------------
Peter A. Guglielmi, Director
23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT............................................. F-2
BALANCE SHEET-January 31, 1996........................................... F-3
STATEMENTS OF OPERATIONS-For the Years Ended January 31, 1996 and 1995... F-4
STATEMENT OF STOCKHOLDERS' EQUITY-For the Period from February 1, 1994
through January 31, 1996............................................... F-5
STATEMENTS OF CASH FLOWS-For the Years Ended January 31, 1996 and
1995................................................................... F-6
NOTES TO FINANCIAL STATEMENTS............................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Internet Communications Corporation
Englewood, Colorado
We have audited the accompanying balance sheet of Internet Communications
Corporation as of January 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for the years ended January 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Internet Communications
Corporation as of January 31, 1996, and the results of its operations and its
cash flows for the years ended January 31, 1996 and 1995, in conformity with
generally accepted accounting principles.
HEIN + ASSOCIATES LLP
April 24, 1996
Denver, Colorado
F-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
BALANCE SHEET
JANUARY 31, 1996
ASSETS
------
CURRENT ASSETS:
Cash $ 473,000
Receivables:
Trade, net of $133,000 allowance for doubtful accounts 2,757,000
Other 400,000
Inventory 1,398,000
Prepaid expenses and other 397,000
-----------
Total current assets 5,425,000
FURNITURE AND EQUIPMENT, net 1,943,000
OTHER ASSETS 82,000
-----------
TOTAL ASSETS $ 7,450,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Note payable $ 1,000,000
Accounts payable 2,523,000
Unearned income 662,000
Accrued expenses and other 348,000
-----------
Total current liabilities 4,533,000
COMMITMENTS (NOTE 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 100,000,000 shares
authorized, no shares issued and outstanding -
Common stock, no par value, 4,500,000 shares authorized,
2,400,686 shares issued and outstanding 5,202,000
Stockholders' notes (35,000)
Accumulated deficit (2,250,000)
-----------
Total stockholders' equity 2,917,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,450,000
-----------
-----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
For the Years
Ended
January 31,
------------------------------
1996 1995
------------ -----------
NET SALES:
Equipment $ 9,899,000 $ 9,532,000
Data communication services 8,629,000 6,818,000
------------ -----------
18,528,000 16,350,000
COST OF SALES (13,502,000) (11,996,000)
------------ -----------
Gross margin 5,026,000 4,354,000
OPERATING EXPENSES:
Selling 2,172,000 1,832,000
General and administrative 3,066,000 2,386,000
Software development and maintenance 832,000 1,955,000
Equity in loss of joint venture 61,000 148,000
------------ -----------
6,131,000 6,321,000
------------ -----------
LOSS BEFORE INCOME TAXES (1,105,000) (1,967,000)
Income tax benefit 128,000 137,000
------------ -----------
NET LOSS $ (977,000) $(1,830,000)
------------ -----------
------------ -----------
NET LOSS PER COMMON SHARE $(.41) $(.78)
------------ -----------
------------ -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,397,000 2,352,000
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 1, 1994 THROUGH JANUARY 31, 1996
<TABLE>
<CAPTION>
Common Stock Treasury Stock
---------------------- ------------------- Stockholders' Accumulated
Shares Amount Shares Amount Notes Deficit Total
--------- ---------- ------- --------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, February 1, 1994 2,267,803 $4,516,000 14,000 $ (39,000) $(161,000) $ 557,000 $ 4,873,000
Stock options exercised 26,525 56,000 - - - - 56,000
Warrants exercised 165,358 902,000 - - - - 902,000
Reduction of stockholders' notes - - - - 105,000 - 105,000
Retirement of of treasury stock - - 55,000 (253,000) - - (253,000)
Net loss - - - - - (1,830,000) (1,830,000)
--------- ---------- ------- --------- --------- ------------ -----------
BALANCES, January 31, 1995 2,459,686 5,474,000 69,000 (292,000) (56,000) (1,273,000) 3,853,000
Stock options exercised 10,000 20,000 - - - - 20,000
Reduction of stockholders' notes 21,000 - 21,000
Retirement of treasury stock (69,000) (292,000) (69,000) 292,000 - - -
Net loss - - - - - (977,000) (977,000)
--------- ---------- ------- --------- --------- ------------ -----------
BALANCES, January 31, 1996 2,400,686 $5,202,000 - $ - $ (35,000) $ (2,250,000) $ 2,917,000
--------- ---------- ------- --------- --------- ------------ -----------
--------- ---------- ------- --------- --------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
JANUARY 31,
--------------------------
1996 1995
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (977,000) $(1,830,000)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Depreciation and amortization 658,000 564,000
Bad debt expense and debt forgiveness 116,000 129,000
Deferred income taxes - (100,000)
Write-down of software 137,000 1,475,000
Loss in joint venture 61,000 148,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (62,000) (1,337,000)
Income taxes - 83,000
Inventory (660,000) (98,000)
Prepaid expenses and other 258,000 (90,000)
Increase (decrease) in:
Accounts payable 495,000 1,199,000
Unearned income 125,000 97,000
Accrued expenses and other 52,000 55,000
------------ -----------
Net cash provided by operating activities 203,000 295,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs (100,000) (688,000)
Capital expenditures (1,014,000) (732,000)
Proceeds from marketable securities 157,000 137,000
Purchase of marketable equity securities - (105,000)
Investment in joint venture (36,000) (175,000)
------------ -----------
Net cash used in investing activities (993,000) (1,563,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 2,965,000 2,375,000
Repayment of debt (2,315,000) (2,025,000)
Proceeds from notes receivable 25,000 70,000
Purchase of treasury stock - (253,000)
Proceeds from sale of stock, net 16,000 958,000
------------ -----------
Net cash provided by financing activities 691,000 1,125,000
------------ -----------
(DECREASE) IN CASH (99,000) (143,000)
CASH, beginning of period 572,000 715,000
------------ -----------
CASH, end of period $ 473,000 $ 572,000
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 64,000 $ 32,000
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - Internet Communications Corporation (the Company)
was incorporated in 1986 as a Colorado corporation. The Company is
currently a wide and local area integrater of data communications equipment,
services and carrier circuits.
CASH EQUIVALENTS - The Company considers all highly liquid monetary
instruments purchased with an original maturity of three months or less to
be cash equivalents. Occasionally, the Company has funds in a financial
institution in excess of amounts insured by the Federal Deposit Insurance
Corporation.
CONCENTRATIONS OF CREDIT RISK - Credit risk represents the accounting loss
that would be recognized at the reporting date if counterparties failed
completely to perform as contracted. Concentrations of credit risk (whether
on or off balance sheet) that arise from financial instruments exist for
groups of customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly effected by changes in economic or other
conditions.
Substantially all of the Company's accounts receivables result from hardware
sales and services. This concentration of customers may be similarly
affected by changes in economic or other conditions. However, historical
credit losses incurred by the Company have not been significant. The
Company's activities are throughout the United States.
A Director of the Company also serves as an officer of a major vendor with
which the Company purchased approximately $3,400,000 of product during
fiscal 1996. This amount is not considered a material amount to the vendor.
INVENTORY - Inventory, which consists of finished goods (communications
equipment), is stated at the lower of cost (first-in, first-out method)
or market.
INVESTMENT IN JOINT VENTURE - During the year ended January 31, 1995, the
Company had a 50% interest in a joint venture, which served as a marketing
center for the sale of communication products and services. The Company's
investment in the joint venture was accounted for under the equity method
of accounting. During the year ended January 31, 1996, the Company purchased
the remaining 50% interest in the joint venture for $36,000. The results of
operations of the former joint venture from its purchase date of June 1,
1995 have been combined into the accompanying financial statements. Prior
operations of the joint venture were not significant relative to the
Company.
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost and
depreciation is calculated generally on a straight-line basis over the
estimated useful lives of five to seven years. When assets are retired or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the respective accounts and any profit or loss on the
disposition is reflected in operations.
F-7
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Furniture and equipment consist of the following at January 31, 1996:
Telecommunications equipment $ 2,406,000
Office furniture and equipment 1,369,000
Transportation equipment 37,000
Leasehold improvements 265,000
-----------
4,077,000
Less accumulated depreciation and amortization (2,134,000)
-----------
Total furniture and equipment $ 1,943,000
-----------
-----------
SOFTWARE DEVELOPMENT COSTS - The cost of developing computer software for
which technological feasibility has been established is capitalized and
amortized to operations in the greater of the amount computed using either
the straight-line method of generally five years or the ratio of current
gross revenue to total anticipated revenue over the estimated useful life of
the software. Software development costs capitalized during the years ended
January 31, 1996 and 1995 were $100,000 and $688,000, respectively.
Amortization of capitalized software development costs for the years ended
January 31, 1996 and 1995 was $13,000 and $7,000, respectively. Amortization
of computer software commences when the product is completed. The net
realizable value of such deferred costs is reviewed by management on a
periodic basis, and costs in excess of net realizable value is charged to
operations. During the year ended January 31, 1996, and 1995, the Company
expensed $137,000 and $1,475,000, respectively, which was primarily software
development costs, based on the evaluation by management of its future
realizable value (see Note 2).
Costs for maintenance and customer support are charged to expense when the
related revenue is recognized or when those costs are incurred, whichever
occurs first.
Costs incurred in researching, designing and planning for the development of
new software are charged to operations in the year incurred.
REVENUE RECOGNITION - Revenue on system installation is recognized as work
is performed under the Company's contracts with its customers. Revenue on
maintenance contracts is recognized over the term of the agreement. Unearned
income represents current month's advance billings and revenue received in
advance for services under contract. These amounts will be recognized as
revenue when earned. Commissions paid in advance are expensed generally over
the term of the related noncancelable service agreements.
INCOME TAXES - The Company accounts for income taxes under the liability
method of SFAS No. 109, whereby current and deferred tax assets and
liabilities are determined based on tax rates and laws enacted as of the
balance sheet date. Deferred tax expense or benefit represents the change in
the deferred tax asset/liability balance.
F-8
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The estimated fair values for
financial instruments under SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS, are determined at discrete points in time based on
relevant market information. These estimates involve uncertainties and
cannot be determined with precision. At January 31, 1996, the Company
believes the carrying values of its receivables, notes payables and accounts
payable approximate their estimated fair values.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In March 1995, the
Financial Accounting Standards Board issued a new statement titled
"Accounting for Impairment of Long-Lived Assets." This new standard is
effective for years beginning after December 15, 1995 and would change the
Company's method of determining impairment of long-lived assets. Although
the Company has not performed a detailed analysis of the impact of this new
standard on the Company's financial statements, the Company does not believe
that adoption of the new standard will have a material effect on the
financial statements.
In October 1995, the Financial Accounting Standards Board issued a new
statement titled "Accounting for Stock-Based Compensation" (FAS 123). The
new statement is effective for fiscal years beginning after December 15,
1995. FAS 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on fair value. Companies that do not adopt
the fair value accounting rules must disclose the impact of adopting the
new method in the notes to the financial statements. Transactions in equity
instruments with non-employees for goods or services must be accounted for
on the fair value method. The Company currently does not intend to adopt the
fair value accounting prescribed by FAS 123, and will be subject only to the
disclosure requirements prescribed by FAS 123. However, the Company intends
to continue its analysis of FAS 123 and may elect to adopt its provisions in
the future.
NET LOSS PER SHARE - Net loss per share is based upon the weighted average
number of shares outstanding, including common stock equivalents outstanding
during the period. Fully diluted net income per share assumes conversion of
all potentially dilutive outstanding warrants and options. Common stock
equivalents were anti-dilutive for the years ended January 31, 1996 and
1995, and therefore, are not included in the computation of net loss per
share.
2. SOFTWARE DEVELOPMENT EXPENSE:
During the years ending January 31, 1996 and 1995, the Company re-evaluated
the net realizability of its capitalized software. At those times, it was
determined that due to technological changes in
F-9
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
the market as well as delays in completing development, the projected market
for its software product was substantially lower than previously
anticipated. The related capitalized costs were in excess of the anticipated
future profit from the sale of the product. In conjunction with the
completion of the software, the Company has closed its software development
office and written down certain specialized computer equipment to its
estimated net realizable value. This has resulted in a write-off of $137,000
of cost in fiscal 1996 and $1,475,000 in fiscal 1995 of cost, a substantial
portion of which was capitalized during the related year. These amounts are
included in software development and maintenance expense. The Company is
currently not involved in any other software development projects.
3. NOTE PAYABLE:
The Company has a line-of-credit for $1,750,000 with interest at prime plus
1% (totaling 9.5% at January 31, 1996). This facility consists of a general
use line-of-credit of $1,300,000 and a $450,000 facility to support the
performance bond which will expire upon the release of the bond. As of
January 31, 1996, there was $1,000,000 outstanding under the line-of-credit
and another $450,000 was committed under a performance bond. The
line-of-credit is collateralized by accounts receivable and inventory and
expires in June 1996. As of January 31, 1996, the Company was not in
compliance with certain financial loan covenants, however, such covenants
have been waived.
4. COMMITMENTS:
The Company leases office space and equipment under noncancelable operating
leases. Total rental expense for the years ended January 31, 1996 and 1995
was $298,000 and $262,000, respectively. The total minimum rental
commitments for the years ending January 31 are as follows:
1997 $ 327,000
1998 331,000
1999 342,000
2000 323,000
2001 331,000
Thereafter 678,000
----------
$2,332,000
----------
----------
5. STOCKHOLDERS' EQUITY:
The Company has authorized 100,000,000 shares of preferred stock that may
be issued in such series and preferences as determined by the Company's
Board of Directors.
F-10
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Company has issued shares of common stock to certain employees for
notes, which have an outstanding balance of $35,000 as of January 31,
1996. During fiscal 1995, these notes were reduced by $105,000, including
the forgiveness by the Company of approximately $35,000.
The Company's Board of Directors have granted non-qualified options to
various officers, employees, and others. Generally, the options are
granted at the current market price of the Company's common stock,
however, there have been occasions where options have been granted at
below the market price and the Company has recorded the difference as an
expense. The exercise periods have ranged between one to four years.
During fiscal 1995 and 1994, non-qualified options for 21,500 and 8,000
were granted to employees.
At its March 18, 1996 Board of Directors meeting, the Company adopted a
Incentive Stock Plan (Plan), subject to shareholder approval, that
authorizes the issuance of up to 625,000 shares of common stock. Pursuant
to the plan, the Company may grant "incentive stock options" (intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as
amended), non-qualified stock options and stock purchase rights or a
combination thereof.
Incentive stock options may not be granted at an exercise price of less
than the fair market value of the common stock on the date of grant
(except for holders of more than 10% of common stock, whereby the
exercise price must be at least 110% of the fair market value at the date
of grant for incentive stock options). The term of the options may not
exceed ten years. In July 1995, options were granted under the plan for
91,000 options (including 2,000 options which were subsequently
terminated) which will vest over the next four years, beginning in July
1996. These options are exercisable through July 2009 at $3.875 per
share. No options have been exercised.
During the fiscal year ended January 31, 1996, the Company also adopted
the Non Employee Directors' Stock Option Plan (Outside Directors' Plan),
which provides for the grant of stock options to non-employee directors
of the Company and any subsidiary. An aggregate of 40,000 shares of
common stock are reserved for issuance under the Outside Directors' Plan.
The exercise price of the options will be the fair market value of the
stock on the date of grant. Outside directors are automatically granted
options to purchase 10,000 shares initially and an additional 2,000
shares for each subsequent year that they serve. All options granted
vest over a 3-year period from the date of grant. In July 1995, one
director was granted options to purchase 10,000 shares each, exercisable
at $6.125 per share. No options have been exercised.
F-11
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Option activity is as follows:
EXERCISE
OPTIONS PRICE
------- ------------
BALANCE, February 1, 1994 358,949 $1.34-$13.06
Options granted 21,500 $3.65-$4.50
Options exercised (26,525) $1.34-$2.75
Options expired (66,500) $1.98-$4.94
-------
BALANCE, January 31, 1995 287,424 $1.87-$13.06
Options granted 107,000 $ 3.88
Options exercised (10,000) $ 2.00
Options expired (87,624) $1.87-$13.06
-------
BALANCE, January 31, 1996 296,800
-------
-------
Options exercisable at January 31, 1996 totaled approximately $953,000.
In April 1996, employees owing options totaling 189,800 options
(including those options issued during the fiscal year ending January 31,
1996 and 75,000 options to officers/directors granted in 1993), exchanged
their options, which generally would have expired in April 1996 for
313,000 new qualified incentive stock options (including 180,000 options
to officers and directors) which will vest 25% at time of grant and 25%
on each of succeeding three anniversaries exercisable at $3.75 per share
(except for affiliates which will be exercisable at $4.13). These options
are ten year options.
6. INCOME TAXES:
Deferred income taxes are provided for differences between the tax and
book basis of assets and liabilities as a result of temporary differences
in the recognition of revenues or expenses for tax and financial
reporting purposes.
F-12
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
At January 31, 1996, these differences consist of the following:
Deferred revenue $ 685,000
Depreciation difference 74,000
Income tax loss carryforward 9,000
Other 29,000
---------
Total 797,000
Less valuation allowance (797,000)
---------
Net $ --
---------
---------
Income tax benefit is comprised of the following:
1996 1995
-------- --------
Current benefit $128,000 $ 37,000
Deferred benefit - 100,000
-------- --------
$128,000 $137,000
-------- --------
-------- --------
As of January 31, 1996, the Company has income tax loss carryforwards of
approximately $1,850,000 which expire in the years 2006 through 2011.
During the year ended January 31, 1996, the Company utilized
approximately $530,000 in net operating losses by carrying them back to
prior years to offset taxable income.
F-13
<PAGE>
APPENDIX F
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 APRIL 30, 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
incorporation or organization Identification 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 April 30, 1996, 2,400,686 shares of Common Stock, no par value were
outstanding
Page 1 of 10 pages.
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INDEX
PAGE
----
Form 10-Q SB Cover Page 1
Index Page 2
Part I Condensed Balance Sheets 3
April 30, 1996 and January 31, 1996
Condensed Statements of Operations 4
Three months ended April 30, 1996 & 1995
Condensed Statements of Cash Flows 5
Three months ended April 30, 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 9
Item 6 - Exhibits and Reports on Form 8-K 9
Signature Page 10
2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED BALANCE SHEETS
April 30 January 31,
1996 1996
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $266,000 $473,000
Receivables:
Trade, net of allowance $2,297,000 $2,757,000
Other $361,000 $400,000
Inventory $1,182,000 $1,398,000
Prepaid expenses and other $377,000 $397,000
----------- -----------
Total current assets $4,483,000 $5,425,000
FURNITURE AND EQUIPMENT, NET $1,900,000 $1,943,000
OTHER ASSETS: $69,000 $82,000
TOTAL ASSETS $6,452,000 $7,450,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $1,100,000 $1,000,000
Accounts payable $1,656,000 $2,523,000
Unearned income $672,000 $662,000
Accrued expenses and other $304,000 $348,000
----------- -----------
Total current liabilities $3,732,000 $4,533,000
STOCKHOLDERS' EQUITY:
Common stock, no par value $5,202,000 $5,202,000
Stockholders' notes ($35,000) ($35,000)
Accumulated deficit ($2,447,000) ($2,250,000)
----------- -----------
Total stockholders' equity $2,720,000 $2,917,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,452,000 $7,450,000
----------- -----------
----------- -----------
See accompanying notes to these condensed financial statements
3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
For the three months
ended April 30,
1996 1995
(Unaudited) (Unaudited)
NET SALES:
Equipment $1,258,000 $2,607,000
Data communication services $2,356,000 $2,110,000
---------- ----------
$3,614,000 $4,717,000
COST OF SALES ($2,548,000) ($3,248,000)
---------- ----------
GROSS MARGIN $1,066,000 $1,469,000
OPERATING EXPENSES:
Selling $493,000 $524,000
General and administrative $734,000 $676,000
Software development & maintenance $36,000 $133,000
Equity in loss of joint venture $0 $39,000
---------- ----------
$1,263,000 $1,372,000
---------- ----------
INCOME BEFORE INCOME TAXES ($197,000) $97,000
INCOME TAX EXPENSE $0 $0
---------- ----------
NET INCOME (LOSS) ($197,000) $97,000
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE $ (0.08) $ 0.04
---------- ----------
---------- ----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,397,000 2,521,000
---------- ----------
---------- ----------
See accompanying notes to these condensed financial statements
4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the three months
ended April 30,
1996 1995
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ($197,000) $97,000
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 188,000 149,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables - Net 499,000 (660,000)
Inventory 216,000 (219,000)
Prepaid expenses and other 33,000 74,000
Increase (decrease) in:
Accounts payable (887,000) 140,000
Unearned income 10,000 15,000
Accrued expenses (44,000) 98,000
---------- ---------
Net cash (used in) provided by operating activities (162,000) (306,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs -- (100,000)
Capital expenditures (145,000) (118,000)
Purchase of Marketable securities -- (2,000)
---------- ---------
Net cash used in investing activities (145,000) (220,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 100,000 765,000
Repayment of debt -- (550,000)
Proceeds from notes receivable -- 2,000
Purchase of treasury stock -- (2,000)
---------- ---------
Net cash provided by (used in) financing activities 100,000 215,000
---------- ---------
INCREASE (DECREASE) IN CASH (207,000) (311,000)
CASH, beginning of period 473,000 572,000
---------- ---------
CASH, end of period $266,000 $261,000
---------- ---------
---------- ---------
See accompanying notes to these condensed financial statements.
5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
APRIL 30, 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
<PAGE>
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 April 30, 1996 remained unchanged (1.20) when compared
to January 31, 1996 (1.20), and working capital decreased by $141,000 for the
period from January 31, 1996 to April 30, 1996. The Company's cash and cash
equivalents at April 30, 1996 were $266,000 compared to $473,000 at January 31,
1996. Trade accounts receivable decreased $460,000 at April 30, 1996, when
compared to January 31, 1996 primarily due to collection efforts by Company
personnel. Inventory balances decreased $216,000 compared to January 31, 1996
due to decreased vendor lead time, stock rotation to vendors and improved
customer delivery time. During the three months ending April 30, 1996 the
Company purchased $ 145,000 of capital assets used primarily in technological
services.
The Company increased its use of its line of credit during the first quarter of
fiscal 1997. The balance drawn on at April 30, 1996 was $1,100,000 an increase
of $100,000 from January 31, 1996. The total credit facility is $1,750,000 of
which $450,000 is held as collateral for a performance bond on a significant
customer contract. During the first quarter ending April 30, 1996, the Company
was in violation of loan agreement covenants. However, the lender has waived
those violations and extended the line of credit to June 30, 1996. It is
management's opinion that the Company has adequate working capital and bank
credit to fund its on-going operations. Accounts Payable decreased $867,000
when compared to January 31, 1996. This primarily resulted from payment to
vendors with cash generated through 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.
7
<PAGE>
RESULTS OF OPERATIONS:
For the three months ended April 30, 1996, the Company reported revenues of
$3.6 million respectively, resulting in net losses of $197,000 respectively,
compared to revenues of $4.7 million with net income of $97,000 for the three
months ended April 30, 1995.
Sales for the three months ended April 30, 1996, decreased 23% compared to the
same periods in 1995. The decrease in sales for the three months of fiscal 1997
was primarily the result of reduced equipment sales generated from the Company's
resale sales channel, partially offset by an increase in data communication
service sales of 12% when compared to the same period last year. Gross margin
as a percentage of sales was 29.5% for the three months ending April 30, 1996,
compared to 31.2% for the same periods of fiscal 1996. The decrease in gross
margin percentage during the three months ended April 30, 1996 when compared to
the same period last year was the result of lower margin equipment sales. The
Company's gross margin percentage can vary significantly from period to period
due to changes in the relative mix of equipment and service sales.
Selling expense as a percentage of revenues increased slightly (13.6%) for the
three months ended April 30, 1996 compared to the same periods of fiscal 1996
(11.1%). The increase is the result of greater sales force compensation per
revenue dollar for data communication service sales vs equipment sales.
General and Administrative expenses increased $58,000 for the three month
period ending April 30, 1996 when compared to the same periods in fiscal 1996.
These operating expense increases reflect the inclusion of operating expenses of
former Internet-Inacom operations acquired on June 1, 1995, expansion of office
facilities and general increase in expenses due to higher anticipated revenue
activity.
Software development & maintenance expense decreased $97,000 during the quarter
ending April 30, 1996 when compared to the same period last year. The decrease
is the result of the Company's de-emphasis of software development. See related
discussion in form 10-KSB dated January 31, 1996.
8
<PAGE>
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
NONE
ITEM 5. OTHER INFORMATION
Subsequent to the quarter ended April 30, 1996, the Company filed Form 8K dated
May 14, 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
9
<PAGE>
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: June 12, 1996
By: /s/ Benjamin T. Kelly
-------------------------------------------
Benjamin T. Kelly, Chief Financial Officer
and Treasurer
Date: June 12, 1996
10
<PAGE>
PROXY PROXY
INTERNET COMMUNICATIONS CORPORATION
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas C. Galley and Arnell J. Galley, each
with the power to appoint his/her substitute, and hereby authorizes them to
represent and to vote as designated below, all the shares of common stock of
Internet Communications Corporation held of record by the undersigned on
August 5, 1996 at the Special Meeting of Shareholders to be held on September
__, 1996, or any adjournment thereof.
1. A proposal to adopt the 1995 Non-Employee Director Stock Option Plan.
/ / FOR / / AGAINST / / ABSTAIN
2. A proposal to adopt the 1996 Incentive Stock Plan.
/ / FOR / / AGAINST / / ABSTAIN
3. A proposal to approve the Amended and Restated Acquisition Agreement
(the "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 (the
"Merger") 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 and Group
will receive a number of shares of the Company's common stock, no par value
("Company Common Stock"), that will in general be equal to 49% of the number
of shares of Company Common Stock that will be issued and outstanding after
giving effect to the closing of the Merger.
/ / FOR / / AGAINST / / ABSTAIN
4. A proposal to amend the Articles of Incorporation to increase the number
of authorized shares of the Company's Common Stock, no par value, from
4,500,000 shares to 20,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
5. A proposal 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 removal of directors
before expiration of their terms of office only for cause.
/ / FOR / / AGAINST / / ABSTAIN
6. A proposal to amend the Articles of Incorporation to provide for
increased voting requirements for
<PAGE>
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.
/ / FOR / / AGAINST / / ABSTAIN
7. A proposal to elect five (5) Directors.
/ / FOR the following nominees (except as marked to the contrary)
Dale Morrison
William J. Maxwell
Arnell J. Galley
Peter A. Guglielmi
Thomas C. Galley
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
cross out that nominee's name above).
8. In their discretion, the named proxies may vote on such other business
as may properly come before the Special Meeting or any adjournments or
postponements thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1,2, 3,4, 5, 6 and 7.
SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT THE MEETING IN
ACCORDANCE WITH THE SHAREHOLDER S SPECIFICATIONS ABOVE. THE PROXY
CONFERS DISCRETIONARY AUTHORITY IN RESPECT TO MATTERS NOT KNOWN OR
DETERMINED AT THE TIME OF THE MAILING OF THE NOTICE OF THE SPECIAL
MEETING OF SHAREHOLDERS TO THE UNDERSIGNED.
The undersigned hereby acknowledges receipt of the Notice of the Special
Meeting of Shareholders, Proxy Statement and Annual Report on Form 10-KSB
furnished therewith.
Dated:
---------------------------------
- - - - ---------------------------------------
Signature(s) of Shareholder(s)
Signature(s) should agree with name(s) appearing hereon. Executors,
administrators, trustees, guardians and attorneys should indicate when
signing. Attorneys should indicate when signing. Attorneys should submit
powers of attorney.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF INTERNET
COMMUNICATIONS CORPORATION. PLEASE SIGN AND RETURN THIS PROXY IN THE
ENCLOSED PRE-ADDRESSED ENVELOPE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR
RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
