<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT
OF 1934
For the quarterly period ended OCTOBER 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission file number 0-19578
INTERNET COMMUNICATIONS CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1095516
- -------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7100 E. BELLEVIEW AVENUE, SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
----------------------------------------------------------------------
(Address of principal executive offices)
(303) 770-7600
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 December 1, 1997, 5,397,887 shares of Common Stock, no par value, were
outstanding
Page 1 of 11 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
PAGE
----
Form 10-Q SB Cover Page 1
Index Page 2
Part I Condensed Consolidated Balance Sheets 3
October 31, 1997 and January 31, 1997
Condensed Consolidated Statements of Operations 4
Three and nine months ended October 31, 1997 & 1996
Condensed Consolidated Statements of Cash Flows 5
Nine months ended October 31, 1997 & 1996
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 7 - 9
Condition and Results of Operations
Part II Other Information
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 10
Item 3 - Defaults upon Senior Securities 10
Item 4 - Submission of Matters to a Vote of 10
Security Holders
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signature Page 11
2
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
1997 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 111,000 $ 571,000
Trade receivables, net of allowance 7,232,000 7,509,000
Inventory 3,165,000 2,294,000
Prepaid expenses and other 600,000 702,000
Costs and estimated earnings in excess of
billings on uncompleted contracts 627,000 711,000
----------- -----------
Total current assets 11,735,000 11,787,000
EQUIPMENT, net 2,144,000 2,233,000
OTHER ASSETS:
Goodwill, net 3,245,000 3,398,000
Spares inventory, net 458,000 412,000
Other, net 877,000 987,000
----------- -----------
TOTAL ASSETS $18,459,000 $18,817,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 3,571,000 $ 279,000
Accounts payable and accrued expenses 4,614,000 4,162,000
Unearned income and deposits 892,000 937,000
----------- -----------
Total current liabilities 9,077,000 5,378,000
NOTES PAYABLE 121,000 5,596,000
DEFERRED REVENUE 126,000 161,000
MINORITY INTERESTS IN CONSOLIDATED
SUBSIDIARIES 131,000 277,000
STOCKHOLDERS' EQUITY:
Common stock, no par value 13,927,000 10,815,000
Stockholders' notes (35,000) (35,000)
Accumulated deficit (4,888,000) (3,375,000)
----------- -----------
Total stockholders' equity 9,004,000 7,405,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,459,000 $18,817,000
----------- -----------
----------- -----------
See accompanying notes to these condensed consolidated financial statements
3
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the nine months ended For the three months ended
October 31, October 31,
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES
Equipment $ 17,466,000 $ 8,790,000 $ 5,506,000 $ 5,129,000
Installation 5,768,000 1,498,000 1,870,000 1,189,000
Other services 9,947,000 7,858,000 3,394,000 3,328,000
----------- ------------ ----------- -----------
33,181,000 18,146,000 10,770,000 9,646,000
COST OF SALES (23,470,000) (11,791,000) (7,889,000) (6,206,000)
----------- ------------ ----------- -----------
GROSS MARGIN 9,711,000 6,355,000 2,881,000 3,440,000
OPERATING EXPENSES:
Selling 5,118,000 2,740,000 1,711,000 1,247,000
General and administrative 5,613,000 3,279,000 2,000,000 1,842,000
Interest expense, net 342,000 178,000 87,000 114,000
Loss from sale of subsidiary 152,000 - 137,000 -
----------- ------------ ----------- -----------
11,225,000 6,197,000 3,935,000 3,203,000
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (1,514,000) 158,000 (1,054,000) 237,000
INCOME TAX EXPENSE - - - -
NET INCOME (LOSS) $(1,514,000) $ 158,000 $(1,054,000) $ 237,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE
Primary $ (0.29) $ 0.06 $ (0.20) $ 0.07
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
WEIGHTED AVERAGE COMMON SHARES AND
EQUIVALENTS OUTSTANDING 5,175,000 2,711,000 5,378,000 3,488,000
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months
ended October 31,
1997 1996
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(1,514,000) $ 158,000
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 1,184,000 694,000
Increase in bad debt reserve - 47,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables- net 277,000 (1,610,000)
Inventory (871,000) (9,000)
Prepaid expenses and other (126,000) (141,000)
Increase (decrease) in:
Accounts payable and accrued expenses 452,000 (768,000)
Unearned income 4,000 166,000
------------ -----------
Net cash used in operating activities (594,000) (1,463,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (774,000) (601,000)
Investment in intangible assets (48,000)
Investment in subsidiaries 79,000
Proceeds from sale of subsidiary 79,000 -
------------ -----------
Net cash used in investing activities (695,000) (570,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 3,012,000 20,000
Proceeds from debt 9,146,000 4,900,000
Repayment of debt (11,329,000) (2,788,000)
------------ -----------
Net cash provided by financing activities 829,000 2,132,000
------------ -----------
INCREASE (DECREASE) IN CASH (460,000) 99,000
CASH, beginning of period 571,000 474,000
------------ -----------
CASH, end of period $ 111,000 $ 573,000
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING TRANSACTIONS:
Purchase of stock in subsidiary with common stock $ 100,000 -
------------ -----------
------------ -----------
See accompanying notes to these condensed financial statements.
5
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INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997
(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-KSB for the fiscal year ended January 31, 1997. The
financial data for the interim periods may not necessarily be indicative of
results to be expected for the year.
6
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INTERNET COMMUNICATIONS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This 10-QSB 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-QSB 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 fund future operations.
- 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 condensed
consolidated financial statements.
FINANCIAL CONDITION
In April 1997 a private placement transaction brought cash proceeds of
$3,000,000. In exchange the Company issued to its largest shareholder 631,579
shares of common stock and 63,158 warrants to purchase common stock at $5.70
per share exercisable for a period of five (5) years. The price of the shares
and warrants was based on the market value at the time of the transaction.
Additionally, the Company agreed to a revised borrowing agreement with its
lending institution which provides for $5.0 million credit availability and
sets 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. The net proceeds from the private placement
transaction were used to pay down the line of credit. The balance of the line
of credit at the end of October 1997 is $3,500,000 compared to $5,322,000 at
the end of January 1997.
As the proceeds from the private placement were used to retire debt, which was
classified as a long-term liability at January 31, 1997, but is classified as a
short-term liability at October 31, 1997, the benefit of this transaction was
not reflected in working capital at October 31, 1997. The change in
classification from long-term to short-term is due to the line of credit
expiration date of September 1998. However, because the company was able to
pay down the line of credit discussed above, the available credit on the line
is expected to provide sufficient working capital for future operations. The
current ratio decreased
7
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from 2.19 at January 31, 1997 to 1.29 at October 31, 1997 as working capital
decreased by $3,751,000. Other than the transactions described above, there
were no other significant trends, events or uncertainties which would have a
material impact on the Company's liquidity.
During the nine months ended October 31, 1997, the Company had negative cash
flows from operations in the amount of $615,000 compared to the prior year
negative cash flows from operations in the amount of $1,463,000. While the
Company shows a greater loss for the nine months period ended in the current
year compared to the prior year, it was offset by greater non-cash expenses
(depreciation and amortization) which increased from $694,000 to $1,184,000 for
the nine months ended October 31, 1997 and 1996, respectively. This increase
is primarily the result of amortizing goodwill recorded in the Interwest
Communications C.S. Corporation (Interwest) acquisition. Additional payments
on accounts receivable and increases in accounts payable and accrued expenses
also had a positive impact on cash flows provided by operations. An increase
in inventory of $871,000, which had the effect of reducing cash flows, was
primarily a result of products received late in the third quarter which are
expected to be shipped to customers during the fourth quarter.
The primary use of cash during the first nine months of the fiscal year was for
capital expenditures in the amount of $774,000 and debt repayment in the amount
of $2,183,000, net. There are no material commitments for capital expenditures
after October 31, 1997.
As a result of these transactions, the cash balance decreased by $460,000 from
January 31, 1997.
RESULTS OF OPERATIONS:
Effective September 1, 1996, the Company acquired Interwest and its
subsidiaries. Therefore, the results of operations of Interwest for the
quarterly and nine month periods ending October 31, 1997 are included in the
operations of the Company, but only two months are included for the
comparative period in the prior year. The following discussion will disclose
the effect of the Company's acquisition on its financial performance.
For the quarter ended October 31, 1997, the Company recorded a net loss of
($1,054,000), compared to net income in the quarterly period in the prior year
of $237,000. Net loss per share for the current quarter was ($.20) compared to
net income of $.07 in the prior year.
For the nine and three months ended October 31, 1997, net sales increased
$15,035,000 (83%) and $1,124,000 (12%), respectively. The acquisition of
Interwest accounted for $15,339,000 and $1,538,000 of the increase. Internet
net sales (on a stand-alone basis) decreased by 2% and 9% for the nine and
three month period, respectively, compared to the same periods in the prior
year, which decrease is more attributable to the unusually strong Internet
equipment sales for the same periods in the prior year. While overall sales
for Internet on a stand-alone basis decreased, service revenues for the nine
month period in the current year increased by 8%.
Gross margin for the nine and three month periods in 1997 was 29.3% and 26.8%
of sales as compared to 35.0% and 35.7% in the prior year. Although the
Company's gross margin percentage can vary from period to period due to changes
in the relative mix of equipment and service sales, it should be noted that the
prior year third quarter gross margins were unusually high. Gross margins as
compared to previous quarters in the current year (30.6% and 30.3% in the first
and second quarter, respectively) were slightly
8
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lower as a result of higher than expected cost of sales in the voice
communication product sales and services.
Selling expenses as a percentage of revenue were slightly higher in the current
nine month period (15.4% compared to 15.1%) and significantly higher in the
current three month period (15.9% compared to 12.9%). Both Interwest and
Internet (on a stand-alone basis) contributed to the higher selling expenses,
primarily due to the increase in sales staff and higher fixed costs for
increased salaries.
For the nine and three months ended October 31, 1997, general and
administrative costs increased by $2,334,000 (71%) and $158,000 (9%) over the
prior year. These expenses as a percentage of sales were slightly lower in the
current three and nine month periods compared to the prior year. One non-cash
expense - amortization of goodwill costs - contributed $298,000 and $56,000 to
the increase in G&A expenses for the nine and three months, respectively.
After the Interwest acquisition, it has taken the Company longer to realize the
benefits of combining the two companies and a reduction in G&A expenses did
not initially materialize. However, the Company is now beginning to realize
some of these benefits and over the long-term will expect to see additional
reductions in some G&A expenses.
Interest expense increased by $164,000 for the nine month period and decreased
by $27,000 for the three month period as compared to the prior year. The
changes from the prior year are due to relative usage of the line of credit as
compared to the same periods in the prior year.
Operating expenses also include a loss on the sale of its interest in a
subsidiary company, Work Telcom Services, Inc. (WTS), in the amount of
$152,000. The Company's basis in the shares of WTS was $309,000 and the shares
were sold for $157,000. The Company received half of the sales price in cash
and the other half in a note, secured by the shares sold, payable over five
years. WTS contributed $28,000 towards the Company's loss in the current year
and was considered to be non-core in its future operations.
Additionally, the Company acquired 49% of Interwest Communications Pueblo
Corporation (ICPC) in exchange for Company shares valued at $100,000. The
value of the shares issued approximated fair market value at the date of the
transaction. After the acquisition, effective October 31, 1997, ICPC is a
wholly-owned subsidiary of the Company. ICPC's net income (before minority
interest) for the nine month period ending October 31, 1997 was $68,000.
9
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INTERNET COMMUNICATIONS CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
12,500 shares of common stock were issued in a private placement transaction
described in Part I.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K was filed on September 19, 1997 reporting a change in auditor from
Hein + Associates LLP to KPMG Peat Marwick LLP.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET COMMUNICATIONS CORPORATION
(Registrant)
Date: December 15, 1997 By: /s/ Thomas C. Galley
-----------------------------------------
Thomas C. Galley, President
Date: December 15, 1997 By: /s/ Paul W. Greiving
-----------------------------------------
Paul W. Greiving, Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 111,000
<SECURITIES> 0
<RECEIVABLES> 7,431,000
<ALLOWANCES> 199,000
<INVENTORY> 3,165,000
<CURRENT-ASSETS> 11,735,000
<PP&E> 5,934,000
<DEPRECIATION> 3,790,000
<TOTAL-ASSETS> 18,459,000
<CURRENT-LIABILITIES> 9,077,000
<BONDS> 0
0
0
<COMMON> 13,927,000
<OTHER-SE> (4,923,000)
<TOTAL-LIABILITY-AND-EQUITY> 18,459,000
<SALES> 10,770,000
<TOTAL-REVENUES> 10,770,000
<CGS> 7,889,000
<TOTAL-COSTS> 11,737,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87,000
<INCOME-PRETAX> (1,054,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,054,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,054,000)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> 0
</TABLE>
