<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:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ 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).
/ / 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 was
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
/X/ 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>
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 12, 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 12, 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
<PAGE>
mandatory indemnification of directors and officers in every case in which a
corporation is entitled under Colorado law to indemnify directors and officers.
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 6, 1996,
will be entitled to notice of and to vote at this special meeting, or any
adjournment or adjournments thereof.
Date: August 12, 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
-2-
<PAGE>
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 6, 1996,
will be entitled to notice of and to vote at this special meeting, or any
adjournment or adjournments thereof.
Date: August 12, 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
-3-
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
PROXY STATEMENT
FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 12, 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
12, 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 12, 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.
-4-
<PAGE>
TABLE OF CONTENTS
PAGE
Revocability of Proxy..........................................................3
Solicitation...................................................................3
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995.................................5
Voting Securities..............................................................5
Security Ownership of Certain Beneficial Owners and Management.................6
Directors and Executive Officers of the Company................................8
Directors Meetings and Standing Committees.....................................9
Compliance with Section 16(a) of the Securities Exchange Act of 1934..........10
Price Range of the Company Common Stock.......................................10
Executive Compensation........................................................11
Proposal One, A Proposal to Approve the 1995 Non-employee Director Stock
Option Plan.............................................................12
Proposal Two, A Proposal to Approve the 1996 Incentive Stock Plan.............14
Proposal Three, A Proposal to Approve the Amended and Restated Acquisition
Agreement and Related Transactions......................................17
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 ......................................................36
Proposal Five, A Proposal to Amend the Articles of Incorporation Concerning
Classification of Directors and Election for Staggered Terms............39
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...............................41
Proposal Seven, A Proposal to Elect Five Directors............................44
Company's Relationship With Independent Certified Public Accountants..........45
Financial Information.........................................................45
Other Matters.................................................................45
Shareholder Proposals.........................................................46
Appendices:
A -- 1995 Option Plan
B -- 1996 Option Plan
C -- Amended and Restated Acquisition Agreement
D -- Financial Statements
E -- Form 10-KSB
F -- Form 10-QSB
-5
<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 technology
- 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 6, 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 postpone the Special Meeting to another time or
place for the purpose of soliciting additional proxies necessary for approval of
a proposal or otherwise.
-6-
<PAGE>
-7-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 6, 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>
<CAPTION>
PRE-MERGER OWNERSHIP POST-MERGER OWNERSHIP POST MERGER/NOTE
-------------------------- -------------------------------- CONVERSION OWNERSHIP
-----------------------------
AMOUNT OF AMOUNT OF AMOUNT OF
BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
OWNERSHIP CLASS OWNERSHIP CLASS OWNERSHIP 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 5,333(3) * 5,333(3) * 5,333 *
4951 Indiana Avenue
Lisle, Illinois 60532
-8-
<PAGE>
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.(6) - - 2,306,541 49.0% 2,606,541 52.1%
ALL DIRECTORS AND OFFICERS 808,011 31.4% 3,114,552 66.1% 3,414,552 68.2%
AS A GROUP(7)
</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.
(4) Includes options presently exercisable to purchase 7,500 shares.
Excludes 22,500 options which will vest over the next three years.
-9-
<PAGE>
(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) Philip F. Anschutz, the sole shareholder of a corporate parent of Group,
555 17th Street, Suite 2400, Denver, Colorado 80202, will exercise sole
voting and dispositive control over these shares.
(7) Five persons as of August 6, 1996; eight persons assuming consummation of
the Merger and the election to the Board of Messrs. Couzens, Smith and
Slater.
-10-
<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 50 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 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.
-12-
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Before Tax Net Profit Bonus Percentage of
as Percentage of Sales Before Tax Net Profits
---------------------- ----------------------
<S> <C>
3% or less of gross sales 4% of before tax net profit
-13-
<PAGE>
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
</TABLE>
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
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.
-14-
<PAGE>
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>
<CAPTION>
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, 94 Jul. 31, 94 Oct. 31, 94 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
</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 $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation Awards
---------------------------------------------------------------------------------------------------------------
Other All
Name Annual Restricted LTIP Other
and Compen- Stock Options/ Pay- Compen-
Principal Salary Bonus sation Award(s) SARs outs sation
Position Year(1) ($) ($) ($) ($) (#)(2) ($) ($)(3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <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>
(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
-15-
<PAGE>
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>
<CAPTION>
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 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.
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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.
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
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<PAGE>
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 options, non-qualified stock options, and stock purchase rights.
Approximately 85 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 (85 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. 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%
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<PAGE>
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 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 outstanding
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.
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<PAGE>
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.
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 value 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 had 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
29, 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.
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<PAGE>
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 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
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that both the $900,000 loan to the Company and the amounts owed by Interwest
with respect to the Bank One Loan will be repaid through expanded credit lines
and cash flows 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 of specified
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<PAGE>
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.
Concurrent with the execution of the Acquisition 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
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<PAGE>
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.
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.
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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. Marlowe. 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
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
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<PAGE>
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.
REVENUE BREAKDOWN FOR THE THREE YEARS ENDED MARCH 31, 1996
- --------------------------------------------------------------------------------
HARDWARE SERVICE TOTAL
REVENUES REVENUES REVENUES
- --------------------------------------------------------------------------------
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%
- --------------------------------------------------------------------------------
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.
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<PAGE>
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 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
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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:
- --------------------------------------------------------------------------------
SALES FORCE DEPLOYMENT
- --------------------------------------------------------------------------------
General Interwest Work U.S. Network
Business Sound Telcom Telphonics Systems Total
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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:
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.
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<PAGE>
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
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
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<PAGE>
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.
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<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.
- --------------------------------------------------------------------------------
APPROXIMATE EXPIRATION
LOCATION 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
- --------------------------------------------------------------------------------
PRO FORMA AND INTERWEST - SELECTED FINANCIAL INFORMATION.
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 ends), 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.
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).
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<PAGE>
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
<TABLE>
<CAPTION>
Interwest Historical
--------------------------------------------------------------------
Three Seven Two
Months Months Months
Ended Ended Ended Years Ended
March 31, December 31, May 31, March 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>
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<PAGE>
COMPARATIVE PER SHARE DATA
<TABLE>
<CAPTION>
Internet Interwest
----------------------------------------------- -----------------------------------------------
Pro Forma Historical Equivalent Pro Forma Historical
----------- ------------ ---------------------- ------------
----------- ------------ ---------------------- ------------
Three Year Ended Three Year Three Year Ended Three Year Ended
Months January 31, Months Ended Months December Months December
Ended 1996 Ended January 31, Ended 31, 1995** Ended 31, 1995
April 30, April 30, 1996 March 31, March 31,
1996 1996 1996* 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book Value per Share $1.74 1.79 $1.13 $1.22 $1.59 1.61 $89.29 $90.80
Cash Dividends per Share None None None None None None None None
Net income (loss) per Share (.06) (.19) (.08) (.41) (.03) .04 (1.51) (2.51)
</TABLE>
________________________
________________________
* AMOUNTS HAVE BEEN CALCULATED BASED ON HISTORICAL SHARES OUTSTANDING.
** AMOUNTS HAVE BEEN CALCULATED BASED ON SHARES OF INTERNET EXCHANGED FOR SHARES
OF INTERWEST.
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<PAGE>
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, 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
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<PAGE>
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 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.
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<PAGE>
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, 1995 Compared to the Three Months Ended March 31,
1996
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% of
revenue 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 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.
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<PAGE>
COMPETITION. The telecommunications equipment industry is characterized by
intense competition. Interwest competes against a number of competitors, come
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 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. Seligman
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
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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 Manger. 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.
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. Mr. Smith is expected to receive a commission of
approximately 1% of gross sales resulting from his efforts.
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.
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The Company is a subcontractor to install wiring under a contract with
Rooney Engineering, Inc., an affiliate of Group. The Company expects to receive
approximately $1,045,000 under the subcontract, which was entered into in May
1996. The terms of the subcontract were negotiated at arms length.
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 6, 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 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 6, 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.
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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
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.
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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 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
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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 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
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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.
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
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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:
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 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.
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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 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
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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 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.
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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.
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.
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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.
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
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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
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.
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<PAGE>
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 12, 1996 Thomas C. Galley,
Chairman of the Board of Directors
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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 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.
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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.
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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.
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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
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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
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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
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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.
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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.
<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.
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(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 were subject thereto shall
become available for future grant or sale under the Plan unless the Plan shall
have been terminated.
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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 meaning 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, 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
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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 interfere in any way with his right or the
Corporation s right to terminate his employment or services at any time.
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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 424 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) 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.
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(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 Option to the extent he was entitled within
the time specified herein, the Option shall itself terminate at the time of such
termination.
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(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 return to the Corporation (together with payment for
the Stock being purchased) within the time specified.
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(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.
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.
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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 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-9
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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%
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
B-10-
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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, 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").
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(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 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
B-12
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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 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
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<PAGE>
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.
13. 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 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.
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<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
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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
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<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
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APPENDIX C
AMENDED AND RESTATED ACQUISITION AGREEMENT
dated as of
May 29, 1996
among
INTERNET COMMUNICATIONS CORPORATION,
INTERWEST GROUP, INC.
and
INTERNET 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
Section 4.6 Taxes......................................................... 10
Section 4.7 Litigation.................................................... 10
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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
Section 7.8 Severability of Provisions.................................... 29
Section 7.9 Headings and References....................................... 29
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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
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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
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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
INTERNET 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 Agreement substantially in the form of EXHIBIT B attached hereto
(the "REGISTRATION RIGHTS AGREEMENT").
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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 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
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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.
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
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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.
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
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(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 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
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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 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;
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(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 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
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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
(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."
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(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"):
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
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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 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
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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 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
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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 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
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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 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
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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 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,
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(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 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
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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:
(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
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(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 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.
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(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 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
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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:
(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
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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 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
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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,
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
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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) 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.
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(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
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
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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 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
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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;
(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
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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 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.
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(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.
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
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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 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.
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(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; 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
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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.
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
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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.
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,
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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 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.
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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 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.
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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.
___________________________
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IN WITNESS WHEREOF, the parties have executed and delivered this
Amended and Restated Acquisition 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
-------------------------
INTERNET ACQUISITION ONE, INC.
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
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80112
Telecopy: (303) 792-0227
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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 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
C-42
<PAGE>
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.
"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
C-43
<PAGE>
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.
"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
C-44
<PAGE>
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 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
C-45
<PAGE>
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.
"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.
C-46
<PAGE>
"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
(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
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<PAGE>
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.
"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>
INTERNET COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
APPENDIX D
PAGE NO.
--------
1. 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, as adjusted,
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
2. 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
(Unaudited) and December 31, 1995 D-9
c. Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 (Unaudited) and the Seven
Months Ended December 31, 1995 D-11
d. Consolidated Statement of Stockholder's Equity for the
Seven-Month Period Ended December 31, 1995 and the
Three-Month Period Ended March 31, 1996 (Unaudited) D-12
e. Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 (Unaudited) and the Seven
Months Ended December 31, 1995 D-13
f. Notes to the Consolidated Financial Statements D-15
D-1
<PAGE>
3. INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
a. Independent Auditor's Report D-25
b. Combined Statements of Income and Retained 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 D-26
c. Combined Statements of Cash Flows 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 D-27
d. Notes to Combined Financial Statements D-28
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.
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 $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 377,000 238,000 615,000
----------- ----------- ----------- ------------
4,483,000 5,087,000 800,000 (a) 10,370,000
PROPERTY AND EQUIPMENT, net 1,900,000 840,000 2,740,000
OTHER ASSETS, net 69,000 2,236,000 100,000 (c) 4,306,000
1,800,000 (b)
----------- ----------- ----------- ------------
TOTAL ASSETS $6,452,000 $8,163,000 $2,700,000 $17,416,000
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
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 - 481,000 900,000 (a) 1,381,000
Accrued expenses and other 304,000 620,000 - 924,000
----------- ----------- ----------- ------------
3,732,000 3,941,000 900,000 8,573,000
LONG-TERM DEBT - 230,000 - 230,000
OTHER - 179,000 - 179,000
MINORITY INTEREST - 230,000 - 230,000
----------- ----------- ----------- ------------
- 639,000 - 639,000
EQUITY:
Common stock 5,202,000 3,726,000 1,758,000 (b) 10,686,000
Accumulated deficit (2,447,000) (143,000) (143,000) (b) (2,447,000)
Other (35,000) - - (35,000)
----------- ----------- ----------- ------------
2,720,000 3,583,000 1,901,000 8,204,000
----------- ----------- ----------- ------------
TOTAL LIABILITIES AND EQUITY $6,452,000 $8,163,000 $2,801,000 $17,416,000
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
</TABLE>
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
APRIL 30, MARCH 31, PRO FORMA
-------------------------------
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 1,066000 1,674,000 - 2,740,000
OPERATING EXPENSES 1,234000 1,745,000 15,000 (d) 2,994,000
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (168,000) (71,000) (15,000) (254,000)
Other expenses (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 2,397,000 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 YEAR FOR THE YEAR
ENDED ENDED
JANUARY 31, DECEMBER 31, PRO FORMA
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) FOR OPERATIONS (1,063,000) 254,000 (155,000) (964,000)
Other expenses (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 $2,001,000 will be recorded.
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>
INTERWEST COMMUNICATIONS C.S. CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
<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 14, 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
March 31, December 31,
ASSETS 1996 1995
------ ------------- -------------
(Unaudited)
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
------------- -------------
------------- -------------
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
March 31, December 31,
LIABILITIES AND STOCKHOLDER'S EQUITY 1996 1995
------------------------------------ ------------- -------------
(Unaudited)
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
------------- -------------
------------- -------------
The accompanying notes to financial statements
are an integral part of these balance sheets.
D10
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND SUBSIDIARIES
(A wholly owned subsidiary of Interwest Group, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Seven Months
Ended Ended
March 31, December 31,
1996 1995
------------- -------------
(Unaudited)
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)
------------- -------------
------------- -------------
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>
<CAPTION>
Nonvoting Retained Total
Common Stock Common Stock Earnings Stockholder's
Shares Amount Shares Amount (Deficit) Equity
------- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, May 31, 1995 1000 $ - 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
Three Months Seven Months
Ended Ended
March 31, December 31,
1996 1995
---------- -------------
(Unaudited)
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
---------- ----------
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
Three Months Seven Months
Ended Ended
March 31, December 31,
1996 1995
----------- --------------
(Unaudited)
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
----------- -----------
----------- -----------
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 number 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 costs for each
D-16
<PAGE>
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.
D-17
<PAGE>
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.
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.
D18
<PAGE>
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.
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.
D-19
<PAGE>
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 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.
D-20
<PAGE>
(3) DEBT
Long-term debt at March 31, 1996 and December 31, 1995 consists of the
following:
March 31, December 31,
1996 1995
-------- -----------
(Unaudited)
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
-------- --------
-------- --------
D-21
<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.
(4) INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1995, are as follows:
D-22
<PAGE>
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-23
<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-24
<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-25
<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-26
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
TWO MONTHS
ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31,
1995 1995 1994
---------- ----------- -----------
NET SALES $1,966,000 $12,075,000 $12,219,000
Cost of Sales 1,102,000 7,011,000 7,189,000
---------- ----------- -----------
GROSS PROFIT 864,000 5,064,000 5,030,000
SELLING, GENERAL AND ADMINISTRATIVE 865,000 4,212,000 3,912,000
---------- ----------- -----------
INCOME FROM OPERATIONS (1,000) 852,000 1,118,000
Other Income (Expense), net 29,000 - (23,000)
---------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTERESTS 28,000 852,000 1,095,000
Provision (Benefit) for Income
Taxes
Current 17,000 344,000 379,000
Deferred (9,000) (30,000) 5,000
---------- ----------- -----------
8,000 314,000 384,000
---------- ----------- -----------
INCOME BEFORE MINORITY INTERESTS 20,000 538,000 711,000
Minority Interests in Income (10,000) (71,000) (84,000)
---------- ----------- -----------
NET INCOME 10,000 467,000 627,000
RETAINED EARNINGS AT BEGINNING
PERIOD 1,603,000 1,136,000 509,000
---------- ----------- -----------
RETAINED EARNINGS AT END OF PERIOD $ 1,613,000 $ 1,603,000 $ 1,136,000
---------- ----------- -----------
---------- ----------- -----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-27
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
TWO MONTHS
ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31,
--------- ---------------------
1995 1995 1994
---------- -------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 10,000 $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 71,000 84,000
Depreciation and amortization 40,000 118,000 157,000
Provision for bad debts 5,000 83,000 94,000
Deferred tax expense
(benefit) (9,000) (31,000) 5,000
(Increase) decrease in:
Receivables 100,000 (134,000) (1,452,000)
Inventories (524,000) (194,000) 59,000
Prepaid expenses (20,000) (48,000) (21,000)
Deposits and other (10,000) 1,000 (3,000)
Increase (decrease) in:
Accounts payable 318,000 228,000 88,000
Accrued liabilities (89,000) 7,000 414,000
Billings in excess of costs (2,000) 2,000 (49,000)
Deposits on uncompleted
contracts 45,000 211,000 (26,000)
Deferred revenues 29,000 22,000 (62,000)
Warranty reserves 18,000 69,000 -
--------- -------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (79,000) 872,000 (85,000)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Collection on installment sales 9,000 16,000 15,000
Purchase of property and equipment (36,000) (157,000) (49,000)
Proceeds from sales of property
and equipment - 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) (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 -
Payments on long term debt (36,000) (150,000) (114,000)
--------- -------- ----------
NET CASH USED IN FINANCING
ACTIVITIES (36,000) (59,000) (141,000)
--------- -------- ----------
NET INCREASE (DECREASE) IN CASH (184,000) 651,000 (297,000)
CASH, at beginning of year 754,000 103,000 400,000
--------- -------- ----------
CASH, at end of year $570,000 $754,000 $103,000
--------- -------- ----------
--------- -------- ----------
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
D-28
<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-29
<PAGE>
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.
2. CASH FLOW INFORMATION:
Cash paid for interest and income taxes consisted of:
TWO MONTHS
ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31,
--------- ---------------------
1995 1995 1994
--------- -------- ----------
Interest $ 2,000 $ 24,000 $ 31,000
--------- -------- ----------
--------- -------- ----------
Income Taxes $ - $ 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.
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-30
<PAGE>
i. 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 carrryforward.
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
ENDED FOR THE YEARS ENDED
MAY 31, MARCH 31,
--------- ---------------------
1995 1995 1994
--------- -------- ----------
Interwest C.S. and Work $ 7,000 $ 37,000 $ 34,000
Telcom
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,
D-31
<PAGE>
INTERWEST COMMUNICATIONS C.S. CORPORATION AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1995. Interwest C.S. also leases its operations facility in Denver under an
operating lease which expires 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-32
<PAGE>
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 Identification
incorporation or organization 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)
-------------------------------------
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)
<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
2
<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
3
<PAGE>
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.
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.
4
<PAGE>
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 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
5
<PAGE>
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.
6
<PAGE>
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 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
7
<PAGE>
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
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.
8
<PAGE>
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 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
9
<PAGE>
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.
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
10
<PAGE>
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.
11
<PAGE>
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
12
<PAGE>
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.
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.
13
<PAGE>
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.31,96
-----------------------------------------------------
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
(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
15
<PAGE>
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.
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
19
<PAGE>
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 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
20
<PAGE>
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.
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 TO 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: /s/ Thomas C. Galley
-------------------------------
Thomas C. Galley, President and
Principal Executive Officer
Date: April 30, 1996 By: /s/ Benjamin T. Kelly
-------------------------------
Benjamin T. Kelly,
Principal Financial Officer and
Treasurer
SIGNATURES
Date: April 30, 1996 By: /s/ Thomas C. Galley
-------------------------------
Thomas C. Galley, Director
19
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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
FINANCIAL STATEMENTS
JANUARY 31, 1996
<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, 5,202,000
2,400,686 shares issued and outstanding
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' note - - - - 105,000 - 105,000
Retirement 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' note 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.
<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:
F-9
<PAGE>
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 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
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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.
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>
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 Identification
incorporation or organization Number)
7100 E. BELLEVIEW AVENUE, SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 770-7600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
At April 30, 1996, 2,400,686 shares of Common Stock, no par value were
outstanding
<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
<TABLE>
<CAPTION>
April 30, January 31,
1996 1996
(Unaudited)
ASSETS
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to these condensed financial statements
3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the three months ended April 30,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to these condensed financial statements
4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the three months ended April 30,
1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
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 (867,000) 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
------------ -----------
------------ -----------
</TABLE>
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
