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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 OR 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For Fiscal year ended JANUARY 31, 1997
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from N/A to N/A
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Commission file number 0-19578
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INTERNET COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-1095516
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State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization Number)
7100 E. BELLEVIEW AVE., SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
- ---------------------------------------- ---------------------------------
(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 May 12, 1997, 5,372,806 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 $7,984,419.
Total revenues for the fiscal year ended January 31, 1996 is $28,001,000.
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Documents incorporated by reference: Proxy Statement to be filed in May, 1997.
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 46 pages. Exhibits are indexed on page 24.
(Complete Copy)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Internet Communications Corporation ("Internet" or "the Company"), a
Colorado corporation, is a service-based telecommunications and networking
company providing "total network solutions" in the following broad areas - data
and voice communications systems design, installation and support; computer
networking; equipment maintenance; internet connectivity and support; carrier
circuits; specialty low voltage systems design, installation, and support; and
fiber optic cable design, installation, and support. It is the Company's
objective to be a single source supplier of hardware, software, and consulting
services in meeting all of the data, voice, computer networking, and internet
needs of its customers. Internet offers its services and products as a total
outsourced solution for its customers' voice and data communications systems or
for specific projects targeted at designated elements of the system. Customers
are engaged in the fields of retail, distribution, banking, education,
insurance, libraries, hospitality, governmental units, health care, computer
software services and other business enterprises. Internet is organized along
functional and geographic lines with branch locations in several Colorado cities
and in Minneapolis, Minnesota.
BUSINESS COMBINATIONS
During the fiscal year ended January 31, 1997, Internet acquired Interwest
Communications C.S. Corporation and its subsidiaries ("Interwest"). Interwest
was founded 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. With this acquisition Internet expanded its business
beyond data communications equipment and services to include voice
communications equipment and services, specialty low voltage systems, and
communications cabling. Each party recognized that the merging of voice and
data technologies necessitated broader product offerings which included
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both voice and data solutions. Each party also gained access to the other's
customer base, technical staffs, and sales and marketing programs.
In addition, the Company acquired the assets of Paragon Data Systems, Inc.,
located in Denver, Colorado. Former employees of Paragon became employees of
Internet. Through this acquisition, Internet gained access to new manufacturers,
a new customer base, Paragon's tele-selling organization, and its senior staff
talents.
STRATEGY
The cornerstone of Internet's business strategy is to provide clients with
communications systems and support which meet the customer's need for integrated
solutions while meeting Internet's objective of developing recurring revenue
streams. The Company's breadth and depth of technical communications expertise
drives this strategy.
Increasingly, there is a growing demand for voice and data equipment, as
well as a demonstrated requirement for the network and the know-how to tie
the various pieces of equipment together into an efficient network in a
cost-effective manner.
Internet is positioning its product and service offerings to meet these
requirements. The Company is already unique in its ability to manage and
maintain national networks and will be building its product line to provide
end-to-end voice and data network services, including frame relay and other
new technologies. On the voice side of the Company, Internet will be
providing services in the fast growing call processing/call center
environment.
In addition, Internet is further developing its customer service
organization realizing that the most valued customers are those the Company
already has. During the first quarter of fiscal year 1998, Internet will
continue to develop its customer service organization as well as implementing
a premier services offering for its largest customers.
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PRODUCTS AND SERVICES
The Company offers a broad range of products and services of which local
area networking (LAN) design, installation, and support and internet
connectivity and services were added during Fiscal Year 1997. Company
products and services include:
WAN AND LAN DATA NETWORK DESIGN, INSTALLATION AND SUPPORT - These services
include customized network design which allows for high speed transmission of
data, voice, fax and video within a defined geographical area, procurement and
installation of the appropriate equipment and network connections, and
monitoring of the communications network. These networks may be a local area
network contained within a single building (a LAN) or may spread across the
United States in a wide area network (a WAN). Because communications networks
require the integration and installation of a wide range of complex
technologies, the Company's customers are increasingly outsourcing their needs
and turning to outside firms, such as Internet, which have the expertise and
experience to design and create a customized data communication network.
Internet offers network system analysis, network system design, and network
management services. Network system analysis provides customers with technical
communications system analysis and consulting services. Network system design
provides a comprehensive, customized communications system based on the
customer's specific needs. Network management provides trained communications
technicians who monitor and evaluate the performance of a customer's network and
each individual component of the system. Network management services also
provides assistance in the future reconfiguration and the addition of new
equipment to a network as well as tracking performance for planning long-term
network growth. Internet's network management services facilities operate 24
hours a day, seven days a week at the Company's office in the Denver
metropolitan area.
As part of its network services, Internet's management and engineers are
constantly evaluating products, services, and newly available industry
technology. Internet believes it is able to
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provide technologically advanced systems at a cost below its competitors
because it is a value-added reseller and has non-exclusive dealer agreements
with manufacturers and suppliers, such as, Tellabs Operations, Inc., 3Com
Corporation, Cisco, Bay Networks, Network Equipment Technologies (NET),
Premisys, Motorola ICG, Citrix, and Raptor. This enables Internet to directly
provide the customers with equipment which it feels is the most effective in
their custom designed systems and most economical for their communications
needs. These products consist of modems, multiplexers, network control and
interchange devices, and frame relay, ATM and ISDN access devices.
Internet offers its customers installation, maintenance, and repair
services. The Company's field engineers perform equipment installations on
site in Colorado or elsewhere as the customer requires. Equipment maintenance
is provided on site in Colorado and other locations throughout the United States
by Internet technicians or by way of subcontracts with Motorola 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.
VOICE COMMUNICATIONS AND VOICE PROCESSING SYSTEMS DESIGN, INSTALLATION, AND
SUPPORT - Internet through its wholly owned subsidiary, Interwest Communications
C.S. Corporation, offers voice communications and voice processing systems
design, installation, and support. In this area of product and service,
Interwest offers multi-featured, digital key telephone systems, private branch
exchange ("PBX") systems, voice processing products, computer telephone
integration ("CTI") and network services. Interwest's products also include
peripheral telecommunications products including call accounting and local area
network integrated messaging.
Interwest is currently one of NEC America's 10 largest dealers in the U.S.
market. Additional manufacturer relationships include Northern Telecom,
Fujitsu, Iwatsu, and Hitachi. Voice processing products installed and maintained
by Interwest include the
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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.
CARRIER CIRCUITS - The Company provides to its customers as an integral
part of their communications network circuits for long distance data, voice and
video transmissions throughout the United States. These circuits are offered
under multi-year agreements at competitive rates. Internet purchases high speed
T1-Fiber Optic circuits from major carriers such as WilTel, QWEST, ICG, AT&T,
and others 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 a 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.
INTERNET CONNECTIVITY AND SUPPORT - The company provides internet
connectivity and related equipment and services to its commercial customers for
a monthly fee under multi-year contracts. The related services may include web
page design, server co-location, and connection to special internet content
providers. The Company has specifically chosen not to offer these services to
the home or home office marketplace.
DATA COMMUNICATIONS EQUIPMENT SALES - Data communications equipment sales
without related services are made to customers for a variety of reasons,
including network expansion or equipment repair. These sales are handled by a
separate targeted tele-selling group which allows for sales at lower margins.
BUSINESS TELEPHONE SYSTEMS MAINTENANCE - Work Telcom, a subsidiary of
Internet, performs maintenance support for business telephone systems not
originally sold through Internet.
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REFURBISHED VOICE COMMUNICATIONS EQUIPMENT SALES - U.S. Telphonics, a
subsidiary of Internet, operates in the secondary market selling refurbished
telephone and voice mail systems throughout the United States. Typically, these
systems are systems traded in by customers following the installation of a new
system by Internet.
SPECIALTY LOW VOLTAGE SYSTEMS DESIGN, INSTALLATION, AND SUPPORT - Internet,
through its Interwest Sound subsidiary, designs and installs commercial paging
systems, school intercom systems, nurse call, video security and card access
security systems.
FIBER OPTIC CABLE DESIGN, INSTALLATION AND SUPPORT - Internet Subsidiary,
Interwest Cable Network Systems, Inc., designs, installs and maintains fiber
optic networks for competitive local exchange carriers, interexchange carriers
and campus area networks.
INDUSTRY OVERVIEW AND MARKET NICHE
Internet operates in the telecommunications, computer services, and
internet industries which are all characterized by rapid change in technology,
increasing customer demands, changing business alliances, and significant
competitive forces. Major firms are entering and leaving the market with
increasing frequency. Government regulation continues to evolve and will have
impact into the future. On the other hand, these industries represent
significant opportunity because their services and products are strategic to
businesses and individuals.
Formerly, the telecommunications industry was a monopoly controlled by AT&T
which required consumers to use a single provider for the transmission over
phone lines of voice, data, fax, and video information. Recent court decisions
and telecommunications legislation have eased the entry of new service providers
into the marketplace, spurring price competition and multiple sources for each
product or service, and changing
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business alignments. 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.
COMPETITION
Internet management believes that the marketplace categorizes equipment and
service providers into three categories, based on size and breadth of
product/services offerings and financial and technical resources.
The first category includes small telecommunications and networking firms
which offer a limited group of equipment and services, such as, direct equipment
sales and network system design and installation. They lack sufficient size to
offer a full range of products and services or 24 hour-7 day network support and
maintenance. Internet feels it can effectively compete against firms in this
category through its superior and broader service offerings and volume discounts
on equipment purchases.
A second category of competitors would include firms significantly larger
than Internet who offer very specialized services or a broad range of products
and services. These competitors might include but are not limited to circuit
carriers, such as, AT&T or WilTel; equipment manufacturers, such as, Motorola or
Bay Networks; consulting firms, such as, EDS or Andersen Consulting; and broad
service providers, such as, AT&T or the RBOC's (Regional Bell Operating
Companies). Management believes that it can effectively compete against firms
in this category because Internet is targeting the middle tier of customers,
while these major competitors due to their size usually target the largest
firms in the United States. Many customers find product and service
providers of that size to be less
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effective in meeting client needs of the middle tier enterprises.
The third category of competitors is firms similar to Internet in size and
product offering. These firms range in size from $10-$100 million in revenues
and tend toward a regional geographic market strategy. Internet competes
against the firms in this category due its unusual combination of data and
voice expertise, its highly qualified technical staff, its aggressive pursuit
of new technology, and its technically knowledgeable sales personnel.
Internet operates in a knowledge intensive environment, and management feels
that its high level of technical expertise is a strong competitive advantage.
GOVERNMENT REGULATION
Certain aspects of the Company's operations are subject to regulation by
the Federal Communications Commission ("FCC") under the Communications Act of
1934, as amended and to legislation by the US Congress. The FCC establishes the
prices that the Company and the other intercity carriers 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 US Congress through the Telecommunications Act
of 1996 has sought to take further steps to deregulate the telecommunications
environment and to introduce higher levels of competition at the local
provider level.
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The Company's ability to provide intrastate dedicated line service is also
subject to regulation in each state by the appropriate state regulatory agency.
Colorado's and other states' publicly utility commissions permit certain
re-sellers and certified carriers such as Internet to carry intrastate long
distance and dedicated line traffic without regulation.
SALES AND MARKETING
Internet's sales and marketing functions are currently staffed by
seventy-six (76) sales and marketing personnel. 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. One of the strengths of
Internet is the continuing relationships which it establishes with its customers
which results in repeat business and a solid base for references. Traditional
marketing programs will be re-directed under the leadership of a vice president
of marketing hired by Internet on April 1, 1997. During the fiscal year the
Company shut down its "Indirect Sales Department": terminating or relocating
to other departments five (5) employees.
CUSTOMERS
Internet provides products and services to approximately 7,000 customers,
ranging from local phone systems for a single physical location for a smaller
business enterprise to full systems installation and support for multiple
locations dispersed over a wide geographic area. No single customer accounted
for more than 10% of sales in the fiscal year ended January 31, 1997.
SEASONALITY
The sales of the Company are not seasonal to any significant extent. Sales
may decrease or increase at various times throughout a year due to customers
delaying purchases while waiting for new product announcements and increasing
purchases subsequent to such announcements.
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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, 1997, there were orders received from various customers which will account
for approximately $3,021,000 in future sales for the Company. Internet (on a
stand-alone basis) has a backlog of $380,000, and Interwest (on a stand-alone
basis) has backlog of $2,641,000.
In addition, the Company has on-going contracts with customers that range
from three (3) months to five (5) years for network management, data and voice
equipment maintenance service and data circuits which provides monthly recurring
revenue to the Company. The total monthly revenue provided by these contracts
is approximately $800,000 per month as of January 31, 1997.
EMPLOYEES
On March 31, 1997, the Company employed two hundred and sixty-seven (267)
full-time employees, including three (3) executive officers, seventy-six (76) in
sales and marketing, one hundred and thirty-five (135) in network operations and
technical services, and fifty-three (53) in accounting, administration, and
other support areas.
RESEARCH AND DEVELOPMENT
Internet is primarily an integrator and service provider and as such is
not involved in any significant research and development efforts.
LOCATIONS
Internet'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. The Company and its subsidiaries conduct business in
several cities in Colorado and in Minneapolis, Minnesota.
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RECENT DEVELOPMENTS
On April 29, 1997, Internet closed a private placement transaction under
which the Company issued 631,579 shares of common stock and five-year 63,158
warrants exercisable at $5.70 per share in exchange for gross receipts of
$3,000,000. The shares and warrants were issued to Interwest Group, Inc. and
represent an additional investment in Internet by Interwest Group. This
transaction brings Interwest Group's investment in Internet common stock to
52.3% of outstanding shares and 52.9% upon the exercise of the warrants.
On April 23, 1997, Internet and its lending institution agreed to revised
borrowing agreement which included lowering the credit availability from $6.0
million to $5.0 million and setting new financial performance covenants. At
the same time the lending institution waived the violation of financial
performance covenants that existed as of January 31, 1997. Interwest is a
co-obligor on the loan agreement.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases under multi-year agreements approximately 84,000 square
feet of office and/or office/warehouse space at lease rates ranging from $6.00
to $12.50 per square foot at locations in Greenwood Village, Denver, Colorado
Springs, Pueblo, Fort Collins, Colorado and Minneapolis, Minnesota. The Company
also leases a small construction yard and office at $3.37 per square foot for
its cabling division, located in Commerce City, Colorado.
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 material legal proceedings
contemplated or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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There were no matters submitted to a vote of security holders during the
quarter ending January 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRINCIPAL MARKET OR MARKETS. Internet's Common Stock is traded on the
NASDAQ Small-Cap Market under the symbol INCC.
The following table represents the range of high and low closing prices for
the Common Stock and Warrants for the eight fiscal quarters ended January 31,
1997.
QUARTER ENDED
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APR. 30, 95 JUL.31, 95 OCT.31, 95 JAN.31, 96
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Security High Low High Low High Low High Low
Common 4.625 3.625 6.125 3.625 7.25 3.875 6.00 3.50
QUARTER ENDED
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APR. 30, 96 JUL.31, 96 OCT.31, 96 JAN.31, 97
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Security High Low High Low High Low High Low
Common 4.625 3.625 7.125 4.00 6.813 5.125 6.875 5.125
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK AND WARRANTS. As of May 12,
1997, there were 160 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. It
is the present
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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. Current loan agreements require
lender approval of dividend payments.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This 10-KSB 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 10-KSB 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
- Possible future government regulation
- Competition for talented employees
- Company's ability to finance its growth
- Resolution of unbilled receivable claims
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. The following sections will disclose the effect of the
Company's acquisitions on its financial performance (See comments under
heading of Business Combinations under Part 1 of this document). The balance
sheet of Interwest Communications C.S. Corporation as of the fiscal year
ended January 31, 1997 is included in the balance sheet of Internet
Communications. The results of operations for the period of September 1,
1996 to January 31, 1997 of Interwest are included in the results of
operations of Internet. Paragon Data Systems, whose net assets were acquired
on October 1, 1996, has been merged into the operations of Internet and has
no separate identity. Its results of operations for the period of October 1,
1996 to January 31, 1997, are not considered material and thus are not
discussed separately.
FINANCIAL CONDITION
The financial condition of the Company at January 31, 1997 as compared to
the previous year is discussed below. All known
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significant trends and events in financial condition, liquidity and capital
resources are also discussed below.
Significant changes have occurred in the balance sheet of Internet due to
the acquisition of Interwest. The table below shows selected balance sheet
accounts for Internet and Interwest
INTERNET INTERWEST COMBINED
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($000) ($000) ($000)
Cash $375 $196 $571
Trade Receivable $3,187 $4,322 $7,509
Costs/Earnings - $-0- $711 $711
Uncompleted Contracts
Inventory $965 $1,330 $2,294
Working Capital $5,111 $1,298 $6,409
Equipment $1,396 $837 $2,233
Goodwill $258 $3,140 $3,398
Total assets $7,385 $11,432 $18,817
Notes Payable* $5,592 $283 $5,875
Accounts Payable $1,324 $ 1,992 $3,316
Net Equity $7,416 ($11) $7,405
- - includes both the short-term and long-term portions of
notes payable
The Company's cash position has increased to $571,000 as compared to
$473,000 for the prior year. The Company has no material marketable
securities, and all cash is held in operating accounts or money market mutual
funds. The Company's current ratio increased from 1.20 as of January 31,
1996, to 2.19 as of January 31, 1997. As of April 30, 1997, Internet through
a private placement with Interwest Group Inc. received gross proceeds of
$3,000,000 in the form of cash. If the investment had been in place at
January 31, 1997, working capital would have increased to $9,409,000 from the
$6,409,000 actually reported. The Company used $2,850,000 of the gross
proceeds to pay down its line of credit and lower its interest expense. Under
the new loan agreement Internet has total credit availability of $5.0
million. Management believes that the Company has adequate working capital
and bank credit to fund its on-going operations.
Net trade accounts receivable have increased by $4,752,000 to $7,509,000
as compared to $2,757,000 for the prior year. This
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change resulted from an increase of $431,000 for Internet when viewed as a
stand-alone business entity plus $4,322,000 of accounts receivable for the
Interwest subsidiary.
Interwest has a number of contracts that require equipment delivery and
installation and/or services to be provided over extended periods of time. In
accordance with generally accepted accounting principles, Interwest recognizes
revenues, expenses, and profits periodically during the execution of the
contract on a percentage of completion basis. The asset of $711,000 in "Costs
and estimated earnings in excess of billings on uncompleted contracts"
represents monies that have been earned but have not yet been billed to the
customer on three major contracts.
Inventory has increased by $869,000 when compared to the prior year due to
the acquisition of Interwest. The inventory balance for Interwest as of January
31, 1997 is $1,330,000. Internet (on a stand-alone basis) decreased its
inventory balance from $1,398,000 as of January 31, 1996 to $937,000 as of
January 31, 1997 due to improved inventory management practices.
During fiscal year 1997, Internet (on a stand-alone basis) increased its
investment in equipment in support of its technical operations by $603,000. The
acquisition of Interwest increased equipment balances by $837,000, net of
accumulated depreciation.
The balance of goodwill as of January 31, 1997 is $3,398,000. Goodwill
represents the balance paid for an acquired entity in excess of the net
assets of the acquired company prior to the acquisition. The goodwill
included in the balance sheet relates to the acquisition of Paragon Data
Systems by Internet, the acquisition of Interwest by Internet and of several
small businesses and/or customer lists acquired by Interwest during the years
prior to being acquired by Internet. The goodwill is being amortized over
lives which are specific to each transaction.
During the fiscal year ended January 31, 1997, the Company entered into a
multi-year credit facility relationship with a new lending institution. Under
this agreement borrowings are collateralized by company assets and are limited
to an agreed-to
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percentage of accounts receivable. The Company borrowed under this line of
credit to fund company operations and to pay-off approximately $900,000 of
debt as required by the Interwest acquisition agreement. As of January 31,
1997, the Company was in violation of a number of financial performance
covenants of the credit facility. The lending institution has waived those
violations. As of April 23, 1997, Internet and the lending institution have
entered into a modified borrowing agreement. See comments under the heading
of "Subsequent Events" of Part 1.
Accounts payable balances as of January 31, 1997, include $1,992,000 for
Interwest (on a stand-alone basis) and $1,324,000 for Internet (on a stand-alone
basis). Accounts payable balances for Internet (on a stand-alone basis) have
declined by $1,199,000 from the prior year. This decline in accounts payable was
funded primarily through Internet's line of credit.
RESULTS FROM OPERATIONS
Revenues for Internet and its subsidiaries (Interwest Communications C.S.
Corporation and its subsidiaries) increased by 51% to $28,001,000 for the fiscal
year ended January 31, 1997, from $18,528,000 for the prior year. Internet
Communications Corporation's revenues (on a stand-alone basis) decreased by
$2,393,000, while the acquisition of Interwest added revenues of $10,300,000 for
the five months of September 1, 1996 to January 31, 1997. During the fiscal
year just ended, Company management decided to eliminate its "Indirect Sales
Department" which had generated $3,033,000 in revenues in the prior fiscal year.
Revenues from this area in the current fiscal year were $989,000 with a loss on
that activity of $42,000. This sales department sold equipment to value-added
resellers at declining gross margins. Due to increased competition and
escalating costs in this area, management decided to devote those resources to
other areas which it believes will generate higher gross margins in the coming
years. Important customer relationships were transferred to Internet's
Tele-Selling Department.
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During the fiscal year ended January 31, 1997, the Company undertook a
number of programs to increase revenues from the services segments of its
business and to lessen its dependency on equipment sales. The table below
shows the composition of revenue:
FISCAL YEAR ENDED
-----------------
($000)
REVENUE CATEGORY 1/31/97 1/31/96
---------------- ------- --------
Equipment/Materials* $13,657 $9,899
Data Circuits $6,288 $5,585
Installation* $3,782 $578
Equipment Maintenance* $2,144 $1,513
Service Requests* $695 $ -0-
Network Management $691 $630
Consulting/Training $440 $138
Internet Services $174 $ -0-
Software and Other* $130 $185
------- -------
TOTAL $28,001 $18,528
* - category includes revenues from Interwest
During the current fiscal year, in addition to new revenue sources from
Interwest, Internet introduced new products in the areas of LAN
consulting/training, internet services, and software sales. These new product
introductions generated $532,000 in revenues for the fiscal year.
During the fiscal year, gross margins increased to 29.1% from 27.1% for the
prior fiscal year. Internet (on a stand-alone basis) recorded gross margins of
27.5%, while Interwest (on a stand-alone basis) recorded gross margins of 31.8%.
The positive growth in gross margin percentage for Internet (on a stand-alone
basis) is attributable to closing down of the "Indirect Sales Department" and
the shift to services revenues which yield a higher gross margin.
Selling and Marketing expense increased to $4,315,000 as compared to
$2,172,000 for the prior year. This increase is
20
<PAGE>
attributable to selling and marketing expense of $1,503,000 for Interwest (on
a stand-alone basis) and an increase in Internet (on a stand-alone basis)
selling and marketing expense of $639,000. This increase results from
staffing of sales positions for new product introductions, adding of a senior
sales executive, and the initiation of marketing activities for both existing
and new products.
General and administrative expenses increased due to the addition of
Interwest with general and administrative expenses of $1,765,000 and a
decrease in these expenses for Internet of $212,000. The decrease in
Internet's general and administrative expenses results from cost savings
programs and a net reduction of headcount in administrative areas. On an
overall basis, general and administrative represent 16.6% of revenues as
compared to 16.3% for the prior year.
During the current fiscal year, the Company completed the shut down of its
software development operations, incurring expenses of $63,000. In the prior
fiscal year, Internet incurred expenses $832,000 of software capitalization,
development and maintenance expenses. The company had determined that there was
no market for the product developed over the prior three fiscal years.
Net interest expense for the current fiscal year was $315,000 as compared
to $43,000 for the prior year. The increase in interest expense is due to
increased use of lines of credit to fund day-to-day operations, loans for
equipment on the books of Interwest, and short-term loans related to the
acquisition of Interwest.
For the year ended January 31, 1997, the Company had a net loss of
($1,125,000) or ($.33) per common share compared to a net loss of ($977,000) or
($.41) per common share for the prior year. The net loss for the current fiscal
year was substantially incurred in the fourth quarter as the Company began
implementing its plan for combining the resources of both Internet and
Interwest. The Company is attempting to synergize the two entities by cross
training sales and other personnel, eliminating duplicate overhead and combining
operations. Initially this is
21
<PAGE>
resulting in increased costs and distraction from sales generation. Thus
expenses were higher than planned, while revenues were lower. The net loss
per share declined even though the net loss increased due to the increased
number of shares outstanding as a result of the acquisition of Interwest by
Internet.
SUBSEQUENT EVENTS
Subsequent to January 31, 1997, two events took place which affect the
financial condition of the Company. On April 29, 1997, Internet closed a private
placement transaction under which the Company issued 631,579 shares of common
stock and 63,158 five-year warrants exercisable at $5.70 per share in exchange
for gross receipts of $3,000,000. The shares and warrants were issued to
Interwest Group, Inc. and represent an additional investment in Internet by
Interwest Group. The total investments of Interwest Group, Inc. represent 52.3%
of outstanding shares and 52.9% upon the exercise of the warrants. The proceeds
of the private placement will be used for general corporate activities.
On April 23, 1997, Internet and its lending institution agreed to revised
borrowing agreement which included lowering the credit availability from $6.0
million to $5.0 million and setting new financial performance covenants. At the
same time the lending institution waived the violation of financial performance
covenants that existed as of January 31, 1997. Interwest is a co-obligor on
the loan agreement. The Company used $2,850,000 of the proceeds from the
Interwest Group investment to pay down its line of credit and to reduce
interest expense.
OUTLOOK
Company management believes that Internet Communications Corporation is in
a high growth marketplace in which voice, data, and video networks are merging
technologies of strategic importance to its customers' business operations. The
Company believes that the acquisition of Interwest with its voice and related
systems expertise and customer base gives Internet an important competitive
advantage. Management believes that the shift to value-added services and the
lessening of dependence on equipment sales for revenue should be continued.
22
<PAGE>
The company will select business opportunities and strategic relationships
in the coming year that emphasize value-added services and "total network
solutions" in achieving its objectives of more products and services for
existing customers and expanding the customer base.
ITEM 7. FINANCIAL STATEMENTS
1. The following Financial Statements are filed as part of this
Report:
PAGE
----
Index to Financial Statements F-1
Independent Auditors' Reports F-2
Consolidated Balance Sheet, January 31, 1997 F-3
Consolidated Statements of Operations, For the
Years Ended January 31, 1997 and 1996 F-4
Consolidated Statement of Stockholders' Equity,
For the Period from February 1, 1995 through
January 31, 1997 F-5
Consolidated Statements of Cash Flows, For the
Years Ended January 31, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-7
2. There are no Financial Statement Schedules required to be filed as
part of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<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
July 1997.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a). EXHIBITS:
<TABLE>
Exhibit Sequential
No. Exhibits Location Page No.
- ------- -------- -------- ----------
<S> <C> <C> <C>
3.1 Articles of Incorporation Incorporated by reference to Exhibit --
and Bylaws No. 3.1 to the Registrant's Form S-18
Registration Statement No. 33-24299-D
3.2 Articles of Amendment to the Incorporated by reference to --
Articles of Incorporation Registrant's Form S-1 Registration
filed with the Colorado Statement, dated December 13,
Secretary of State on August 1991, File No. 33-43029
16, 1991
3.3 Articles of Amendment to the Incorporated by reference to
Articles of Incorporation Registrant's definitive proxy,
filed with Colorado Secretary dated August 12, 1996,
of State on August 16, 1991 File No. 0-19578
10.1 Stock Exchange Agreement Incorporated by reference to Exhibit --
10.1 filed with the Registrant's Form 8-K
dated January 19, 1990, File No.
33-24299
10.2 Lease Agreement between Incorporated by reference to Exhibit --
Internet Datacomm, Inc. 10.2 to Registrant's Form 10-K
(predecessor of the dated January 31, 1991, File No.
Registrant) and The Prudential 33-24299
Insurance Company of America
dated August 13, 1990 and
first amendment dated March 7,
1991
10.3 Development and License Incorporated by reference to Exhibit --
Agreement between Internet 10.3 to Registrant's Form 10-K
Systems Corp., Internet dated January 31, 1991, File No.
Datacomm, Inc. (predecessor 33-24299
of the Registrant) and
Tellabs, Inc. dated
October 2, 1990
10.4 Domestic Distribution Incorporation by reference to --
Agreement between Internet Registrant's Form S-1 Registration
Communications Corporation Statement, dated December 13, 1991,
and Codex Corporation dated File No. 33-43029
October 24, 1990
24
<PAGE>
10.5 Reseller-Affiliate Pricing Incorporated by reference to --
Agreement between Internet Registrant's Form S-1 Registration
Communications Corporation and Statement dated December 13, 1991,
Williams Telecommunications File No. 33-43029
Services, Inc. dated
May 22, 1991
10.6 Value Added Reseller Agreement Incorporated by reference to --
between Tellabs Inc. and Registrant's Form S-1 Registration
Internet Datacomm, Inc. Statement dated December 13, 1991,
(predecessor of the Registrant) File No. 33-43029
10.7 1990-1991 Sales Agency Incorporated by reference to --
Agreement between U.S. West Registrant's Form S-1 Registration
Communications and Internet Statement dated December 13, 1991,
Datacomm, Inc. (predecessor File No. 33-43029
of the Registrant)
10.8 Pledge Agreement and Incorporated by reference to --
Promissory Note Registrant's Form S-1 Registration
Statement, dated December 13, 1991,
File No. 33-43029
10.9 1992-1993 Sales Agency Incorporated by reference to --
Agreement between U.S. West Registrant's Form 10-K dated
Communications and Internet January 31, 1992, File No. 0-19578
Communications Corporation
10.10 Non-Compete Agreement between Incorporated by reference to --
Thomas C. Galley and Internet Registrant's Form 10-K dated
Communications Corporation January 31, 1992, File No. 0-19578
dated December 23, 1991
10.11 Non-Compete Agreement between Incorporated by reference to --
Arnell J. Galley and Internet Registrant's Form 10-K dated
Communications Corporation January 31, 1992, File No. 0-19578
dated December 23, 1991
25
<PAGE>
10.12 Non-Compete Agreement between Incorporated by reference to --
Paul W. Greiving and Internet Registrant's Form 10-K dated
Communications Corporation January 31, 1992, File No. 0-19578
dated December 23, 1991
10.13 Non-Compete Agreement between Incorporated by reference to --
Dale R. Morrison and Internet Registrant's Form 10-K dated
Communications Corporation January 31, 1992, File No. 0-19578
dated February 21, 1992
10.14 Articles of Merger merging Incorporated by reference to --
Internet Systems Corp. into Registrant's Form 10-KSB dated
Internet Communications January 31, 1993, File No. 0-19578
Corporation dated January 29,
1993
10.15 Product Development, Supply Incorporated by reference to --
and License Agreement between Registrant's Form 10-KSB dated
Internet Communications January 31, 1993, File No. 0-19578
Corporation and Tellabs
Operations Inc. dated January
1, 1993
10.16 Executive Employment Agreement Incorporated by reference to --
between Thomas C. Galley and Registrant's Form 10-KSB dated
Internet Communications January 31, 1995, File No. 0-19578
Corporation dated May 1, 1994
10.17 Buy-Sell Agreement between Incorporated by reference to --
Thomas C. Galley and Internet Registrant's Form 10-KSB dated
Communications Corporation January 31, 1995, File No. 0-19578
dated May 1, 1994
26
<PAGE>
10.18 Joint Venture Agreement Incorporated by reference to --
between Internet Registrant's Form 10-KSB dated
Communications Corporation January 31, 1995, File No. 0-19578
and Strategic Products &
Services, Inc. dated April 1,
1994
10.19 Share Exchange Agreement, Incorporated by reference to
Stock Registration Agreement, Registrant's Form 8-K dated May 29,
and Loan Agreement dated 1996, File No. 0-19578
May 29, 1996, between
Internet Communications
Corporation and Interwest
Group
10.20 1995 Non-Employee Direct Incorporated by reference to
Stock Option Plan, dated Registrant's definitive proxy,
September 12, 1996 dated August 12, 1996,
File No. 0-19578
10.21 1996 Incentive Stock Plan, Incorporated by reference to
dated September 12, 1996 Registrant's definitive proxy,
dated August 12, 1996,
File No. 0-19578
22 Subsidiaries of Incorporated by reference to Exhibit --
the Registrant 22.1 to Registrant's Report on Form
10-K for the year ended Jnauary 31,
1991, File No. 33-24299
22.1 Subsidiaries of Attached as Exhibit 22.1
the Registrant
</TABLE>
(b) Form 8-K was filed on December 3, 1996 in which the financials statements
relating to the acquisition of Interwest Communications C.S. Corporation by
Internet Communications Corporation were filed as required by SEC
regulation.
Form 8-K/A will be filed in May, 1997, amending the Form 8-K filed on
December 3, 1996. The Form 8-K/A will revise the financial statements of
Interwest Communications C.S. Corporation to include the impact of
compensation agreements triggered by the acquisition of Interwest by Internet
Communications. The effect will be to increase the net loss of Interwest for
the period prior to the acquisition date.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the under-signed, thereunto duly authorized.
INTERNET COMMUNICATIONS CORPORATION
Date: May 14, 1997 By: /s/ Thomas C. Galley
-----------------------------------
Thomas C. Galley, President,
Principal Executive Officer,
and Chief Financial Officer
Date: May 14, 1997 By: /s/ Christine Tolen
-----------------------------------
Christine Tolen,
Chief Accounting Officer
SIGNATURES
Date: May 14, 1997 By: /s/ Thomas C. Galley
-----------------------------------
Thomas C. Galley, Director
29
<PAGE>
Date: May 14, 1997 By: /s/ William Maxwell
-----------------------------------
William Maxwell, Director
Date: May 14, 1997 By: /s/ Arnell J. Galley
-----------------------------------
Arnell J. Galley, Director
Date: May 14, 1997 By: /s/ Dale Morrison
-----------------------------------
Dale Morrison, Director
Date: May 14, 1997 By: /s/ Robert Smith
-----------------------------------
Robert Smith, Director
30
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1997 AND 1996
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT. . . . . . . . . . . . . . . . . . . . . . . F- 2
CONSOLIDATED BALANCE SHEET - January 31, 1997 . . . . . . . . . . . . . . F- 3
CONSOLIDATED STATEMENTS OF OPERATIONS - For the Years Ended January 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F- 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - For the Period from
February 1, 1995 through January 31, 1997 . . . . . . . . . . . . . . . F- 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Years Ended
January 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F- 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . F- 7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Internet Communications Corporation
Greenwood Village, Colorado
We have audited the accompanying consolidated balance sheet of Internet
Communications Corporation and Subsidiaries as of January 31, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended January 31, 1997 and 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 audits to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Internet Communications Corporation and Subsidiaries as of January 31, 1997, and
the results of their operations and their cash flows for the years ended
January 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
May 2, 1997
Denver, Colorado
F-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JANUARY 31, 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 571,000
Trade receivables, net of $585,000 allowance
for doubtful accounts and sales returns 7,509,000
Inventory 2,294,000
Prepaid expenses and other 702,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 711,000
-----------
Total current assets 11,787,000
EQUIPMENT, net 2,233,000
OTHER ASSETS:
Goodwill, net 3,398,000
Spares inventory 412,000
Other, net 987,000
-----------
TOTAL ASSETS $18,817,000
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 279,000
Accounts payable 3,316,000
Unearned income and deposits 937,000
Accrued expenses and other 846,000
-----------
Total current liabilities 5,378,000
NOTES PAYABLE 5,596,000
DEFERRED REVENUE 161,000
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 277,000
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 100,000,000
shares authorized -
Common stock, no par value, 20,000,000 shares
authorized, 4,738,727 shares issued and outstanding 10,815,000
Stockholders' notes (35,000)
Accumulated deficit (3,375,000)
-----------
Total stockholders' equity 7,405,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,817,000
-----------
-----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
JANUARY 31,
-----------------------------
1997 1996
------------ -----------
NET SALES:
Equipment and installation $ 13,657,000 $ 9,899,000
Services 14,344,000 8,629,000
------------ -----------
Total sales 28,001,000 18,528,000
COST OF SALES (19,857,000) (13,502,000)
------------ -----------
Gross margin 8,144,000 5,026,000
OPERATING EXPENSES:
Selling 4,315,000 2,172,000
General and administrative 4,576,000 3,023,000
Software development and maintenance 63,000 832,000
Equity in loss of joint venture - 61,000
Interest expense, net 315,000 43,000
------------ -----------
Total expenses 9,269,000 6,131,000
------------ -----------
LOSS BEFORE INCOME TAXES (1,125,000) (1,105,000)
Income tax benefit - 128,000
------------ -----------
NET LOSS $ (1,125,000) $ (977,000)
------------ -----------
------------ -----------
NET LOSS PER COMMON SHARE $ (.33) $ (.41)
------------ -----------
------------ -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,371,000 2,397,000
------------ -----------
------------ -----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 1, 1995 THROUGH JANUARY 31, 1997
COMMON STOCK TREASURY STOCK
----------------------- -------------------- STOCKHOLDERS' ACCUMULATED
SHARES AMOUNT SHARES AMOUNT NOTES DEFICIT TOTAL
--------- ----------- ------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, February 1, 1995 2,459,686 $ 5,474,000 69,000 $(292,000) $(56,000) $(1,273,000) $ 3,853,000
Stock options exercised 10,000 20,000 - - - - 20,000
Reduction of stockholders' notes - - - - 21,000 - 21,000
Retirement of treasury stock (69,000) (292,000) (69,000) 292,000 - - -
Net loss - - - - - (977,000) (977,000)
--------- ----------- ------- --------- -------- ----------- -----------
BALANCES, January 31, 1996 2,400,686 5,202,000 - - (35,000) (2,250,000) 2,917,000
Stock options exercised 6,500 20,000 - - - - 20,000
Stock issued in connection with
purchase of Interwest 2,306,541 5,480,000 - - - - 5,480,000
Stock issued in connection with
purchase of Paragon 25,000 113,000 - - - - 113,000
Net loss - - - - - (1,125,000) (1,125,000)
--------- ----------- ------- --------- -------- ----------- -----------
BALANCES, January 31, 1997 4,738,727 $10,815,000 - $ - $(35,000) $(3,375,000) $ 7,405,000
--------- ----------- ------- --------- -------- ----------- -----------
--------- ----------- ------- --------- -------- ----------- -----------
SEE ACCOMPANYING NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
F-5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
FOR THE YEARS ENDED
JANUARY 31,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,125,000) $ (977,000)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 1,079,000 658,000
Bad debt expense 61,000 116,000
Write-down of software - 137,000
Loss in joint venture - 61,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (1,448,000) (62,000)
Inventory 943,000 (660,000)
Spares inventory (82,000) (269,000)
Prepaid expense and other 123,000 258,000
Increase (decrease) in:
Accounts payable (910,000) 495,000
Unearned income 105,000 125,000
Accrued expenses and other (789,000) 52,000
------------ ------------
Net cash used in operating activities (2,043,000) (66,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs - (100,000)
Capital expenditures (682,000) (745,000)
Proceeds from marketable securities - 157,000
Investment in joint venture - (36,000)
Cash acquired in business acquisitions 78,000 -
------------ ------------
Net cash used in investing activities (604,000) (724,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 6,722,000 2,965,000
Repayment of debt (2,561,000) (2,315,000)
Repayment of advances from related party (1,436,000) -
Proceeds from notes receivable - 25,000
Proceeds from sale of stock, net 20,000 16,000
------------ ------------
Net cash provided by financing activities 2,745,000 691,000
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 98,000 (99,000)
CASH AND CASH EQUIVALENTS, at beginning of period 473,000 572,000
------------ ------------
CASH AND CASH EQUIVALENTS, at end of period $ 571,000 $ 473,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Interest paid $ 316,000 $ 64,000
------------ ------------
------------ ------------
Issuance of common stock for Interwest acquisition $ 5,480,000 $ -
------------ ------------
------------ ------------
Issuance of common stock for Paragon acquisition $ 113,000 $ -
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Internet Communications Corporation (Internet) and from
September 1, 1996, Interwest Communications Corporation, C.S. (Interwest)
(collectively referred to as "the Company"). Internet acquired the
outstanding common stock of Interwest effective September 1, 1996, as more
fully described in Note 2. Internet is currently a wide and local area
integrater of data communications equipment, services and carrier circuits.
Interwest is engaged primarily in the business of selling, leasing,
installing, and maintaining telephone communication systems.
After the acquisition of Interwest, the Company became 46% controlled by
Interwest Group (see Note 8).
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Internet and Interwest; 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
80% 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.
CASH AND 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 data
and telecommunications hardware sales and related 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 primarily
located in the State of Colorado, however, activities are conducted
throughout the United States.
The Company has an unbilled receivable at January 31, 1997 of approximately
$900,000 related to pending change orders on a project in which the
Company is a subcontractor. The Company believes it is probable a
substantial portion of these change orders will be approved by the
customer, when billed by the primary contractor.
F-7
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORY - Inventory, which consists of finished goods (communications
equipment), is stated at the lower of cost (first-in, first-out method) or
market. Spares inventory consists of finished parts used in servicing
customer maintenance contracts. This amount is stated at the lower of cost
or market and a provision is provided for expected obsolescence.
EQUIPMENT - Equipment is 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 gain or loss on the disposition is reflected in
operations.
Equipment consists of the following at January 31, 1997:
Telecommunications equipment $ 1,841,000
Office furniture and equipment 2,351,000
Transportation equipment 211,000
Leasehold improvements 340,000
-----------
4,743,000
Less accumulated depreciation and amortization (2,510,000)
-----------
Total furniture and equipment $ 2,233,000
-----------
-----------
REVENUE RECOGNITION - Most of the Company's contracts are short-term. For
contract revenue, the Company utilizes the percentage-of-completion method
under which revenues are recognized by measuring the percentage of costs
incurred to date to estimated total costs for each contract. Contract
costs include direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Operating costs are charged to expense as
incurred. Provisions for estimated losses on incomplete contracts are made
in the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
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.
OTHER ASSETS - The excess of the purchase price over the net amount
acquired recorded in the acquisition of Interwest and another entity is
recorded as goodwill. Goodwill is being amortized on a straight-line
F-8
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
basis over a period of 5 to 20 years. Accumulated amortization at
January 31, 1997 is approximately $74,000.
Other assets is comprised primarily of noncompete agreements and purchased
customer lists which are being amortized on a straight-line basis over five
years. At January 31, 1997, the related accumulated amortization is
approximately $86,000.
The amortization expense for the years ended January 31, 1997 and 1996 for
the above intangibles was approximately $98,000 and $42,000, respectively.
USE OF ESTIMATES - The preparation of the Company's consolidated 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.
The Company's financial statements are based on a number of significant
estimates, including the percentage of completion on projects in progress
at year-end which is the basis for the calculation of revenue earned for
these projects. The Company's estimates to complete are determined by
management for all projects in process at year-end and could change as
future information becomes available. Management believes it is reasonably
possible that there will be changes to total revenues and expenses on
projects in process at year-end through change orders that will affect
these projects ultimate profitability.
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, 1997, the Company
believes the carrying values of its receivables, notes payables and
accounts payable approximate their estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS - In fiscal 1997, the Company adopted SFAS
No. 121 "IMPAIRMENT OF LONG-LIVED ASSETS" (FAS 121). In the event that
facts and circumstances indicate that the cost of assets may be impaired,
an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the
asset would be compared to the asset's carrying amount to determine if a
write-down to market value or discounted cash flow value is required.
Adoption of FAS 121 had no effect on the January 31, 1997 financial
statements.
STOCK-BASED COMPENSATION - In fiscal 1997, the Company adopted SFAS
"ACCOUNTING FOR STOCK-BASED COMPENSATION" (FAS 123). 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 has elected not to adopt the fair value accounting
prescribed by FAS 123 for employees,
F-9
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and is subject only to the disclosure requirements prescribed by FAS 123.
Adoption of FAS 123 had no effect on the Company's financial statements.
NET LOSS PER SHARE - Net loss per share is based upon the weighted average
number of shares outstanding. Common stock equivalents outstanding during
the period were not considered as their effect would be antidilutive.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
financial statements to conform to the 1997 presentations. Such
reclassifications had no effect on net income.
2. ACQUISITIONS:
In September 1996, the Company acquired the outstanding common stock of
Interwest through the issuance of 2,306,541 shares of its common stock,
which was valued at approximately $5,480,000. This acquisition was
accounted for under purchase method of accounting. The excess of the
purchase price over the net liabilities acquired of approximately
$2,162,000 is being amortized over a period not to exceed 20 years.
Additionally, in October 1996, the Company purchased the assets of another
entity for 25,000 shares of the Company's common stock, with the
possibility that an additional 25,000 shares may be issued if certain
performance goals are met. This acquisition was accounted for under the
purchase method of accounting. All other assets and liabilities were
recorded at book values, which approximated fair value. Unaudited pro-
forma financial information is provided below:
FISCAL YEAR FISCAL YEAR
1997 1996
----------- -----------
Net Revenues $40,003,000 $34,147,000
----------- -----------
----------- -----------
Net Loss $(2,033,000) $ (903,000)
----------- -----------
----------- -----------
Net Loss per Share $ (.43) $ (.19)
----------- -----------
----------- -----------
The above pro-forma financial information assumes the acquisitions occurred
at the beginning of the period presented. This information is not
necessarily indicative of the financial results which would have resulted
if the acquisition had occurred at such earlier date nor of future
financial operating results.
F-10
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. CONTRACTS IN PROGRESS:
The following applies to long-term contracts in progress as of January 31,
1997:
Costs incurred on contracts in progress $3,680,000
Estimated earnings 527,000
----------
4,207,000
Less progress billings 3,496,000
----------
$ 711,000
----------
----------
4. NOTES PAYABLE:
In April 1997, the Company renegotiated its line-of-credit for $5,000,000
(which was $6,000,000 as of January 31, 1997) with interest at prime plus 1%
(totaling 8.75% at January 31, 1997). The new facility consists of a
general use line-of-credit of $5,000,000 and a $450,000 facility to support
the performance bond which will expire upon the release of the bond. As of
January 31, 1997, there was $5,322,000 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 September 1998, but may be extended for an additional year at the sole
discretion of the financial institution. As of January 31, 1997, the
Company was not in compliance with certain financial loan covenants,
however, such covenants have been waived and the loan was renegotiated with
new covenant requirements which the Company believes it will meet.
The Company also has various notes payable agreements with various
individuals totaling approximately $553,000 at January 31, 1997. In
general, these notes are unsecured, however, a few are collateralized by
certain equipment and vehicles of the Company. Interest accrues on these
notes at between approximately 7% and 14% per annum.
Annual maturities of notes payable for the years ending January 31 are as
follows:
1998 $ 279,000
1999 5,441,000
2000 71,000
2001 53,000
2000 31,000
----------
$5,875,000
----------
----------
F-11
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES:
The Company leases office space and equipment under noncancelable operating
leases. Total rental expense for the years ended January 31, 1997 and 1996
was $688,000 and $298,000, respectively. The total minimum rental
commitments for the years ending January 31 are as follows:
1998 $ 723,000
1999 675,000
2000 597,000
2001 528,000
2002 447,000
Thereafter 309,000
----------
$3,279,000
----------
----------
The Company also leases telecommunications circuits under noncancelable
leases. The Company subleases these circuits to its customers as part of
its normal operations. Minimum commitments under these agreements total
approximately $1,275,000 for fiscal 1998, $1,500,000 for fiscal 1999 and
2000, $1,100,000 for fiscal 2001, and only minimal commitments thereafter.
The Company has received notice from both the State of Colorado and the
City and County of Denver alleging past due sales tax related to circuit
revenues. Including interest and penalties, the aggregate alleged amount
due totals approximately $400,000. The Company is not aware of similar
sales taxes being successfully asserted against any other entity and
accordingly has not accrued any liability in connection with this matter.
The Company has filed a response denying any liability and plans to
vigorously defend its position. The ultimate resolution of this matter is
not known, however, if the Company is unsuccessful in its defense of these
claims, an additional future expense would be recorded.
6. STOCKHOLDERS' EQUITY:
The Company has authorized 100,000,000 shares of preferred stock, which may
be issued in series and with such preferences as determined by the
Company's Board of Directors.
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. The
exercise periods have ranged from one to ten years.
During the fiscal year ended January 31, 1997, the Company adopted, and the
stockholders approved, an Incentive Stock Plan (Plan), 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.
F-12
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
During the fiscal year ended January 31, 1997, the Company also adopted,
and the stockholders approved, 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.
The following is a summary of activity under these stock option plans for
the years ended January 31, 1997 and 1996:
1997 1996
-------------------- --------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- -------- --------- --------
Outstanding, beginning of year 296,800 $3.44 287,424 $3.54
Granted 686,344 4.10 107,000 3.88
Exchanged (217,900) 3.20 - -
Exercised (6,500) 3.00 (10,000) 2.00
Forfeitures (98,900) 4.20 (87,624) 4.42
-------- -------
Outstanding, end of year 659,844 4.18 296,800 3.44
-------- -------
-------- -------
At January 31, 1997, the exercise prices of options outstanding ranged
from $3.75 to $5.88 per share. For all options granted during 1997 and
1996, the weighted average market price of the Company's common stock on
the grant date was approximately equal to the weighted average exercise
price. At January 31, 1997 and 1996, options for 173,463 and 199,800 shares
(with weighted average exercise prices of $4.18 and $3.45, respectively)
were exercisable and options for 162,127, 162,127, and
F-13
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
162,127 shares become exercisable in 1998, 1999, and 2000, respectively.
If not exercised, options outstanding at January 31, 1997, will expire as
follows:
Weighted
Average
Number Exercise
Year Ending January 31, of Shares Price
----------------------- --------- --------
2000 10,000 $3.80
2002 376,344 4.78
2007 273,500 3.38
-------
659,844
-------
-------
PRO FORMA STOCK-BASED COMPENSATION DISCLOSURES - The Company applies APB
Opinion 25 and related interpretations in accounting for its stock options
and warrants which are granted to employees. Accordingly, no compensation
cost was recognized for grants of options during the years ended
January 31, 1997 and 1996 to employees since the exercise prices were not
less than the fair value of the Company's common stock on the grant dates.
Had compensation cost been determined based on the fair value at the grant
dates for awards under those plans consistent with the method of FAS 123,
the Company's net loss and net loss per share would have been reduced to
the pro forma amounts indicated below.
Years Ended January 31,
-------------------------
1997 1996
----------- -----------
Net loss applicable to common stockholders:
As reported $(1,125,000) $ (977,000)
Pro forma (1,803,000) (1,001,000)
Net loss per common share
As reported $(.33) $(.41)
Pro forma (.53) (.42)
The fair value of each employee option granted in 1997 and 1996 was
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Years Ended January 31,
-------------------------
1997 1996
----------- -----------
Expected volatility 83% 89%
Risk-free interest rate 7% 7%
Expected dividends - -
Expected term (in years) 5 4
Contractual term (in years) 7 4
F-14
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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.
At January 31, 1997, these differences consist of the following:
Income tax loss carryforward $ 895,000
Allowance on assets 272,000
Deferred revenue 47,000
Depreciation difference (220,000)
Other (42,000)
---------
Total 952,000
Less valuation allowance (952,000)
---------
Net $ -
---------
---------
The valuation allowance for deferred tax assets increased from $797,000
at January 31, 1996 to $952,000 at January 31, 1997, due primarily to an
increase in the Company's net operating loss carryforwards.
Income tax benefit is comprised of the following:
1997 1996
------- --------
Current benefit $ - $128,000
Deferred benefit - -
------- --------
Net $ - $128,000
------- --------
------- --------
As of January 31, 1997, the Company has income tax loss carryforwards of
approximately $2,400,000 which expire in the years 2006 through 2012. The
utilization of these net operating loss carryforwards may be restricted
because of ownership changes that resulted when Internet acquired
Interwest. These restrictions limit the amount of utilizable net operating
loss carryforwards each year. 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.
8. SUBSEQUENT EVENT:
In April 1997, the Company issued 631,579 shares of common stock for
$3,000,000 and 63,158 warrants to purchase common stock at $5.70 per share
exercisable for a period of 5 years to Interwest Group. After the
purchase, Interwest Group owns 52% of the Company.
F-15
<PAGE>
EXHIBIT 22.1
List of Subsidiaries of Internet Communications Corporation
Interwest Communications C.S. Corporation
Work Telecom Services, Inc.
Omega Business Communications
Services, Inc. D/B/A Interwest
Sound Communications, Inc.
Interwest Cable Network System, Inc.
Interwest Communications Pueblo Corporation
All subsidiaries are Colorado corporations
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 571,000
<SECURITIES> 0
<RECEIVABLES> 8,094,000
<ALLOWANCES> (585,000)
<INVENTORY> 2,294,000
<CURRENT-ASSETS> 11,787,000
<PP&E> 4,743,000
<DEPRECIATION> (2,510,000)
<TOTAL-ASSETS> 18,817,000
<CURRENT-LIABILITIES> 5,378,000
<BONDS> 0
0
0
<COMMON> 10,815,000
<OTHER-SE> (3,410,000)
<TOTAL-LIABILITY-AND-EQUITY> 7,405,000
<SALES> 28,001,000
<TOTAL-REVENUES> 28,001,000
<CGS> 19,857,000
<TOTAL-COSTS> 19,857,000
<OTHER-EXPENSES> 9,269,000
<LOSS-PROVISION> 61,000
<INTEREST-EXPENSE> 315,000
<INCOME-PRETAX> (1,125,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,125,000)
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
