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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
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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
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Commission file number 0-19578
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INTERNET COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-1095516
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State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
7100 E. BELLEVIEW AVE., SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 770-7600
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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
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(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
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Documents incorporated by reference: May 3,1996 Proxy Statement (Part III)
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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)
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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 Scitek. This division
enables Internet to directly provide the customers with equipment which it
feels is the most compatible to operate within their 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
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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 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.
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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 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
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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 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.
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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
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 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 and fiscal 1996. Those products are manufactured by such
companies as Premisys, Cisco, Scitek, Gandalf and N E T.
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COMMUNICATIONS EQUIPMENT: INSTALLATION, MAINTENANCE AND REPAIR
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 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 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
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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 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.
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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, 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.
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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 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.
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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.
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.
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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
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Apr. 30, 94 Jul.31, 94 Oct.31, 94 Jan.31, 95
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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
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Apr. 30, 95 Jul.31, 95 Oct.31, 95 Jan.31, 95
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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 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.
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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 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 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
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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
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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%
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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 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.
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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 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 Tellab 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
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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 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.
16
<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.
17
<PAGE>
3. EXHIBITS:
(a) None
(b) None
(c) No reports on Form 8-K were filed during the quarter ending January
31, 1996.
18
<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 under-signed, thereunto duly authorized.
INTERNET COMMUNICATIONS CORPORATION
Date: April 30, 1996 By: /s/ Thomas C. Galley
---------------------------------
Thomas C. Galley, President
and Principal Executive Officer
Date: April 30, 1996 By: /s/ Benjamin T. Kelly
---------------------------------
Principal Financial Officer
and Treasurer
SIGNATURES
Date: April 30, 1996 By: /s/ Thomas C. Galley
---------------------------------
Thomas C. Galley, Director
Date: April 30, 1996 By: /s/ Arnell J. Galley
---------------------------------
Arnell J. Galley, Director
Date: April 30, 1996 By: /s/ Peter A. Guglielmi
---------------------------------
Peter A. Guglielmi, Director
19
<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
Greenwood Village, 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> <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 the
market as well as delays in completing development, the projected market
for its software product was
F-9
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 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.
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.
F-10
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 89,000 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>
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 $2.00-$13.06
--------
--------
Options exercisable at January 31, 1996 totaled approximately 199,800.
In April 1996, employees owning options totaling 255,300 options
(including those options issued during the fiscal year ended 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/directors) which will vest 25% at the time
of grant and 25% on each of the succeeding three anniversaries
exercisable at $3.75 per share (except for officers/directors 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.
<PAGE>
F-12
At January 31, 1996, these differences consist of the following:
Income tax loss carryforward $ 685,000
Deferred revenue 74,000
Depreciation difference 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>
INTERNET COMMUNICATIONS CORPORATION
FINANCIAL STATEMENTS
JANUARY 31, 1996 AND 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-END> JAN-31-1996
<CASH> 473
<SECURITIES> 0
<RECEIVABLES> 2,890
<ALLOWANCES> (133)
<INVENTORY> 1,398
<CURRENT-ASSETS> 5,425
<PP&E> 4,077
<DEPRECIATION> (2,134)
<TOTAL-ASSETS> 7,450
<CURRENT-LIABILITIES> 4,533
<BONDS> 0
0
0
<COMMON> 5,202
<OTHER-SE> (2,215)
<TOTAL-LIABILITY-AND-EQUITY> 2,917
<SALES> 18,528
<TOTAL-REVENUES> 18,528
<CGS> 13,502
<TOTAL-COSTS> 13,502
<OTHER-EXPENSES> 6,131
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> (977)
<INCOME-TAX> 0
<INCOME-CONTINUING> (977)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (977)
<EPS-PRIMARY> (.41)
<EPS-DILUTED> 0
</TABLE>
