<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 JULY 31, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to _____________
Commission file number 0-19578
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INTERNET COMMUNICATIONS CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
COLORADO 84-1095516
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7100 E. BELLEVIEW AVENUE, SUITE 201, GREENWOOD VILLAGE, COLORADO 80111
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(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 August 29, 1997, 5,375,806 shares of Common Stock, no par value, were
outstanding
Page 1 of 11 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
PAGE
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Form 10-Q SB Cover Page 1
Index Page 2
Part I Condensed Consolidated Balance Sheets 3
July 31, 1997 and January 31, 1997
Condensed Consolidated Statements of Operations 4
Three and six months ended July 31, 1997 & 1996
Condensed Consolidated Statements of Cash Flows 5
Six months ended July 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
July 31, January 31,
1997 1997
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 270,000 $ 571,000
Trade receivables, net of allowance 7,700,000 7,509,000
Inventory 2,627,000 2,294,000
Prepaid expenses and other 615,000 702,000
Costs and estimated earnings in excess of billings
on uncompleted contracts 635,000 711,000
----------- -----------
Total current assets 11,847,000 11,787,000
EQUIPMENT, net 2,144,000 2,233,000
OTHER ASSETS:
Goodwill, net 3,356,000 3,398,000
Spares inventory, net 390,000 412,000
Other, net 891,000 987,000
----------- -----------
TOTAL ASSETS $18,628,000 $18,817,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable $ 117,000 $ 279,000
Accounts payable and accrued expenses 4,796,000 4,162,000
Unearned income and deposits 915,000 937,000
----------- -----------
Total current liabilities 5,828,000 5,378,000
NOTES PAYABLE 2,439,000 5,596,000
DEFERRED REVENUE 140,000 161,000
MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES 293,000 277,000
STOCKHOLDERS' EQUITY:
Common stock, no par value 13,797,000 10,815,000
Stockholders' notes (35,000) (35,000)
Accumulated deficit (3,834,000) (3,375,000)
----------- -----------
Total stockholders' equity 9,928,000 7,405,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,628,000 $18,817,000
----------- -----------
----------- -----------
See accompanying notes to these condensed financial statements
3
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the six months ended For the three months ended
July 31, July 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES
Equipment $11,960,000 $ 3,661,000 $ 7,448,000 $ 2,403,000
Installation 3,898,000 309,000 2,360,000 199,000
Other services 6,553,000 4,530,000 3,284,000 2,284,000
----------- ----------- ----------- -----------
22,411,000 8,500,000 13,092,000 4,886,000
COST OF SALES (15,581,000) (6,007,000) (9,089,000) (3,459,000)
----------- ----------- ----------- -----------
GROSS MARGIN 6,830,000 2,493,000 4,003,000 1,427,000
OPERATING EXPENSES:
Selling 3,407,000 1,062,000 1,808,000 569,000
General and administrative 3,613,000 1,384,000 1,887,000 691,000
Interest expense, net 255,000 64,000 110,000 23,000
Other 15,000 61,000 15,000 25,000
----------- ----------- ----------- -----------
7,290,000 2,571,000 3,820,000 1,308,000
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (460,000) (78,000) 183,000 119,000
INCOME TAX (EXPENSE) BENEFIT 0 0 0 0
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (460,000) $ (78,000) $ 183,000 $ 119,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE
Primary $ (0.09) $ (0.03) $ 0.03 $ 0.05
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS OUTSTANDING
Primary 5,071,000 2,453,000 5,473,000 2,453,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to these condensed financial statements.
4
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the six months ended July 31,
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (460,000) $ (78,000)
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 780,000 330,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables - net (191,000) (618,000)
Inventory (333,000) 289,000
Prepaid expenses and other 16,000 129,000
Increase (decrease) in:
Accounts payable and accrued expenses 634,000 (1,181,000)
Unearned income 33,000 90,000
----------- -----------
Net cash provided by (used in) operating activities 479,000 (1,039,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (443,000) (240,000)
----------- -----------
Net cash used in investing activities (443,000) (240,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 3,011,000 5,000
Expenses from sale of common stock (29,000) -
Repayment of debt (6,360,000) -
Proceeds from debt 3,041,000 1,200,000
----------- -----------
Net cash provided by (used in) financing activities (337,000) 1,205,000
----------- -----------
INCREASE (DECREASE) IN CASH (301,000) (74,000)
CASH, beginning of period 571,000 473,000
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CASH, end of period $ 270,000 $ 399,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to these condensed financial statements.
5
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INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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
financial statements.
FINANCIAL CONDITION
The financial condition of the Company improved significantly as a result of
a private placement transaction which occurred in April 1997. In exchange
for $3,000,000, 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 July 1997 is $2,300,000 compared to $5,322,000
at the end of January 1997.
As the proceeds from the private placement were used to retire debt, which is
classified as a long-term liability, the benefit of this transaction was not
reflected in working capital at July 31, 1997. However, because the company
was able to pay down the line of credit discussed above, the available credit
on the line provides significant additional working capital for future
operations. The current ratio decreased from 2.19 at January 31, 1997 to
2.03 at July 31, 1997 as working capital decreased by $390,000. Other than
7
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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 six months ended July 31, 1997, the Company had positive cash
flows from operations in the amount of $479,000 compared to the prior year
negative cash flows from operations in the amount of $1,039,000. While the
Company shows a greater loss for the six 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 $330,000 to $780,000 for
the three months ended July 31, 1997 and 1996, respectively. This increase
is primarily the result of amortizing goodwill recorded in the 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.
The primary use of cash during the first six months of the fiscal year was
for capital expenditures in the amount of $443,000 and debt repayment in the
amount of $3,319,000, net. There are no material commitments for capital
expenditures after July 31, 1997.
As a result of these transactions, the cash balance decreased by $301,000
from January 31, 1997.
RESULTS OF OPERATIONS:
Effective September 1, 1996, the Company acquired Interwest Communications
C.S. Corporation and its subsidiaries (Interwest). Therefore, the results of
operations of Interwest for the quarterly and six month periods ending July
31, 1997 are included in the operations of the Company, but are not 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 July 31, 1997, the Company recorded net income of
$183,000, compared to net income in the quarterly period in the prior year of
$119,000. Net income per share for the current quarter was $.03 compared to
$.05 in the prior year, the decrease resulting from an increase in shares
outstanding.
For the six and three months ended July 31, 1997, net sales increased
$13,911,000 (164%) and $8,206,000 (168%), respectively. The acquisition of
Interwest accounted for $13,801,000 and $8,617,000 of the increase. Internet
net sales (on a stand-alone basis) increased by 1% for the six month period
and decreased by 8% for the quarter compared to the same period in the prior
year, which decrease is more attributable to the unusually strong Internet
sales for the prior year quarter ended July 31, 1996. While services
revenues continued to grow during the current year and quarter, the largest
portion of the increase in sales was attributable to equipment sales,
increasing 227% year-to-date and 210% for the quarter as compared to the
prior year.
Gross margin for the first six months was 30.5% of sales as compared to 29.3%
in the prior year (quarterly results were similar: 30.6% in the current year
compared to 29.2% in the prior year). One factor in the increase in gross
margin percentage was the increase in service revenues, particularly
installation revenues as compared to the prior periods. Gross margins
relative to service revenues are typically greater than gross margins
relative to equipment sales. An objective of the company is to continue to
increase service revenues as a percentage of the Company's overall net sales.
Selling expenses as a percentage of revenue were slightly higher in the
current six and three month periods (15% and 14%) compared to the same period
in the prior year (13% and 12%). Both Interwest and
8
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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 six and three months ended July 31, 1997, general and administrative
costs increased by $2,229,000 (161%) and $1,196,000 (173%) over the prior
year. These expenses as a percentage of sales were not significantly
different during the current three and six month periods compared to the
prior year. One non-cash expense - amortization of goodwill costs -
contributed $242,000 and $129,000 to the increase in G&A expenses for the six
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 $191,000 and $87,000 for the six and three
month periods, respectively, due to the increased use of the line of credit
as compared to the same period in the prior year.
9
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INTERNET COMMUNICATIONS CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 10, 1997, the annual meeting of the Company's shareholders was held
to vote on proposals contained in a proxy statement mailed to shareholders
on May 30, 1997. The following items were voted upon by shareholders.
Proposal # 1 to elect four directors. The following directors were
nominated by the Company management and were elected:
William J. Maxwell - 5,090,959 votes for and 30,728 votes withheld.
Craig D. Slater - 5,090,159 votes for and 31,528 votes withheld.
Joseph P. Nacchio - 5,090,659 votes for and 31,028 votes withheld.
Richard T. Liebhaber - 5,090,859 votes for and 30,828 votes withheld.
Proposal # 2 to approve an amendment to the 1996 incentive stock plan to
increase the number of options available to be granted from 625,000 to
875,000. This proposal passed with 4,993,886 votes for, 79,318 votes
against, 18,555 abstaining, and 29,928 not voting.
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed Form 8-K/A dated May 27, 1997.
10
<PAGE>
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: September 12, 1997 By: /s/ Thomas C. Galley
-----------------------------------------
Thomas C. Galley, President
Date: September 12, 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> JUL-31-1997
<CASH> 270,000
<SECURITIES> 0
<RECEIVABLES> 7,915,000
<ALLOWANCES> 215,000
<INVENTORY> 2,627,000
<CURRENT-ASSETS> 11,847,000
<PP&E> 5,723,000
<DEPRECIATION> 3,579,000
<TOTAL-ASSETS> 18,628,000
<CURRENT-LIABILITIES> 5,828,000
<BONDS> 0
0
0
<COMMON> 13,797,000
<OTHER-SE> (3,869,000)
<TOTAL-LIABILITY-AND-EQUITY> 18,628,000
<SALES> 13,092,000
<TOTAL-REVENUES> 13,092,000
<CGS> 9,089,000
<TOTAL-COSTS> 12,799,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,000
<INCOME-PRETAX> 183,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 183,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 183,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
