<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For Fiscal year ended N/A
--------------
or
[X] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from February 1, 1997 to December 31, 1997
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Commission file number 0-19578
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INTERNET COMMUNICATIONS CORPORATION
(Name of small business issuer 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., STE 201, GREENWOOD VILLAGE, COLORADO 80111
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (303) 770-7600
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Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE NASDAQ
- -------------------------- ------------------
(Title of Class) (Name of Exchange)
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
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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 the Form 10-KSB [ ]
Revenues for the fiscal year ended December 31, 1997 is $33,113,000.
At March 16, 1998, 5,397,887 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 $8,576,000.
Documents incorporated by reference:Proxy Statement to be filed in April 1998.
Page 1 of pages. Exhibits are indexed on page 34.
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(Complete Copy)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
GENERAL
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Internet Communications Corporation (INCC or the Company), a Colorado
corporation, is a multi-faceted telecommunications and networking company
specializing in the design, implementation, maintenance and management of
communications systems and networks. With headquarters in metropolitan Denver,
the Company has over 5,000 business, government and institutional customers.
The Company is capable of handling the total communications needs of its
customers' enterprise-wide networks for data and voice. This unique capability
was created in 1996 with the merger of two prominent Colorado communications
companies -- INCC, a leading data networking services company, and Interwest
Communications Corporation, a leading telephone interconnect company in
Colorado. This combination has produced a company with strong voice and data
integration capabilities and the wherewithal to deal with the convergence of
various electronic communications media.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
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SECURITIES LITIGATION REFORM ACT OF 1995
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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 fund future operations.
- Company's need to refinance debt.
RECENT DEVELOPMENTS
- -------------------
In March 1998, the Company announced that it has taken steps to brings its
corporate structure in line with its corporate strategy by divesting non-core
businesses and sales channels. Two subsidiaries, Interwest Sound ("Sound") and
Interwest Cable Network Systems, Inc. ("Cable"), will be sold. In addition, the
Company has re-sized its operations concentrating on areas which generate
revenues and profits. As a result, 50 positions, or 21% of the Company's
workforce (not including Sound and Cable) have been eliminated. In connection
with this restructuring, the Company's president, Thomas C. Galley, resigned
from his position as president and CEO. John M. Couzens replaces Mr. Galley as
interim president and CEO.
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Also in March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note, due March 1999. The note bears
interest at 10% and interest payments are due quarterly. The note includes a
conversion clause which allows conversion if the note is not paid when due and
carries a conversion price of $4.25 per common share. Proceeds from the note
will be used for working capital.
PRODUCTS AND SERVICES
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The Company provides design, implementation, maintenance and management of
enterprise-wide voice and data networks and business telephone systems. To
provide fully integrated network solutions, the Company offers a full array of
products and services, including data communications equipment, circuits, and
value-added services, such as network design, installation, maintenance and
management.
Enterprise Networks
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To provide data communications equipment, the Company maintains distribution
agreements with premier manufacturers and suppliers, including 3Com, Cisco,
Tellabs, ADC/Kentrox, Adtran, Motorola, Memotech, and Telco Systems. To provide
circuits, the Company has agreements with a number of carriers, including
Worldcom, ICG, and U S WEST and operates, itself, as an FCC approved
interexchange carrier. To provide value added services, the Company employs a
highly trained technical staff and operates an advanced network control center
("NCC").
The NCC is located at the Company's corporate headquarters in Greenwood Village,
Colorado, and is capable of managing networks on an international scale. The
NCC is capable of monitoring and remotely diagnosing most data communication
devices as well as the circuits connecting customer locations. Problem
resolution and network analysis are other key elements of the Company's network
management services.
INCC Network and Field Engineers have a broad knowledge of data and voice
communications equipment and networks, built on a foundation of experience and
training. Their knowledge extends to multiple vendors, and they are experts at
designing and installing integrated networks and resolving any problems arising
in those networks.
Business Communications Systems
- -------------------------------
Building on the experience and product lines gained in the merger with
Interwest, the Company also provides design, installation, and maintenance and
management for a full range of business telephone systems and associated
equipment and applications software. The Company is currently one of NEC
America's 10 largest dealers in the U.S. market. Additional relationships with
telephone system manufacturers include Northern Telecom, Fujitsu and Active
Voice (the largest PC-based voice processing systems manufacturer).
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Internet Access Services
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The Company also operates as an Internet Service Provider, offering complete
internet access, including circuits, data communications equipment, firewalls
(hardware and software to enhance network security), high speed connection to
the internet, and services, like network management, maintenance, hosting of the
customer's web site and/or computers at our facilities, and internet consulting.
Network Consulting
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The Company has a network consulting division which offers analysis and
recommendations on a wide range of networking requirements, issues, problems or
concerns. The Company's network consultants perform network system engineering,
network performance analysis, and internet design and engineering. They
recommend and implement new network and system designs, migrations, upgrades,
optimization and multi- platform/application integration.
Sound and Security Systems
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As discussed above, Sound is expected to be sold. Sound designs and installs
commercial paging systems, school intercom systems, nurse call, video security
and card access security systems.
Cable Networks
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As discussed above, Cable is expected to be sold. Cable designs, installs and
maintains fiber optic networks for competitive local exchange carriers,
interexchange carriers and campus area networks.
Refurbished Voice Communications Equipment
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U.S. Telphonics, a division of INCC, operates in the secondary market selling
refurbished telephone and voice mail systems throughout the United States.
Typically, these are systems traded in by customers following the installation
of a new system by INCC.
STRATEGY
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The Company has broad voice and data communications expertise and the ability to
deliver value-added services. In addition to offering a complete array of
communications services and products, the Company will add value by:
* choosing the best solutions from among a variety of sources
* combining multiple services, devices and software applications into complete
solutions
* providing proprietary services to enhance overall network design.
To further strengthen the Company, opportunities will be sought for:
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* adding more proprietary, value-added services to integrated system and network
designs
* adding more products and services that can be offered under the Company brand
* adding more sources of recurring revenue
INDUSTRY OVERVIEW AND MARKET NICHE
- ----------------------------------
The total U.S. market for data communications systems and networks, according to
Data Communications Magazine, is estimated in 1997 at $51 billion, including
over $3.5 billion in internet services. The overall growth of this market is
projected at approximately 20%, and the internet services segment is growing at
a rate of 60% per year.
Helping to fuel this growth is the trend toward an increasingly networked world.
Distributed networks and the valuable information flowing over those networks
have become mission critical. Communications networks have also continued to
grow in complexity as technologies continue to proliferate and evolve.
Information Technologies (I.T.) managers must deliver communications networks
and systems within limited budgets and with limited resources. To help with
this dilemma, I.T. personnel are increasingly looking for integrated solutions
from their vendors. INCC is well positioned to provide such solutions.
COMPETITION
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Competitors for the network integration market are numerous and varied. The
field is comprised of companies which approach the market from different bases
of expertise. The types of companies with whom INCC has traditionally been
competing include:
* manufacturers (such as Cisco) selling data communications terminating
equipment and business communications systems (such as Lucent Technologies)
* distributors of that equipment
* carriers selling direct (such as WilTel)
* re-sellers of carrier services
* national systems integrators (such as EDS, IBM Global Networks, and large
accounting firms)
Throughout 1998, the Company will seek to improve its position as a complete
communications services provider. In contrast to manufacturers, who focus on
selling their own products, or to sales agents, who act as a sales channel on
behalf of manufacturers and carriers, or to distributors, who buy and resell
products "as-is" from a limited number of sources, the Company will seek to add
value by tailoring integrated solutions as described above.
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The Company's competitive position is enhanced by its mix of technical breadth
and flexibility. Few companies the size of INCC can boast as complete an array
of communications services and capabilities. Large companies, who can match
INCC's capabilities, often cannot match the Company's responsiveness to customer
requirements and attractive price structure.
GOVERNMENT REGULATION
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Certain aspects of the Company's operations are subject to regulation by the
Federal Communications Commission ("FCC"). The FCC has the authority to
regulate prices charged by inter-city common carriers. In August 1982, the FCC
substantially deregulated non-facilities-based, resale carriers such as the
Company, and no longer requires certification of these type of carriers or the
filing of tariffs. The Company is consequently not obligated to file tariffs
with the FCC for the interstate circuits it provides to customers. 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.
The Company's ability to provide intrastate circuits is also subject to
regulation in each state by the appropriate state regulatory agency. Although
the Company has no immediate plans to offer these services, it has been
certified by the Colorado Public Utilities Commission to resell intrastate
circuits in that state.
SALES AND MARKETING
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Internet's sales and marketing functions are currently staffed by 41 sales and
marketing personnel (not including the Sound and Cable subsidiaries which are
held for sale). Internet's sales representatives initially contact potential
customers from referrals from other customers or by local market knowledge.
Thereafter the Company is engaged to evaluate and recommend a network
integration solution and network services. 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.
CUSTOMERS
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Internet provides products and services to approximately 5,000 business,
government and institutional customers, ranging from single location, single
system customers to national accounts with integrated networks dispersed over a
wide geographic area. No single customer accounted for more than 10% of sales in
the fiscal year ended December 31, 1997.
SEASONALITY
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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 purchasing decisions.
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BACKLOG
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The Company receives orders for the sale and installation of network systems and
network services to be installed and provisioned in the future. As of December
31, 1997 there were orders received from various customers which are expected to
account for approximately $4.4 million in future sales for the Company.
In addition, the Company has on-going contracts with customers that range from 3
months to 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
$765,000 per month as of December 31, 1997.
EMPLOYEES
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On March 16, 1998 the Company employed 178 full-time employees including 4
executive officers, 41 in sales and marketing, 102 in network operations and
technical services, and 31 in accounting, administration, and other support
areas. In addition, the company owns two subsidiary companies which are held
for sale. These two subsidiaries employed 74 full-time employees as of the same
date.
RESEARCH AND DEVELOPMENT
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Internet is primarily a network integrator and network services provider and as
such is not involved in any significant research and development efforts.
LOCATIONS
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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 throughout
Colorado and in Minneapolis, Minnesota.
ITEM 2. DESCRIPTION OF PROPERTIES
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The Company leases under multi-year agreements approximately 73,000 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, Colorado Springs,
Pueblo, Fort Collins, Colorado and Minneapolis, Minnesota. Cable, which is held
for sale, also leases a small construction yard and office at $3.37 per square
foot located in Commerce City, Colorado.
ITEM 3. LEGAL PROCEEDINGS
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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.
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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 two-
month period ended December 31, 1997.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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(a) Principal Market or Markets. Internet's Common Stock is traded on the
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NASDAQ Small-Cap Market under the symbol INCC.
The following table represents the range of high and low closing prices for the
Common Stock for the eight fiscal quarters ended December 31, 1997.
<TABLE>
<CAPTION>
Quarter Ended
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Apr-30-96 Jul-31-96 Oct-31-96 Jan-31-97
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High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C>
4.63 3.63 7.13 4.00 6.81 5.00 6.88 4.88
<CAPTION>
Quarter Ended
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Apr-30-97 Jul-31-97 Oct-31-97 Dec-31-97
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High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C>
5.56 4.13 8.88 4.63 9.50 7.31 8.00 4.56
</TABLE>
(b) Approximate Number of Holders of Common Stock and Warrants. As of March 16,
-----------------------------------------------------------
1998, there were 150 record holders and an additional estimated 1,500 beneficial
holders of Internet's Common Stock.
(c) Dividends. Internet has paid no cash dividends on its Common Stock and has
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no present intention of paying cash dividends in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the growth of 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. The current loan agreement
requires lender approval of dividend payments.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial statements.
The following sections will disclose the effect of the Company's acquisitions on
its financial
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performance. The Company acquired Interwest Communications C.S. Corporation
(Interwest) and its subsidiaries on September 1, 1996. 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.
The Company elected to change its fiscal year end to December 31 from January
31, effective January 1, 1997. References to fiscal 1996 relate to the year
ended January 31, 1997. References to fiscal 1997 relate to the eleven months
ended December 31, 1997.
FINANCIAL CONDITION
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The financial condition of the Company at December 31, 1997 as compared to the
previous year is discussed below. All known significant trends and events in
financial condition, liquidity and capital resources are also discussed below.
In April 1997, the Company received net proceeds of $2,973,000 in a private
placement transaction with a related party. In exchange, the Company issued
631,579 shares of common stock and 63,158 warrants to purchase common stock at
$5.70 per share exercisable for a period of 5 years. The price of the shares and
warrants was based on the market value at the time of the transaction.
The Company has a borrowing agreement with a lending institution which provides
for a $5.0 million credit facility. At December 31, 1997, the Company had
borrowed $4,390,000 against that facility. Although the Company was in default
of financial performance covenants as of December 31, 1997, the lending
institution waived the violations that existed as of that date. The borrowing
agreement expires in September 1998.
In March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note ("Note"), due March 1999. The Note
bears interest at 10% and interest payments are due quarterly. The Note
includes a conversion clause which allows conversion if the Note is not paid
when due and carries a conversion price of $4.25 per common share.
Following the receipt of cash proceeds from the Note and the waiver of financial
covenants from its lending institution, the Company believes that it has the
capital resources necessary to continue its business operations during the
foreseeable future. In March 1998, the Company made significant reductions to
its cost structure by reducing its employee headcount by more than 20% (see
discussion in "Subsequent Events"). In addition, the Company has announced a
decision to sell two of its subsidiaries (Sound and Cable) during 1998.
Although the sale of these subsidiaries is not expected to generate significant
cash proceeds, it is expected that the Company will reduce its risk of future
losses by eliminating these two companies from its consolidated operating
results. The Company also hopes to enter into an agreement with its lending
institution
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to extend the current loan facility beyond September 1998 or will immediately
begin discussions with other lenders to replace the credit facility. There is no
assurance that the Company will be successful.
The Company's cash position has decreased from $571,000 in the prior year to $0
in the current year. The Company's current ratio decreased from 2.19 as of
January 31, 1997, to .87 as of December 31, 1997. The most significant reason
for the decrease in current ratio is the reclassification of the Company's bank
note payable from a long-term liability at January 31, 1997 to a current
liability in December 31, 1997. The reclassification is required because the
note expires in September 1998.
The Company has an outstanding receivable of $620,000 at December 31, 1997,
related to a project for which the Company is a subcontractor. This receivable
relates to the cost of delays and inefficiencies, as a result of environmental
hazards at the worksite. The Company anticipates recovering substantially all
of these costs from the contractor during 1998, however there is no assurance
that it will be collected. The Company is indemnified under a previous business
combination for any losses resulting from this contract although there can be no
assurance that the Company will collect under the indemnity agreement.
During fiscal 1997, Internet increased its investment in equipment in support of
its technical operations by $995,000.
The balance of goodwill as of December 31, 1997 is $2,198,000. 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 principally to the acquisition of Interwest by Internet.
The goodwill is being amortized over a period of 5 to 20 years.
RESULTS FROM OPERATIONS
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As noted above, the Company changed its fiscal year end to December 31, and as a
result, the current year activity includes 11 months of operating results as
compared to 12 months in the previous year. Additionally, on September 1, 1996,
the Company acquired Interwest and its subsidiaries and the prior year operating
results includes only 5 months of Interwest activity.
In March 1998, the Company adopted a formal plan to sell its non-core business
segments, consisting of Sound and Cable, as a part of the Company's strategic
focus on providing integrated and high-end network systems. The segments have
been presented as discontinued operations for the eleven months ended December
31, 1997 and the year ended January 31, 1997.
During fiscal 1997, the Company recorded a net loss of $4,575,000, including a
$1,225,000 loss from discontinued operations, goodwill impairment of $328,000,
and a loss from the sale of a subsidiary in
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the amount of $152,000. The loss from continuing operations before the goodwill
impairment and loss from subsidiary was $2,870,000. This compares to an overall
net loss in the prior year of $1,125,000 and $934,000 loss from continuing
operations.
Net sales increased by $6,608,000 or 25% as compared to the prior year. The
acquisition of Interwest accounted for $8,503,000 of the increase while Internet
net sales (on a stand-alone basis) decreased by $1,895,000, or 11%. The primary
cause for the decrease in Internet sales was the reduction in equipment sales
from fiscal 1996 to fiscal 1997 (a $1,863,000 decrease). A number of factors
contributed to this decrease. The prior year results included $989,000 of
equipment sales from its "Indirect Sales Department" which was eliminated in
early 1996. Also, the Company had been reducing its emphasis on equipment sales
which do not include any recurring services. There is an intentional effort to
sell "total network systems" as opposed to equipment only, which must usually be
sold at lower margins because of increasing price competition. The conversion
to this type of sale began in 1996 but this approach was stepped up 1997 and
resulted in the decrease in equipment sales.
Cost of goods sold as a percentage of sales and the resulting gross margin
percentages were not significantly different from the percentages in the prior
year. The consistent gross margins from year to year is mostly attributable to
the consistency of equipment and services revenue mix from fiscal 1996 (50%
equipment sales as percentage of total sales) as compared to fiscal 1997 (51%).
Selling expenses were considerably higher in fiscal 1997 as compared to the
prior year. As a percentage of revenue, selling expenses increased from 15% to
17%. Both Interwest and Internet (on a stand-alone basis) contributed to higher
selling expenses due to the increase in sales staff and higher fixed costs for
increased salaries. The Company believes that these increases can be controlled
in future periods by restructuring its compensation plans and increasing its
efforts to monitor the performance of individual sales representatives and
taking corrective action on a more timely basis.
General and administrative ("G&A") expenses have increased both in actual
dollars ($2,397,000) and as a percentage of revenue (from 16% in 1996 to 20% in
1997). The Company realized impairment of goodwill in the amount of $328,000 in
the current year. The impairment was determined based on a comparison of the
realizable value of the goodwill to its book basis. Another contributing factor
to the increase was goodwill and intangible amortization expense which increased
from $98,000 in fiscal 1996 to $406,000 in fiscal 1997.
G&A 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
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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.
For most of 1997, the Company did not realize the benefits of combining the two
companies which was expected to occur after the acquisition of Interwest. There
are ongoing efforts to reduce the overhead expenses of the Company and reduce
G&A as a percentage of sales. As discussed in subsequent events, the Company
reduced its staffing levels in March 1998. It is expected that this will have a
positive effect in reducing its G&A expenses in future periods.
SUBSEQUENT EVENTS
- -----------------
In March 1998, the Company announced that it has taken steps to brings its
corporate structure in line with its corporate strategy by divesting non-core
businesses and sales channels. Two subsidiaries, Sound and Cable, will be sold.
In addition, the Company has re-sized its operations concentrating on areas
which generate revenues and profits. As a result, 50 positions, or 21% of the
Company's workforce (not including Sound and Cable) have been eliminated. In
connection with this restructuring, the Company's president, Thomas C. Galley,
resigned from his position as president and CEO. John M. Couzens replaces Mr.
Galley as interim president and CEO. A non-recurring restructuring charge,
which is expected to be not less than $500,000, will be reported in the first
quarter of 1998.
Also in March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note, due March 1999. The note bears
interest at 10% and interest payments are due quarterly. The note includes a
conversion clause which allows conversion if the note is not paid when due and
carries a conversion price of $4.25 per common share. Proceeds from the note
will be used for working capital.
YEAR 2000
- ---------
In January 1997, the Company developed a plan to deal with potential Year 2000
issues and began converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by the end of 1999.
Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year. The total cost of the
project is estimated to be no more than $20,000 and will be funded through
operating cash flows. The Company is expensing all costs associated with these
system changes as the costs are incurred.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The following Financial Statements are filed as part of this Report:
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<TABLE>
<CAPTION>
Page
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<S> <C>
Independent Auditors' Reports 15-16
Consolidated Balance Sheet, December 31, 1997 17
Consolidated Statements of Operations, For the
Periods Ended December 31, 1997 and January 31, 1997 18
Consolidated Statement of Stockholders' Equity,
For the Period from February 1, 1995 through
December 31, 1997 19
Consolidated Statements of Cash Flows, For the
Periods Ended December 31, 1997 and January 31, 1997 20
Notes to Consolidated Financial Statements 21-32
</TABLE>
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INDEPENDENT AUDITORS' REPORT
----------------------------
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERNET COMMUNICATIONS CORPORATION:
We have audited the accompanying consolidated balance sheet of Internet
Communications Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the 11-month period then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the December 31, 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Internet Communications Corporation and subsidiaries as of December 31, 1997,
and the results of their operations and their cash flows for the 11-month period
then ended in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
March 20, 1998
Denver, Colorado
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INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Internet Communications Corporation
Greenwood Village, Colorado
We have audited the consolidated balance sheet (not included herein) of Internet
Communications Corporation and Subsidiaries as of January 31, 1997, and the
related accompanying consolidated statements of operations, stockholders' equity
and cash flows for the year then ended. 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
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit
provides 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 year then ended, in
conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
May 2, 1997
16
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
- ------
Current assets:
Trade receivables, net of
$318 allowance for doubtful
accounts and sales returns $ 4,907
Inventory 3,255
Prepaid expenses and other 328
Costs and estimated earnings
in excess of billings 1,825
-------
Total current assets 10,315
Equipment, net 2,015
Goodwill, net 2,198
Spares inventory 507
Net assets of discontinued operations 2,078
Other assets, net 1,000
-------
Total assets $18,113
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 4,435
Accounts payable and accrued
expenses 4,706
Billings in excess of costs
and estimated earnings 1,537
Unearned income and deposits 1,125
-------
Total current
liabilities 11,803
Notes payable 209
Deferred revenue 117
------
Total liabilities 12,129
Stockholders' equity:
Preferred stock $0.0001 par
value, 100,000,000 shares
authorized -
Common stock, no par value,
20,000,000 shares
authorized, 5,397,887
shares issued and
outstanding 13,965
Stockholders' notes (31)
Accumulated deficit (7,950)
-------
Total stockholders'
equity 5,984
Commitments and contingencies (note 6)
Total liabilities and
stockholders' equity $18,113
=======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, January 31,
1997 1997
---- ----
<S> <C> <C>
Net sales:
Equipment $ 16,767 13,214
Installation 3,977 1,550
Network services 12,369 11,741
------ ------
Total sales 33,113 26,505
Cost of sales 23,693 18,815
------ ------
Gross Margin 9,420 7,690
------ ------
Operating expenses:
Selling 5,722 3,995
General and administrative 6,648 4,251
Interest expense, net 400 378
------ ------
Total expenses 12,770 8,624
------ ------
Loss from continuing operations (3,350) (934)
Discontinued operations -
loss from operations (1,225) (191)
------ ------
Net loss $(4,575) (1,125)
====== ======
Loss per share - basic and diluted:
Weighted average common shares
outstanding 5,216 3,371
Loss from continuing operations $ (0.64) (0.28)
Loss from discontinued opertions $ (0.24) (0.05)
Net loss $ (0.88) (0.33)
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 31, 1996 TO DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
------------------- Stockholders' Accumulated
Shares Amount notes deficit Total
--------- -------- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 31, 1996 2,400,686 $ 5,198 (31) (2,250) 2,917
Stock options exercised 6,500 20 - - 20
Stock issued in connection with purchase of
Interwest 2,306,541 5,480 - - 5,480
Stock issued in connection with purchase of
Paragon 25,000 113 - - 113
Net loss - - - (1,125) (1,125)
--------- -------- -------------- -------- -------
BALANCES, JANUARY 31, 1997 4,738,727 10,811 (31) (3,375) 7,405
Stock options exercised 8,333 41 - - 41
Stock issued in connection with purchase of 12,570 100 - - 100
Pueblo
Stock issued in connection with private 631,579 2,973 - - 2,973
placement, net
Stock issued to directors and advisors 6,678 40 - - 40
Net loss - (4,575) (4,575)
--------- -------- -------------- -------- -------
BALANCES, DECEMBER 31, 1997 5,397,887 $13,965 (31) (7,950) 5,984
========= ======== ============== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, January 31,
1997 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net Loss from continuing operations $ (3,350) (934)
Adjustments to reconcile income from continued operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,469 932
Allowance for doubtful accounts and sales returns 318 61
Goodwill impairment 259 -
Changes in operating assets and liabilities, net of effect from disposition
of businesses:
Trade receivables 1,567 (2,149)
Inventory (1,035) 942
Spares inventory (95) (82)
Prepaid expenses and other 270 127
Costs and estimated earnings in excess of billings (1,114) -
Accounts payable and accrued expenses 762 (2,187)
Billings in excess of costs and estimated earnings 1,537 -
Deferred revenue and extended warranty 144 147
-------- ------
Net cash provided by (used in) operating activities of continued operations 732 (3,143)
Net cash provided by (used in) operating activities of discontinued operations (2,181) 1,255
Cash flows from investing activities:
Capital expenditures (995) (682)
Cash acquired through business acquisitions - 78
-------- ------
Net cash used in investing activities of continued operations (995) (604)
Cash flows from financing activities:
Proceeds from debt 11,766 6,567
Repayment of debt (12,906) (2,561)
Repayment of advances from related party - (1,436)
Proceeds from sale of stock, net 3,013 20
-------- ------
Net cash provided by financing activities of continued operations 1,873 2,590
-------- ------
Increase (decrease) in cash and cash equivalents (571) 98
Cash and cash equivalents, at beginning of period 571 473
-------- ------
Cash and cash equivalents, at end of period $ - 571
======== ======
Supplemental disclosure of cash flow information
Cash paid during the year for interest 391 316
Supplemental disclosure of significant non-cash investing and financing activities:
Issuance of stock to directors and advisors 40 -
Issuance of stock for acquisitions 100 5,593
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Internet
Communications Corporation (the Company). The Company acquired the
outstanding common stock of Interwest Communications Corporation, C.S.
(Interwest) effective September 1, 1996, as more fully described in note 2.
After the acquisition of Interwest, the Company became 46% controlled by
Interwest Group. The Company is a wide and local area integrator of data
and tele-communications equipment installation, services and carrier
circuits.
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiary Interwest; its 97% subsidiary, Interwest Cable
Network Systems, Inc. (Cable); its 80% subsidiary, Omega Business
Communications Services, Inc. (Sound). The minority interests of the above
subsidiaries are owned by the respective managers of each company and one
of the managers has the option to acquire a stated number of additional
shares at a specified price, but the manager would still own less than 50%
of their respective entity. No minority interests in the losses of these
subsidiaries has been recognized because the related minority interest
liabilities have been reduced to zero. All material intercompany
transactions and amounts have been eliminated in consolidation.
CHANGE IN FISCAL YEAR END
The Company has elected to change its fiscal year end to December 31 from
January 31, effective February 1, 1997. References to fiscal year 1996
relate to the year ended January 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company may deposit 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
affected by changes in economic or other conditions.
21
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Substantially all of the Company's accounts receivable result from data and
telecommunications hardware sales and related services. Historically,
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.
INVENTORY
Inventory, which consists of finished goods (communications equipment), is
stated at average cost. Spares inventory consists of finished parts used
in servicing customer maintenance contracts and is depreciated over a five-
year period. These amounts are 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 on a straight-
line basis over the estimated useful lives of these assets generally five
to seven years. Leasehold improvements are amortized over the lesser of
the useful lives of the assets or the lease term. Expenditures for
maintenance and repairs are expensed as incurred. 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 consisting of the following at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Telecommunications equipment $ 2,338
Office furniture and equipment 2,159
Transportation equipment 60
Leasehold improvements 482
-------
5,039
Less accumulated depreciation and
amortization (3,024)
-------
Total furniture $ 2,015
and equipment =======
</TABLE>
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, and tools.
22
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the 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 over the term of the related noncancelable service agreements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
OTHER ASSETS
The excess of the purchase price over the net amount acquired recorded in
the acquisition of Interwest is recorded as goodwill. Goodwill is being
amortized on a straight-line basis over a period of 20 years.
Accumulated amortization at December 31, 1997 is approximately $360,000.
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 December 31, 1997, the related accumulated amortization is
approximately $292,000.
The amortization expense for the eleven months ended December 31, 1997 and
the year ended January 31, 1997 for the above intangibles was approximately
$406,000 and $98,000, 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 consolidated 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
23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 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
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such assets
may not be recoverable, in accordance with Statement of Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (SFAS 121). This review consists
of a comparison of the carrying value of the asset with the asset's
expected future undiscounted cash flows without interest costs. Estimates
of expected future cash flows are to represent management's best estimate
based on reasonable and supportable assumptions and projections. If the
expected future cash flow exceeds the carrying value of the asset, no
impairment is recognized. If the carrying value of the asset exceeds the
expected future cash flows, an impairment exists and is measured by the
excess of the carrying value over the fair value of the asset. Any
impairment provisions recognized are permanent and may not be restored in
the future.
STOCK-BASED COMPENSATION
In fiscal 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, (SFAS 123). SFAS 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 a 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 method
prescribed by SFAS 123 for employee stock compensation, and is subject only
to the disclosure requirements prescribed by SFAS 123. Adoption of SFAS
123 has no effect on the Company's consolidated financial statements.
24
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
LOSS PER SHARE
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128), which is
effective for financial statements issued for periods ending after December
15, 1997. Under SFAS 128, basic loss per share is computed on the basis of
weighted-average common shares outstanding. Diluted loss per share
considers potential common stock in the calculation, and is the same as
basic loss per share for the 11 months ended at December 31, 1997 and the
year ended January 31, 1997, as all of the Company's potentially dilutive
securities were anti-dilutive during these periods.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentations. Such reclassifications has 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 the 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 and accounted for
the acquisition under the purchase method of accounting.
During 1997, the Company acquired its remaining interest in Interwest
Communications Pueblo Corporation for 12,500 shares of common stock, valued
at $100,000. Any pro-forma results of operations are immaterial to the
consolidated financial statements.
25
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) CONTRACTS IN PROGRESS
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Costs incurred on uncompleted contracts $5,879
Estimated earnings 1,790
------
7,669
Less: Billings to date 7,381
------
$ 288
======
Included in the accompanying balance
sheet accounts under the following
captions:
Costs and estimated earnings in excess
of billings $1,825
Billings in excess of costs and
estimated earnings 1,537
------
$ 288
======
</TABLE>
The Company has entered into various contracts for the installation of
wide-area and local-area voice and data networks. Progress billings are
made to customers upon contract acceptance and completion of certain
milestones. The Company expects to bill and collect all costs and
estimated earnings in excess of billings as of December 31, 1997 in 1998.
(4) GOODWILL
In the fourth quarter of 1997, the Company recognized a goodwill impairment
of $746,000 which is directly associated with discontinued operations (note
9). The goodwill is related to two of the Company's non-core business
segments which the Company's Board of Directors have adopted a plan to sell
during 1998.
In addition, during the fourth quarter of 1997, the Company recognized a
goodwill impairment of $259,000, which is recorded in general and
administrative expenses. The goodwill relates to a 1996 purchase business
combination and was determined to have been impaired because the purchased
business was generating recurring operating losses and key employees were
transferred to other operating units of the Company.
(5) NOTES PAYABLE
In April 1997, the Company renegotiated its credit facility. The new
facility consists of a line-of-credit for $5,000,000 with interest at prime
plus 1/2% (totaling 9% at December 31, 1997) and a $450,000 facility to
support a performance bond which will expire upon the release of the bond.
As of December 31, 1997, there was $4,390,000 outstanding under the line-
of-credit and there was no balance committed under the 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 sole discretion of the financial institution. As of December 31, 1997,
the Company was not in compliance with certain covenants to its credit
facility, however, such covenants have been waived as of December 31, 1997
through the expiration of the credit facility. Pursuant to
26
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
the waiver granted by the Company's lender, the Company and its lender must
agree to the terms of an amendment to the credit facility to incorporate
monthly cash flow covenants for the periods from May 1998 through August
1998, by April 15, 1998.
The Company also has various notes payable agreements with various
individuals totaling approximately $254,000 at December 31, 1997. In
general, these notes are unsecured, however, a few are collateralized by
certain equipment and vehicle of the Company. Interest accrues on these
notes at between approximately 7% and 14% per annum.
Future debt maturities as of December 31, 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $4,435
1999 126
2000 58
2001 25
------
$4,644
======
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and vehicles under noncancelable
operating leases. Total rental expense for the eleven months ended
December 31, 1997 and the year ending January 31, 1997 was $929,945 and
$688,000, respectively. The total minimum rental commitments as of
December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 876
1999 768
2000 711
2001 616
2002 338
Thereafter
------
$3,309
======
</TABLE>
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 an outstanding receivable of $620,000 at December 31, 1997,
related to a project for which the Company is a subcontractor. This
receivable relates to the cost of delays and inefficiencies, as a result of
environmental hazards at the worksite. The Company anticipates recovering
substantially all of these costs from the contractor during 1998. The
Company is indemnified by Interwest Group under a previous business
combination for any losses resulting from this contract.
27
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) 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. As of December 31, 1997, no preferred stock
has been issued.
During the fiscal year 1996, the Company adopted, and the stockholders
approved, an Incentive Stock Plan (Plan), that authorizes the issuance of
up to 875,000 shares of common stock. Pursuant to the Plan, the Company
may grant "incentive stock options" (intended to qualify under Section 422
of the Internal Revenue Code of 1986, as amended), non-qualified stock
options and stock purchase rights or a combination thereof.
Incentive stock options may not be granted at an exercise price of less
than the fair market value of the common stock on the date of grant (except
for holders of more that 10% 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 1996, the Company also adopted the Non Employee
Directors' Stock Option Plan (Outside Directors' Plan), which provides for
the grant of stock options to non-employee directors of the Company and any
subsidiary. An aggregate of 40,000 shares of common stock are reserved for
issuance under the Outside Directors' Plan. The exercise price of the
options will be the fair market value of the stock on the date of grant.
Outside directors are automatically granted options to purchase 10,000
shares initially and an additional 2,000 shares for each subsequent year
that they serve. All options granted vest over a 3-year period from the
date of the grant.
The following is a summary of activity under these stock option plans for
the eleven months ended December 31, 1997 and the year ended January 31,
1997:
<TABLE>
<CAPTION>
Eleven months ended
December 31, 1997 Year ended January 31, 1997
-------------------------- ---------------------------
Weighted Weighted
Number of average Number of average
shares exercise price shares exercise price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 659,844 $4.18 296,800 $3.44
Granted 221,800 5.52 686,344 4.10
Exchanged - - (217,900) 3.20
Exercised (8,333) 4.95 (6,500) 3.00
Forfeitures (40,867) 4.53 (98,900) 4.20
------- --------
Outstanding, end of period 832,444 4.62 659,844 4.18
======= ========
</TABLE>
28
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following tables summarize certain information about the Company's
stock options at December 31, 1997.
Options outstanding
-------------------------------------------------------------
Weighted Weighted
Range of Number of average average
exercise outstanding remaining exercise
prices options contractual life price
------------ ----------- ---------------- --------
$3.75-4.13 444,844 8.2 years $3.88
4.81-6.25 364,100 9.0 5.27
7.88-8.88 23,500 9.7 8.36
-----------
3.75-8.88 832,444 8.6 4.62
===========
Options exercisable
-------------------------------------------------------------
Weighted
Range of Number of average
exercise options exercise
prices exercisable price
------------ ----------- --------
$3.75-4.13 222,422 $3.88
4.81-6.25 140,776 5.33
7.88-8.88 5,875 8.36
-----------
3.75-8.88 369,073 4.51
===========
PRO FORMA STOCK BASED COMPENSATION DISCLOSURES
The Company applies APB Opinion No. 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 eleven months ended December 31, 1997 and year ended
January 31, 1997 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 method described
in SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
29
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Eleven months
ended Year ended
December 31, January 31,
1997 1997
------------ ----------
Net loss applicable to common
shareholders:
As reported $(4,575) (1,125)
Pro forma (5,612) (1,803)
Net loss per common share - basic and
diluted:
As reported (0.88) (0.33)
Pro forma (1.08) (0.53)
The weighted average fair value of options granted in the eleven months
ended December 31, 1997 and the year ended January 31, 1997 on the date of
grant was estimated to be $4.05 and $2.98, respectively, using the Black-
Scholes option-pricing model with the following weighted average
assumptions:
Eleven months
ended Year ended
December 31, January 31,
1997 1997
------------ ----------
Expected volatility 57% 83%
Risk-free interest rate 6% 7%
Expected dividends - -
Expected terms (in years) 10 5
(8) 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 December 31, 1997, these differences consist of the following (in
thousands):
Income tax loss carryforward $ 2,401
Allowance on assets 263
Deferred revenue 53
Depreciation expense 258
Other 40
-------
3,015
Less valuation allowance (3,015)
-------
Net $ -
=======
30
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Company did not recognize tax benefits in 1997 and 1996 due to
increases in the valuation allowance for deferred tax assets in those
periods. The valuation allowance for deferred tax assets increased from
$952,000 at January 31, 1997 to $3,267,000 at December 31, 1997, due
primarily to an increase in the Company's net operating loss carryforwards.
As of December 31, 1997, the Company has income tax loss carryforwards of
approximately $6,436,000 which expire in the years 2006 through 2012. The
utilization of the majority of these net operating loss carryforwards have
been restricted because of ownership changes. These restrictions limit the
amount of utilizable net operating loss carryforwards each year.
(9) EMPLOYEE SAVING PLANS
The Company provides two separate savings plans to its' employees: (1) the
Internet Communications Employee Retirement Savings Plan and Trust, and (2)
the Interwest Communications Employee Thrift Retirement Plan.
The Internet Communications Employee Retirement Savings Plan and Trust
permits employees to make contributions by salary reductions pursuant to
section 401(k) of the Internal Revenue Code. This plan covers substantially
all of the pre-merger Internet Communications Corporation employees who
have been employed with the Company for six months and are at least 21
years of age. The Company may also make additional cash contributions at
the discretion of the Board of Directors. Employees are fully vested in
employer contributions after they complete six years of service. There
were no Company contributions for the 11 month period ended December 31,
1997 or for the year ended January 31, 1997.
The Interwest Communications Employee Thrift Retirement Plan permits
employees to make contributions by salary reductions pursuant to section
401(k) of the Internal Revenue Code. This plan covers substantially all of
the pre-merger Interwest Communications Corporation employees who have been
employed with the Company for one year and are at least 21 years of age.
Each employees contribution up to a maximum of 10% is matched 50% by the
Company. The Company may also make additional cash contributions at the
discretion of the Board of Directors. Employees are fully vested in
employer contributions after they complete six years of service. Company
contributions charged against income for the 11 month period ended December
31, 1997 and for the year ended January 31, 1997 were $97,689 and $44,675,
respectively.
Effective January 1, 1998, the Company adopted a new 401(k) plan. The new
plan will merge the two existing plans together.
(10) DISCONTINUED OPERATIONS
In March 1998, the Company's Board of Directors adopted a formal plan to
sell its non-core business segments, consisting of Sound and Cable, as a
part of the Company's strategic focus on providing integrated and high-end
network systems. The Segments have been accounted for as discontinued
operations in accordance with APB 30 for the 11
31
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
months ended December 31, 1997 and year ended January 31, 1997, which among
other provisions, requires the plan of disposal to be carried out within
one year (the Divestiture Period). Remaining assets and liabilities of
Sound and Cable, primarily consist of accounts receivable and accounts
payable. Summarized results of Sound and Cable for the last two years are
as follows (dollars in thousands):
Sound Cable
-------------- --------------
1997 1996 1997 1996
----- ----- ----- -----
Loss from operations $ 476 69 749 122
The January 31, 1997 consolidated financial statements have been restated
to conform with December 31, 1997 presentation.
(11) RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions in the normal course of
business with related parties. As of December 31, 1997, the Company had
outstanding related party receivables of $448,000, which are included in
trade receivables, and related party payables of $129,000 which are
included in accounts payable and accrued expenses.
(12) SUBSEQUENT EVENT
Subsequent to year end, the Company received $1.6 million from a related
party, in exchange for a convertible promissory note, due March 1999. The
note bears interest at 10% and interest payments are due quarterly. If the
Company defaults on the promissory note, the remaining principal
outstanding may be converted into common stock of the Company at $4.25 per
share.
32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Hein + Associates LLP served as independent accountant for the Company for the
years ended January 31, 1996 and 1997. On September 15, 1997, the Company's
Board of Directors on the recommendation of its Audit Committee selected KPMG
Peat Marwick LLP to serve as its independent accountant with respect to
subsequent periods. The Board of Director's failure to select Hein + Associates
LLP as the Company's independent accountants constitutes their being "dismissed"
as such term is used in Item 304 of Regulation S-K, under the Securities Act of
1933, as amended.
Hein + Associates LLP's reports on the Company's financial statements for the
years ended January 31, 1996 and 1997 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to audit scope or accounting
principles. During the years ended January 31 1996 and 1997 or for any
subsequent interim period, the Company has not had any disagreement with Hein +
Associates LLP on any matter of accounting principles, financial statement
disclosure, or auditing scope or procedures which disagreement if not resolved
to the satisfaction of Hein + Associates LLP, would have caused Hein +
Associates LLP to make reference to the subject matter of the disagreement in
connection with its report.
33
<PAGE>
PART III
The information required by Part III, Items 9, 10, 11 and 12 of Form 10-KSB is
incorporated herein by reference to Registrant's definitive Proxy Statement to
be filed in connection with the Annual Meeting of Shareholders to be held in May
1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit
No. Exhibit Location
3.1 Corporate Bylaws Incorporated by reference to
Exhibit No. 3.1 to the
Registrant's Form S-18
Registration Statement No.
33-24299-D
3.2 Restated Articles of Filed Herewith
Incorporation filed with
the Colorado Secretary of
State on January 23, 1998
10.1 Non-Compete Agreement Incorporated by reference to
between Thomas C. Galley Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.2 Non-Compete Agreement Incorporated by reference to
between Arnell J. Galley Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.3 Non-Compete Agreement Incorporated by reference to
between Paul W. Greiving Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.4 Executive Employment Incorporated by reference to
Agreement between Thomas Registrant's Form 10-KSB
34
<PAGE>
C. Galley and Internet dated January 31, 1995, File
Communications Corporation No. 0-19578
dated May 1, 1994
10.5 Buy-Sell Agreement between Incorporated by reference to
Thomas C. Galley and Registrant's Form 10-KSB dated
Internet Communications January 31, 1995, File No. 0-19578
Corporation dated May 1
1994
10.6 Share Exchange Agreement, Incorporated by reference to
Stock Registration Registrant's Form 8-K dated May
Agreement, and Loan 29, 1996, File No. 0-19578
Agreement dated May 29,
1996, between Internet
Communications Corporation
and Interwest Group
10.7 1995 Non-employee Director Incorporated by reference to
Stock Option Plan, dated Registrant's definitive proxy,
September 12, 1996 dated August 12, 1996, File No.
0-19578
10.8 1996 Incentive Stock Plan, Incorporated by reference to
dated September 12, 1996 Registrant's definitive proxy,
dated August 12, 1996, File No.
0-19578
10.9 1996 Incentive Stock Plan, Incorporated by reference to
dated September 12, 1996 Registrant's definitive proxy
(as amended September 1996) dated May 30, 1997
10.10 1995 Non-employee Director Incorporated by reference to
Stock Option Plan, dated Registrant's Form S-8 dated
September 12, 1996 (as September 8, 1997
amended)
10.11 Convertible Promissory Filed herewith
Note dated March 20, 1998
in the amount of $1,600,000
22.1 Subsidiaries of the Incorporated by reference to
Registrant Exhibit 22.1 to Registrant's
Report on Form 10-K for the year
ended January 31, 1997, File No.
33-24299
23.1 Consent of KPMG Peat
Marwick LLP Filed herewith
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarterly period ending
December 31, 1997.
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, President and
Principal Executive Officer
In accordance the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, President and
Principal Executive Officer
Date: March 30, 1998 By: /s/ Paul W. Greiving
------------------------------
Paul W. Greiving, Chief
Financial Officer and Chief
Accounting Officer
Date: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, Director
Date: March 30, 1998 By: /s/ Thomas C. Galley
------------------------------
Thomas C. Galley, Director
Date: March 30, 1998 By: /s/ Craig D. Slater
------------------------------
Craig D. Slater, Director
Date: March 30, 1998 By: /s/ Peter A. Guglielmi
------------------------------
Peter A. Guglielmi, Director
Date: March 30, 1998 By: /s/ William J. Maxwell
------------------------------
William J. Maxwell, Director
36
<PAGE>
EXHIBIT 3.2
RESTATED ARTICLES OF INCORPORATION
OF
INTERNET COMMUNICATIONS CORPORATION
Pursuant to a resolution adopted by of its Board of Directors, Internet
Communications Corporation hereby adopts the following Restated Articles of
Incorporation:
ARTICLE I
Name
----
The name of the corporation is Internet Communications Corporation.
ARTICLE II
Duration
--------
The corporation shall commence upon the issuance by the Colorado Secretary
of State of a certificate of incorporation and thereafter shall have perpetual
existence.
ARTICLE III
Purpose
-------
The purpose for which the corporation is organized shall be to transact all
lawful business for which corporations may be organized pursuant to the Colorado
Corporation Code.
<PAGE>
ARTICLE IV
Capital Stock
-------------
Section 1. Classes and Shares Authorized. The authorized capital stock of
-----------------------------
the corporation shall be 20,000,000 shares of Common Stock, no par value, and
100,000,000 shares of Preferred Stock, $.0001 par value.
Section 2. Preferred Stock. Shares of Preferred Stock may be divided into
---------------
such series as may be established from time to time by the Board of Directors.
The Board of Directors from time to time may fix and determine the relative
rights and preferences of the shares of any series so established.
Section 3. Common Stock.
------------
(a) After the requirements with respect to preferential dividends on
the Preferred Stock, if any, shall have been met, and after the corporation
shall have complied with all the requirements, if any, with respect to the
setting aside of sums as sinking funds or redemption or purchase accounts, and
subject further to any other conditions which may be fixed in accordance with
the provisions of Section 2 of this Article IV, then, and not otherwise, the
holders of Common Stock shall be entitled to receive such dividends as may be
declared from time to time by the Board of Directors of the corporation paid out
of funds legally available therefor.
(b) After distribution in full of the preferential amount, if any, to
be distributed to the holders of the Preferred Stock in the event of voluntary
or involuntary liquidation, distribution or sale of assets, dissolution, or
winding-up of the corporation, the holders of the Common Stock shall be entitled
to receive all of the remaining assets of the corporation, tangible
2
<PAGE>
and intangible, of whatever kind available for distribution to stockholders,
ratably in proportion to the number of shares of the Common Stock held by them
respectively.
(c) Except as may otherwise be required by law, each holder of the
Common Stock shall have one vote in respect of each share of the Common Stock
held by him on all matters voted upon by the stockholders.
Section 4. General Provisions. The capital stock of the corporation may
------------------
be issued for money, property, services rendered, labor done, cash advanced to
or on behalf of the corporation, or for any other assets of value in accordance
with an action of the Board of Directors, whose judgment as to the value of the
assets received in return for said stock shall be conclusive, and said stock,
when issued, shall be fully paid and nonassessable.
ARTICLE V
Voting
------
Cumulative voting in the election of directors is not authorized.
ARTICLE VI
Preemptive Rights
-----------------
Shareholders of the corporation shall not have preemptive rights to acquire
unissued or treasury shares of the corporation or securities convertible into
such shares or carrying a right to subscribe to or acquire such shares.
3
<PAGE>
ARTICLE VII
Board of Directors
------------------
Section 1. Board of Directors; Number. The governing board of the
--------------------------
corporation shall be known as the Board of Directors, and the number of
directors may from time to time be increased or decreased in such manner as
shall be provided in the Bylaws of the corporation, provided that the number of
directors shall not be reduced to less than three unless the outstanding shares
are held of record by fewer than three shareholders, in which case there need
only be as many directors as there are shareholders.
Section 2. Classification of Directors. The Board of Directors shall be
---------------------------
divided into three classes on the dates and in the manner set forth below. Each
class of Directors shall consist, as nearly as possible, of one-third of the
total number of Directors. The Class I Directors term shall expire at the first
Annual Meeting of Shareholders to be held in 1997; the Class II Directors term
shall expire at the second Annual Meeting of Shareholders to be held in 1998;
the Class III Directors term shall expire at the third Annual Meeting of
Shareholders to be held in 1999. Upon expiration of the initial staggered
terms, Directors will be elected for three (3) years to succeed those Directors
whose terms expire. Notwithstanding the foregoing, and except as otherwise
required by law, whenever the holders of any one or more series of Preferred
Stock shall have the right, voting separately as a class, to elect one or more
directors of the Company, the terms of the director or directors elected by such
holders shall expire at the next succeeding annual meeting of shareholders.
Vacancies which occur during the year may be filled by the Board of Directors to
serve for the remainder of the initial term of each class.
4
<PAGE>
Section 3. Nomination of Directors.
-----------------------
(a) Nominations for the election of directors may be made by the Board
of Directors, by a committee of the Board of Directors, or by any shareholder
entitled to vote for the election of directors. Nominations by shareholders
shall be made by notice in writing, delivered or mailed by first-class United
States mail, postage prepaid, to the Secretary of the Corporation, not less than
fourteen (14) days nor more than fifty (50) days prior to any meeting of the
shareholders called for the election of directors; provided however, that if
----------------
less than 21 days' notice of the meeting is given to shareholders, such written
notice shall be delivered or mailed, as prescribed, to the Secretary of the
Corporation not later than the close of the seventh day following the day on
which notice of the meting was mailed to shareholders.
(b) Each notice under subsection (a) shall set forth (i) the name,
age, business address and, if known, residence address of each nominee proposed
in such notice, (ii) the principal occupation or employment of each such
nominee, and (iii) the number of shares of stock of the Corporation which are
beneficially owned by each such nominee.
(c) The chairman of the shareholders' meeting, may, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded.
Section 4. Certain Powers of the Board of Directors. In furtherance and
----------------------------------------
not in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized:
(a) to manage and govern the corporation by majority vote of members
present at any regular or special meeting at which a quorum shall be present, to
make, alter, or amend
5
<PAGE>
the Bylaws of the corporation at any regular or special meeting, to fix the
amount to be reserved as working capital over and above its capital stock paid
in, to authorize and cause to be executed mortgages and liens upon the real and
personal property of the corporation and to designate one or more committees,
each committee to consist of two or more of the directors of the corporation,
which, to the extent provided in the resolution or in the Bylaws of the
corporation, shall have and may exercise the powers of the Board of Directors in
the management of the business and affairs of the corporation (such committee or
committees shall have such name or names as may be stated in the Bylaws of the
corporation or as may be determined from time to time by resolution adopted by
the Board of Directors);
(b) to sell, lease, exchange or otherwise dispose of all or
substantially all of the property and assets of the corporation in the ordinary
course of its business upon such terms and conditions as the Board of Directors
may determine without vote or consent of the shareholders;
(c) to sell, pledge, lease, exchange, liquidate or otherwise dispose
of all or substantially all of the property or assets of the corporation,
including its goodwill, if not in the ordinary course of its business, upon such
terms and conditions as the Board of Directors may determine; provided however,
----------------
that such transaction shall be authorized or ratified by the affirmative vote of
the holders of at least a majority of the shares entitled to vote thereon at a
shareholders' meeting duly called for such purpose, or authorized or ratified by
the written consent of the holders of all of the shares entitled to vote thereon
and provided further, that any such transaction with any substantial shareholder
----------------
or affiliate of the corporation shall be authorized or ratified by the
affirmative vote of the holders of at least two-thirds of the shares entitled to
6
<PAGE>
vote thereon at a shareholders' meeting duly called for that purpose, unless
such transaction is with any subsidiary of the corporation or is approved by the
affirmative vote of a majority of the continuing directors of the corporation,
or is authorized or ratified by the written consent of the holders of all of the
shares entitled to vote thereon;
(d) to merge, consolidate or exchange all of the issued or outstanding
shares of one or more classes of the corporation upon such terms and conditions
as the Board of Directors may authorize; provided however, that such merger,
----------------
consolidation or exchange shall be approved or ratified by the affirmative vote
of the holders of at least a majority of the shares entitled to vote thereon at
a shareholders' meeting duly called for that purpose, or authorized or ratified
by the written consent of the holders of all of the shares entitled to vote
thereon; and provided further, that any such merger, consolidation or exchange
----------------
with any substantial shareholder or affiliate of the corporation shall be
authorized or ratified by the affirmative vote of the holders of at least two-
thirds of the shares entitled to vote thereon at a shareholders' meeting duly
called for that purpose, unless such merger, consolidation or exchange is with
any subsidiary of the corporation or is approved by the affirmative vote of a
majority of the continuing directors of the corporation or is authorized or
ratified by the written consent of the holders of all of the shares entitled to
vote thereon; and
(e) to distribute to the shareholders of the corporation, without the
approval of the shareholders, in partial liquidation, out of stated capital or
capital surplus of the corporation, a portion of the corporation's assets, in
cash or in property, so long as the partial liquidation is in compliance with
the Colorado Corporation Code.
7
<PAGE>
(f) As used in this Section 4, the following terms shall have the
following meanings:
(i) an "affiliate" shall mean any person or entity which is an
affiliate within the meaning of Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended;
(ii) a "continuing director" shall mean a director who was elected
before the substantial shareholder or affiliate of the corporation which is
to be a party to a proposed transaction within the scope of subsections (c)
and (d) of this Section 4 became such a substantial shareholder or
affiliate of the corporation, as the case may be, or is designated at or
prior to his first election or appointment to the Board of Directors by the
affirmative vote of a majority of the Board of Directors who are continuing
directors;
(iii) a "subsidiary" shall mean any corporation in which the
corporation owns the majority of each class of equity security; and
(iv) a "substantial shareholder" shall mean any person or entity which
is the beneficial owner, within the meaning of Rule 13d-3 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as
amended, of 10 percent or more of the outstanding capital stock of the
corporation.
Section 5. Removal of Members of Board of Directors. The shareholders may
----------------------------------------
remove one or more directors only for cause.
8
<PAGE>
ARTICLE VIII
Conflicts of Interest
---------------------
Section 1. Related Party Transactions.
--------------------------
(a) No contract or transaction between the corporation and one or more
of its directors, or between the corporation and any other corporation,
partnership, association or other organization in which one or more of its
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for that reason or solely because the director
or officer is present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes, approves or ratifies the
contract or transaction or solely because his or their votes are counted for
such purpose if:
(i) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee and the Board or committee in good faith
authorizes, approves or ratifies the contract or transaction by the
affirmative vote of the majority of the disinterested directors, even
though the disinterested directors are less than a quorum; or
(ii) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholder
entitled to vote thereon, and the contract or transaction is specifically
authorized, approved, or ratified in good faith by a vote of the
shareholders; or
9
<PAGE>
(iii) the contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified by the Board of
Directors, a committee thereof or the shareholders.
(b) Common or disinterested directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes, approves or ratifies the contract or transaction.
Section 2. Corporate Opportunities. The officers, directors and other
-----------------------
members of management of the corporation shall be subject to the doctrine of
corporate opportunities only insofar as it applies to business opportunities in
which the corporation has expressed an interest as determined from time to time
by resolution of the Board of Directors. When such areas of interest are
delineated, all such business opportunities within such areas of interest which
come to the attention of the officers, directors and other members of management
of the corporation shall be disclosed promptly to the corporation and made
available to it. The Board of Directors may reject any business opportunity
presented to it, and thereafter any officer, director or other member of
management may avail himself of such opportunity. Until such time as the
corporation, through its Board of Directors, has designated an area of interest,
the officers, directors and other members of management of the corporation shall
be free to engage in such areas of interest on their own. The provisions hereof
shall not limit the rights of any officer, director or other member of
management of the corporation to continue a business existing prior to the time
that such area of interest is designated by the corporation, nor shall they be
construed to release any employee of the corporation (other than an officer,
director or member of management) from any duties which such employee may have
to the corporation.
10
<PAGE>
ARTICLE IX
Indemnification
---------------
The corporation has the right and/or duty to indemnify a director of the
corporation to the extent provided by statute.
The corporation has the right and/or duty to indemnify any officer,
employee or agent of the corporation who is not a director to the extent
provided by law, or to a greater extent if consistent with law and if provided
by resolution of the corporation's shareholders or directors, or in a contract.
A director of the corporation shall not be personally liable to the
corporation or it shareholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the corporation or to its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) for acts specified under Section 7-5-114 of the Colorado
Corporation Code, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Colorado Corporation Code is amended after
this Article is adopted to authorize corporation action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the corporation shall be eliminated or limited to the fullest extent
permitted by the Colorado Corporation Code, as so amended.
Any repeal or modification of the foregoing paragraph by the shareholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or modification.
11
<PAGE>
ARTICLE X
Arrangements with Creditors
---------------------------
Whenever a compromise or arrangement is proposed by the corporation between
it and its creditors or any class of them, and/or between the corporation and
its shareholders or any class of them, any court of equitable jurisdiction may
on summary application by the corporation or by a majority of its shareholders,
or on the application of any receiver or receivers appointed for the
corporation, or on the application of trustees in dissolution, order a meeting
of the creditors or class of creditors and/or of the shareholders or class of
shareholders of the corporation, as the case may be, to be notified in such
manner as the court decides. If a majority in number representing at least
three-fourths in the dollar amount owed to the creditors or class of creditors
and/or the holders of the majority of the stock or class of stock of the
corporation, as the case may be, agrees to any compromise or arrangement and/or
to any reorganization of the corporation as a consequence of such compromise or
arrangement, then said compromise or arrangement and/or said reorganization
shall, if sanctioned by the court to which the application has been made, be
binding upon all the creditors or class of creditors and/or on all the
shareholders or class of shareholders of the corporation, as the case may be,
and also on the corporation.
ARTICLE XI
Shareholders' Meeting
---------------------
Shareholders' meetings may be held at such time and place as may be stated
or fixed in accordance with the Bylaws. At all shareholders' meetings, one-
third of all shares entitled to vote shall constitute a quorum.
12
<PAGE>
ARTICLE XII
Amendments
----------
These Articles of Incorporation may be amended by resolution of the Board
of Directors if no shares have been issued and, if shares have been issued, by
the affirmative vote of the holders of at least a majority of the shares
entitled to vote thereon at a meeting duly called for that purpose or, when
authorized, when such action is ratified by the written consent of all the
shareholders entitled to vote thereon.
ARTICLE XIII
Shareholder Vote
----------------
Whenever the laws of the State of Colorado require the vote or concurrence
of the holders of two-thirds of the outstanding shares entitled to vote thereon
with respect to any action to be taken by the shareholders of the corporation,
such action may be taken by the vote or concurrence of the holders of at least a
majority of the shares entitled to vote thereon.
ARTICLE XIV
Dissolution
-----------
Section 1. Procedure. The corporation shall be dissolved upon the
---------
affirmative vote of the holders of at least a majority of the shares entitled to
vote thereon at a meeting duly called for that purpose, or when authorized or
ratified by the written consent of the holders of all of the shares entitled to
vote thereon.
Section 2. Revocation. The corporation shall revoke voluntary dissolution
----------
proceedings upon the affirmative vote of the holders of at least a majority of
the shares entitled to vote at a
13
<PAGE>
meeting duly called for that purpose, or when authorized or ratified by the
written consent of the holders of all of the shares entitled to vote thereon.
IN WITNESS WHEREOF, I have hereunto set my hand this _____ day of
______________________, 1997.
ATTEST:
_____________________________________________ ___________________________
Arnell J. Galley, Secretary Thomas C. Galley, President
STATE OF COLORADO )
) ss.
________ COUNTY OF __________ )
I, ________________________, a Notary Public, hereby certify that Thomas C.
Galley as President of Internet Communications Corporation, a Colorado
corporation, appeared before me and being by me first duly sworn, declared that
he is the person who signed the foregoing document and that the statements
therein contained are true.
IN WITNESS WHEREOF I have hereunto set my hand and seal this _____ day of
_______________________, 199___.
My commission expires:_______________________
_____________________________________
Notary Public
14
<PAGE>
Exhibit 10.11
INTERNET COMMUNICATIONS CORPORATION
CONVERTIBLE PROMISSORY NOTE
DUE MARCH 19, 1999
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON THE CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE
WITH SAID ACT. THIS NOTE AND SUCH SHARES ARE ALSO SUBJECT TO THE RESTRICTIONS
CONTAINED IN A REGISTRATION RIGHTS AGREEMENT DATED AS OF MAY 29, 1996, AS
AMENDED, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE SECRETARY OF THE
COMPANY.
$1,600,000.00 Englewood, Colorado
March 20, 1998
FOR VALUE RECEIVED, INTERNET COMMUNICATIONS CORPORATION, a Colorado
corporation (the "COMPANY"), promises to pay to the order of ANSCHUTZ COMPANY or
its assigns (the "HOLDER"), on March 19, 1999 (or such earlier date on which the
principal amount hereof shall be payable in accordance with the terms hereof,
the "MATURITY DATE"), the principal amount of $1,600,000).
The Company also promises to pay interest on the unpaid principal amount
hereof, from the date hereof until paid in full, (a) at the rate of 10.0% per
annum from the date hereof. Interest on this Note shall be payable in arrears
on and to the last calendar day of each calendar quarter, upon any payment or
conversion of this Note (to the extent accrued on the amount being paid or
converted) and at maturity (whether at stated maturity, upon acceleration or
otherwise) of this Note. Interest shall be computed on the basis of a year of
twelve 30-day months. Upon the occurrence and during the continuation of an
Event of Default (as defined below), interest shall accrue at the rate that is
5.0% per annum greater than the rate otherwise applicable and interest shall be
payable on demand.
SECTION 1. PAYMENT.
(a) All payments of principal and interest in respect of this Note
shall be made in lawful money of the United States of America in same day funds
at the office of the Holder located at 2400 Anaconda Tower, 555 17th Street,
Denver, Colorado 80202, or at such other place as shall be designated in
writing by the Holder. Until notified in writing of the transfer or assignment
of this Note, the Company shall be entitled to deem the Holder or any subsequent
permitted assignee of this Note as the owner and holder of this Note. Each of
the Holder and any subsequent assignee of this
<PAGE>
Note agrees, by its acceptance hereof, that before disposing of this
Note or any part hereof it will make a notation hereon of all principal payments
previously made hereunder and of the date to which interest hereon has been
paid; PROVIDED, HOWEVER, that the failure to make a notation of any payment made
on this Note shall not limit or otherwise affect the obligations of the Company
hereunder with respect to payments of principal of or interest on this Note.
(b) Whenever any payment on this Note shall be stated to be due on a
day which is not a business day, such payment shall be made on the next
succeeding business day and such extension of time shall be included in the
computation of the payment of interest on this Note.
(c) This Note may be prepaid without penalty at any time upon the
payment of all accrued interest due at the time of such prepayment.
SECTION 2. EVENTS OF DEFAULT. If any of the following conditions or
events ("EVENTS OF DEFAULT") shall occur:
(a) FAILURE TO MAKE PAYMENTS WHEN DUE. Failure to pay any amount of
principal of this Note when due (whether at stated maturity, on the date of any
required prepayment or upon acceleration, or otherwise), or failure to pay
interest or any other amount due under this Note on or before the fifth day
after the date due; or
(b) DEFAULT IN OTHER AGREEMENTS. (i) Failure of the Company to pay
when due any principal of or interest on any obligations for borrowed money
(other than this Note) or amounts due under any guarantee of another person's
obligations for borrowed money ("Debt") (A) in the aggregate amount of $50,000
beyond the end of any grace period provided therefor or (B) in any amount beyond
60 days after the end of any grace period provided therefor; or (ii) breach or
default by the Company or any of its Subsidiaries with respect to any other
material term of (A) any evidence of any Debt or (B) any loan agreement,
mortgage, indenture or other agreement relating to such Debt, if the effect of
such breach or default is to cause, or to permit the holder or holders of that
Debt (or a trustee on behalf of such holder or holders) to cause, that Debt to
become or be declared due and payable prior to its stated maturity or the stated
maturity of any underlying obligation, as the case may be (upon the giving or
receiving of notice, lapse of time, both, or otherwise); or
(c) BREACH OF WARRANTY. Any representation, warranty, certification
or other statement of the Company made in any statement or certificate at any
time given in writing pursuant hereto or in connection herewith shall be false
in any material respect on the date as of which made and such default shall not
have been remedied or waived within 30 days after the earlier of (i) the
Company's obtaining knowledge of such default or (ii) receipt by the Company of
notice from the Holder of such default; PROVIDED, HOWEVER, that if such default
cannot be cured solely by the payment of money and the cure of such default
requires a period in excess of 30 days, and if the Company is diligently and
continuously prosecuting such cure, then such default shall not be an Event of
Default unless the Company fails to cure such default within 90 days after the
Company's obtaining knowledge or notice thereof, as the case may be; or
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<PAGE>
(d) INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) A
court having jurisdiction in the premises shall enter a decree or order for
relief in respect of the Company, in an involuntary case under Title 11 of the
United States Code entitled "Bankruptcy" as now and hereafter in effect, and any
successor statute (the "BANKRUPTCY CODE") or under any other applicable
bankruptcy, insolvency or similar law now or hereafter in effect, which decree
or order is not stayed; or any other similar relief shall be granted under any
applicable federal or state law; or (ii) an involuntary case shall be commenced
against the Company under the Bankruptcy Code or under any other applicable
bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or
order of a court having jurisdiction in the premises for the appointment of a
receiver, liquidator, sequestrator, trustee, custodian or other officer having
similar powers over the Company or over all or a substantial part of its
property, shall have been entered; or there shall have occurred the involuntary
appointment of an interim receiver, trustee or other custodian of the Company
for all or a substantial part of its property; or a warrant of attachment,
execution or similar process shall have been issued against any substantial part
of the property of the Company, and any such event described in this clause (ii)
shall continue for 60 days unless dismissed, bonded or discharged; or
(e) VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. (i) The
Company shall have an order for relief entered with respect to it, in connection
with, or shall commence, a voluntary case under the Bankruptcy Code or under any
other applicable bankruptcy, insolvency or similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an involuntary
case, or to the conversion of an involuntary case to a voluntary case, under any
such law, or shall consent to the appointment of or taking possession by a
receiver, trustee or other custodian for all or a substantial part of its
property; or the Company shall make any assignment for the benefit of creditors;
or (ii) the Company shall be unable, or shall fail generally, or shall admit in
writing its inability, to pay its debts as such debts become due; or the Board
of Directors (or any committee thereof) of the Company shall adopt any
resolution or otherwise authorize any action to approve any of the actions
referred to in clause (i) above or this clause (ii); or
(f) JUDGMENTS AND ATTACHMENTS. Any money judgment, writ or warrant
of attachment or similar process involving in the aggregate at any time an
amount in excess of $10,000 (not adequately covered by insurance as to which a
solvent and unaffiliated insurance company has acknowledged coverage) shall be
entered or filed against the Company or any of their respective assets and shall
remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or
in any event later than five days prior to the date of any proposed sale
thereunder); it being understood and agreed that, in the event the Company posts
a bond pursuant to this Section 2(f), such bond shall not be considered Debt of
the Company for purposes of this Note; or
(g) DISSOLUTION. Any order, judgment or decree shall be entered
against the Company decreeing the dissolution or split up of the Company and
such order shall remain undischarged or unstayed for a period in excess of 30
days;
then, (A) upon the occurrence of any Event of Default described in Section 2(d)
or 2(e), the unpaid
3
<PAGE>
principal amount of and accrued interest on this Note shall automatically become
immediately due and payable, without notice, presentment, demand, protest or
other requirements of any kind, all of which are hereby expressly waived by the
Company, and (B) upon the occurrence and during the continuance of any other
Event of Default, the Holder may, by written notice to the Company, declare all
or any portion of the unpaid principal amount of and accrued interest on this
Note to be, and the same shall forthwith become, immediately due and payable.
SECTION 3. REMEDIES.
(a) Upon the occurrence and during the continuation of an Event of
Default, all or any one or more of the rights, powers, privileges and other
remedies available to the Holder against the Company under this Note (including,
without limitation, the conversion of this Note pursuant to Section 5), or at
law or in equity, may be exercised by the Holder at any time and from time to
time, whether or not all or any portion of the obligations hereunder shall be
declared due and payable. Any such actions taken by the Holder shall be
cumulative and concurrent and may be pursued independently, singly,
successively, together or otherwise, at such time and in such order as the
Holder may determine in its sole discretion, to the fullest extent permitted by
law, without impairing or otherwise affecting the other rights and remedies of
the Holder permitted by law, equity or contract or as set forth herein.
(b) The rights, powers and remedies of the Holder under this Note
shall be cumulative and not exclusive of any other right, power or remedy which
the Holder may have against the Company existing at law or in equity or
otherwise. The rights, powers and remedies of the Holder may be pursued singly,
concurrently or otherwise, at such time and in such order as the Holder may
determine in its sole discretion. No delay or omission to exercise any remedy,
right or power accruing upon an Event of Default shall impair any such remedy,
right or power or shall be construed as a waiver thereof, but any such remedy,
right or power may be exercised from time to time and as often as may be deemed
expedient. A waiver of any Event of Default with respect to the Company shall
not be construed to be a waiver of any subsequent Event of Default by the
Company or to impair any remedy, right or power consequent thereon.
(c) The remedies set forth in this Section 3 are subject to the
provisions of Section 7.
SECTION 4. CONVERSION.
(a) OPTIONAL CONVERSION. This Note may be converted into shares of
Common Stock, as follows:
(1) If the principal amount hereof and all interest accrued thereon shall
not have been paid in full on the Maturity Date (whether at stated
maturity, upon acceleration or otherwise), then, during the period
commencing on the day following the Maturity Date and ending at the close
of business on the date that is 45 days after the Maturity Date, and
subject to and upon compliance with the provisions of this Section 4, at
the option of the Holder, this Note or any portion of the principal amount
hereof which is $1,000 or an integral multiple thereof, may be converted at
the principal amount thereof into shares of Common Stock, as said
4
<PAGE>
shares shall be constituted on the date on which this Note shall be
surrendered for conversion and notice given in accordance with the
provisions of this Section (the "CONVERSION DATE"), at the Conversion Price
(as defined below) in effect at the Conversion Date.
(2) In order to exercise the conversion privilege, the Holder shall
surrender this Note to the Company at its executive offices, together with
the conversion notice in the form attached hereto as Exhibit A (or similar
separate written notice) duly executed, and, if so required by the Company,
accompanied by instruments of transfer, in form satisfactory to the
Company, duly executed by the Holder or by its duly authorized attorney in
writing. As promptly as practicable after the surrender of this Note for
conversion as aforesaid, but in no event later than 30 days after
surrender, the Company shall deliver at its executive office to such
Holder, or on its written order, a certificate or certificates for the
number of full shares of Common Stock deliverable upon the conversion of
this Note or portion thereof (the "CONVERSION SHARES") and a check or cash
in amount equal to any unconverted portion. Such conversion shall be
deemed to have been effected on the date on which such notice shall have
been received at said executive offices and this Note shall have been
surrendered as aforesaid, and the person or persons in whose name or names
any certificate or certificates for Conversion Shares shall be deliverable
upon such conversion shall be deemed to have become on said date the holder
or holders of record of the shares represented thereby; PROVIDED, HOWEVER,
that any such surrender on any date when the stock transfer books of the
Company shall be closed shall constitute the person or persons in whose
name or names the certificates are to be delivered as the record holder or
holders thereof for all purposes on the next succeeding day on which such
stock transfer books are open, but such conversion shall be at the
Conversion Price in effect on the date of such surrender. Subject to the
foregoing, no payment or adjustment shall be made for dividends on any
Shares that shall be delivered upon the conversion of this Note.
(3) Notwithstanding any other provision hereof, (A) if the conversion of
any principal amount of this Note is to be made in connection with a
merger, acquisition, tender offer or other business combination, the
exercise of the conversion privilege may at the election of the Holder be
conditioned upon the conclusion of such transaction, in which case such
exercise shall not be deemed to be effective until the conclusion of such
transaction and (B) if the issuance of any Conversion Shares pursuant to
the conversion of any principal amount of this Note is not exempt from the
applicable requirements under the Hart-Scott-Rodino Act, the exercise of
the conversion privilege shall be conditioned upon the compliance by the
Company, the Holder and all other persons with such requirements, in which
case such exercise shall not be deemed to be effective until all such
requirements are satisfied. The Holder may by written notice withdraw any
such exercise of such conversion privilege before the effectiveness
thereof. Any such exercise or withdrawal shall not impair or otherwise
affect the other rights and remedies of the Holder permitted by law, equity
or contract or as set forth herein.
(b) FRACTIONAL INTERESTS. The Company shall not be required to
deliver fractions of shares of Common Stock upon conversions of this Note. If
any fractional interest in a
5
<PAGE>
share of Common Stock would be deliverable upon the conversion of this Note, the
Company shall make an adjustment therefor in cash equal to the average market
price per share (determined as provided below) of the Common Stock on the
Conversion Date.
(c) MECHANICAL ADJUSTMENTS. The number of Conversion Shares issuable
upon the conversion of this Note and the Conversion Price shall be subject to
adjustment from time to time, as follows:
(1) If the Company shall at any time pay a dividend on its Common Stock in
shares of its Common Stock (including, if applicable, shares of Common
Stock held by the Company in treasury or by a Subsidiary), subdivide its
outstanding shares of Common Stock into a larger number of shares or
combine its outstanding shares of Common Stock into a smaller number of
shares or otherwise effect a reclassification or recapitalization of the
Common Stock, then in each such case the number of Conversion Shares
thereafter issuable upon conversion of this Note shall be adjusted so that
this Note shall thereafter be convertible into the number of Conversion
Shares equal to the number of shares of Common Stock which the Holder would
have held after the occurrence of any of the events described above had
this Note been exercised in full immediately prior to the occurrence of
such event. An adjustment made pursuant to this paragraph (1) shall become
effective retroactively to the related record date in the case of a
dividend and shall become effective on the related effective date in the
case of a subdivision, combination, reclassification or recapitalization.
(2) Except with respect to Permitted Issuances, if the Company or a
Subsidiary shall at any time issue or sell shares of Common Stock at a
purchase price per share of Common Stock (the value of any consideration,
if other than cash, to be determined in good faith by the Board of
Directors) less than the Average Market Price per share (determined as
provided below) of the Common Stock on the date of issuance or sale (for
the purpose of this paragraph (2), the "ADJUSTMENT DATE"), then in each
such case, the number of Conversion Shares thereafter issuable upon
conversion of this Note after such Adjustment Date shall be determined by
multiplying the number of Conversion Shares issuable upon conversion of
this Note on the date immediately preceding such Adjustment Date by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such date of issuance or sale and the number
of additional shares of Common Stock so issued or sold, and the denominator
of which shall be the sum of the number of shares of Common Stock
outstanding on such date of issuance or sale and the number of shares of
Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at such Average Market Price. For the
purposes of this paragraph (2), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the
Company or by a Subsidiary.
(3) If the Company or a Subsidiary shall at any time issue or sell
Derivative Securities (as defined below) providing for the purchase of
shares of Common Stock upon the conversion, exchange or exercise thereof at
a price per share of Common Stock (taking into account any consideration
received by the Company upon the issuance or sale of such Derivative
6
<PAGE>
Securities and any additional consideration to be received upon the
conversion, exchange or exercise thereof, the value of such consideration,
if other than cash, to be determined in good faith by the Board of
Directors) less than the Average Market Price per share (determined as
provided below) of the Common Stock on the date of issuance or sale (for
the purpose of this paragraph (3), the "ADJUSTMENT DATE"), then in each
such case, the number of Conversion Shares thereafter issuable upon
conversion of this Note after such Adjustment Date shall be determined by
multiplying the number of Conversion Shares issuable upon conversion of
this Note on the date immediately preceding such Adjustment Date by a
fraction, the numerator of which shall be the sum of the number of shares
of Common Stock outstanding on such Adjustment Date and the number of
additional shares of Common Stock so offered for subscription or purchase
upon the conversion, exchange or exercise of such Derivative Securities,
and the denominator of which shall be the sum of the number of shares of
Common Stock outstanding on such Adjustment Date and the number of shares
of Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at such Average Market Price. Such
adjustment shall be made whenever any such Derivative Securities are
issued, and shall become effective on the date of issuance retroactive to
the Adjustment Date. If all the shares of Common Stock so offered for
subscription or purchase are not delivered upon the final conversion,
exchange or exercise of such Derivative Securities, then, upon the final
conversion, exchange or exercise of such Derivative Securities, or the
expiration, cancellation or other termination thereof, the number of
Conversion Shares issuable upon conversion of this Note shall thereafter be
readjusted to the number of Conversion Shares which would have been in
effect had the numerator and the denominator of the foregoing fraction and
the resulting adjustment been made based upon the number of shares of
Common Stock actually delivered upon the conversion, exchange or exercise
of such Derivative Securities, or the expiration, cancellation or other
termination thereof rather than upon the number of shares of Common Stock
so offered for subscription or purchase. If the purchase price provided for
in any Derivative Securities, the additional consideration, if any, payable
upon the conversion, exchange or exercise of any Derivative Securities or
the rate at which any Derivative Securities are convertible into or
exchangeable or convertible into Common Stock shall change at any time
(including, without limitation, at the time of or after such conversion,
exchange or exercise), the number of Conversion Shares issuable upon
conversion of this Note in effect at the time of such change shall be
readjusted to the number of Conversion Shares issuable upon conversion of
this Note which would have been in effect at such time had such Derivative
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, on
the related Adjustment Date, and such readjustment shall become effective
on the date of such change retroactive to the Adjustment Date; PROVIDED,
that no such readjustment shall have the effect of decreasing the number of
Conversion Shares issuable upon the conversion of this Note by an amount in
excess of the amount of the adjustment initially made with respect to the
issuance or sale of the Derivative Securities. For the purposes of this
paragraph (3), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company or by a
Subsidiary.
(4) If the Company shall at any time declare or pay a dividend or other
distribution on its
7
<PAGE>
Common Stock other than a stock dividend payable solely in shares of Common
Stock or a cash dividend paid out of current earnings (the value of any
such dividend or other distribution, if other than cash, to be determined
in good faith by the Board of Directors), then in each such case, the
number of Conversion Shares thereafter issuable upon conversion of this
Note after the declaration date therefor (for the purpose of this paragraph
(4), the "ADJUSTMENT DATE") shall be determined by multiplying the number
of Conversion Shares issuable upon conversion of this Note on the date
immediately preceding such Adjustment Date by a fraction, the numerator of
which shall be the sum of the number of shares of Common Stock outstanding
on such Adjustment Date and the number of additional shares of Common Stock
which the aggregate value of such dividend or distribution would purchase
at such Average Market Price and the denominator of which shall be the sum
of the number of shares of Common Stock outstanding on such Adjustment
Date. For the purposes of this paragraph (4), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company or by a Subsidiary.
(5) If the Company or a Subsidiary shall at any time purchase shares of
Common Stock at a price per share of Common Stock (the value of any
consideration, if other than cash, to be determined in good faith by the
Board of Directors) less the Average Market Price per share (determined as
provided below) of the Common Stock on the date of such purchase (for the
purpose of this paragraph (5), the "ADJUSTMENT DATE"), then in each such
case, the number of Conversion Shares thereafter issuable upon conversion
of this Note after such Adjustment Date shall be determined by multiplying
the number of Conversion Shares issuable upon conversion of this Note on
the date immediately preceding such Adjustment Date by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding on such Adjustment Date and the number of additional shares of
Common Stock which the aggregate purchase price of the total number of
shares so purchased would purchase at such Average Market Price and the
denominator of which shall be the sum of the number of shares of Common
Stock outstanding on such Adjustment Date and the number of shares of
Common Stock so purchased. For the purposes of this paragraph (5), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company or by a Subsidiary.
(6) In case of any capital reorganization or any reclassification (other
than a change in par value) of the capital stock of the Company, or of any
exchange or conversion of the Common Stock for or into securities of
another corporation, or in case of the consolidation or merger of the
Company with or into any other person (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock) or in case of any sale or conveyance of
all or substantially all of the assets of the Company, the person formed by
such consolidation or resulting from such capital reorganization,
reclassification or merger or which acquires such assets, as the case may
be, shall make provision such that this Note shall thereafter be
convertible into the kind and amount of shares of stock, other securities,
cash and other property receivable upon such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance, as the case may be, by a holder of the shares of Common Stock
equal to the
8
<PAGE>
number of Conversion Shares issuable upon conversion of this Note
immediately prior to the effective date of such capital reorganization,
reclassification of capital stock, consolidation, merger, sale or
conveyance, assuming (1) such holder of Common Stock of the Company is not
a person with which the Company consolidated or into which the Company
merged or which merged into the Company or to which such sale or transfer
was made as the case may be ("CONSTITUENT ENTITY"), or an affiliate of a
constituent entity, and (2) such person failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such capital reorganization, reclassification of
capital stock, consolidation, merger, sale or conveyance and, in any case
appropriate adjustment (as determined by the Board of Directors) shall be
made in the application of the provisions herein set forth with respect to
rights and interests thereafter of the Holder, to the end that the
provisions set forth herein (including the specified changes in and other
adjustments of the number of Conversion Shares issuable upon conversion of
this Note) shall thereafter be applicable, as near as reasonably may be, in
relating to any shares of stock or other securities or other property
thereafter deliverable upon conversion of this Note .
(7) For the purposes of this Section 4:
(A) "AVERAGE MARKET PRICE" per share of Common Stock on any date
means the average of the daily Closing Prices for the 15 consecutive
Trading Days commencing 20 Trading Days before the date of declaration or
authorization by the Board of Directors of the Company of such issuance or
distribution;
(B) "CLOSING PRICE" means the last reported sales price, regular way,
per share of Common Stock on such day, or if no such sale takes place on
such day, the average of the closing bid and asked prices, regular way, in
each case, as reported in the principal consolidated transaction reporting
system with respect to securities listed or admitted to trading on a
national securities exchange, or, if shares of such stock are not listed or
admitted to trading on a national securities exchange, on the
NASDAQ/National Market System or the NASDAQ/Small Cap market, as the case
may be, or, if such last sales price or closing bid and asked prices are
not so reported, the average of the closing bid and asked prices as
furnished by any New York Stock Exchange member firm selected from time to
time by the Board of Directors for such purpose, or if no such prices are
available, the fair market value of the Common Stock as determined in good
faith by the Board of Directors;
(C) "DERIVATIVE SECURITIES" means securities convertible into or
exchangeable or convertible into shares of Common Stock, rights or warrants
to subscribe for or purchase shares of Common Stock, options for the
purchase of, or calls, commitments or other claims of any character
relating to, shares of Common Stock or any securities convertible into or
exchangeable for any of the foregoing; and
(D) "PERMITTED ISSUANCES" means the issuance of shares of Common
Stock after the date of this Note (i) pursuant to the exercise of options
outstanding on the date hereof, in each case in accordance with the terms
thereof as of the date of this Note, (ii)
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<PAGE>
pursuant to the conversion of this Note and (iii) with the approval of
Holder, which approval may be granted, withheld, conditioned or delayed in
its sole discretion.
(8) If any shares of Common Stock or Derivative Securities are issued or
sold or deemed to have been issued or sold for cash, the consideration
received therefor shall be deemed to be the net amount received by the
Company therefor. In case any shares of Common Stock or Derivative
Securities are issued or sold for a consideration other than cash, the
amount of the consideration other than cash received by the Company shall
be the fair value of such consideration, except where such consideration
consists of marketable securities, in which case the amount of
consideration received by the Company shall be the market price thereof as
of the date of receipt. In case any shares of Common Stock or Derivative
Securities are issued to the owners of the non-surviving entity in
connection with any merger or other business combination in which the
Company is the surviving entity, the amount of consideration therefor shall
be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such shares of
Common Stock or Securities, as the case may be. The fair value of any
consideration other than cash or marketable securities shall be determined
jointly by the Company and the Holder. If such parties are unable to reach
agreement within a reasonable period of time, such fair value shall be
determined by an appraiser jointly selected by the Holder, whose
determination shall be final and binding on the Company and the Holder.
The fees and expenses of such appraiser shall be paid by the Company.
(9) If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (A) to receive a dividend or other distribution
on its Common Stock or (B) to subscribe for or purchase shares of Common
Stock or Derivative Securities, then such record date shall be deemed to be
the date of the payment or distribution of such dividend or other
distribution or the date of issuance and sale of any shares of Common Stock
deemed to have been issued or sold in connection thereto.
(10) All calculations under this Section 4 shall be made to the nearest
one-thousandth of a share of Common Stock.
(11) The price payable by the Holder for the issuance of Conversion Shares
by the Company upon conversion of this Note (the "CONVERSION PRICE") is
$4.25 per Conversion Share at the date of this Note. Whenever the number
of Conversion Shares issuable upon the conversion of this Note is adjusted
or readjusted pursuant to paragraphs (1) through (10), inclusive, above,
the Conversion Price payable upon conversion of this Note shall be adjusted
or readjusted by multiplying the Conversion Price immediately prior to the
related Adjustment Date by a fraction, the numerator of which shall be the
number of Conversion Shares purchasable upon the conversion of this Note
immediately preceding such Adjustment Date, and the denominator of which
shall be the number of Conversion Shares so purchasable immediately
thereafter; PROVIDED that no such readjustment pursuant to paragraph (3)
above with respect to the conversion, exchange or exercise, or expiration,
cancellation or other termination, of any Derivative Securities shall have
the effect of
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<PAGE>
increasing the Conversion Price by an amount in excess of the amount of the
adjustment initially made in respect of the issuance or sale of such
Derivative Securities.
(12) If any event occurs of the type contemplated by the provisions of this
Section 4 but not expressly provided for by such provisions (including,
without limitation, the granting of stock appreciation rights, phantom
stock rights or other rights with equity features), then the Company's
board of directors shall make an appropriate adjustment in the number of
Conversion Shares issuable upon conversion of this Note and the Conversion
Price so as to protect the rights of the Holder under this Note.
(13) For the purpose of this Section 4, the term "SHARES OF COMMON STOCK"
means (A) the class of stock designated as the Common Stock of the Company
at the date of this Note or (B) any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par
value to par value. In the event that at any time, as a result of an
adjustment made pursuant to paragraphs (1) through (4), inclusive, above,
the Holder shall become entitled to receive any shares of the Company other
than shares of Common Stock, thereafter the number of such other shares so
receivable upon conversion of this Note and the Conversion Price shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Conversion
Shares contained in paragraphs (1) through (4), inclusive, above, and the
provisions of Sections 4(d), 4(e) and 4(f), inclusive, with respect to the
Conversion Shares, shall apply on like terms to any such other shares.
(14) Notwithstanding anything herein to the contrary, there shall be no
adjustment in the number of Conversion Shares or in the Conversion Price in
respect of Permitted Issuances.
(15) In case of any consolidation or merger of the Company with or into
another entity (whether or not the Company is the surviving entity) or in
case of any sale, transfer or lease of all or substantially all of the
assets of the Company, the Company or such successor or purchasing entity,
as the case may be, shall execute with the Holder an agreement that the
Holder shall have the right thereafter upon payment of the Conversion Price
in effect immediately prior to such action to purchase upon conversion of
this Note the kind and amount of shares and other securities, cash and
property that the Holder would have owned or would have been entitled to
receive after the happening of such consolidation, merger, sale, transfer,
lease or conveyance had this Note been exercised in full immediately prior
to such action, and if the successor or purchasing entity is not a
corporation, such person shall provide appropriate tax indemnification with
respect to such shares or other securities and property so that upon
conversion of this Note, the Holder would have the same benefits it
otherwise would have had if such successor or purchasing person were a
corporation. Such agreement shall provide for adjustments that shall be as
nearly equivalent as may be practicable to the adjustments provided for in
paragraphs (1) through (14), inclusive, above. The provisions of this
paragraph (15) shall similarly apply to successive consolidations, mergers,
sales or conveyances.
11
<PAGE>
(d) TIME OF ADJUSTMENTS. Each adjustment required by Section 4(c)
shall be effective as and when the event requiring such adjustment occurs.
(e) NOTICE OF ADJUSTMENT. Whenever the number of Conversion Shares
purchasable upon the conversion of this Note or the Conversion Price is adjusted
as herein provided, the Company shall promptly mail by first class mail, postage
prepaid, to each Holder a certificate of a firm of independent public
accountants selected by the Board of Directors of the Company (who may be the
regular accountants employed by the Company) setting forth the number of
Conversion Shares purchasable upon the conversion of this Note and the
Conversion Price after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made. Such certificate shall be conclusive evidence of the
correctness of such adjustment.
(f) NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section 4(c),
no adjustment in respect of any dividends declared or paid on the Common Stock
shall be made during the term of this Note or upon the conversion of this Note.
(g) TAXES. The issue of stock certificates on conversions of this
Note shall be made without charge to the Holder for any tax in respect of the
issue thereof. The Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery of
shares in any name other than that of the Holder, and the Company shall not be
required to issue or deliver any such stock certificate unless and until the
person or persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
(h) RESERVATION OF SHARES. The Company shall at all times reserve
and keep available out of the aggregate of its authorized but unissued shares or
its issued shares held in its treasury, or both, for the purpose of effecting
the conversion of this Note, such number of its duly authorized shares of Common
Stock as shall from time to time be sufficient to effect the conversion,
exchange or exercise of outstanding securities of the Company convertible into
or exchangeable or exercisable for any shares of the Common Stock, all rights to
subscribe for or to purchase, all options for the purchase of, and all calls,
commitments or claims of any character relating to, any shares of Common Stock
and any securities convertible into or exchangeable or exercisable for any of
the foregoing.
(i) REGISTRATION OR APPROVAL. If any shares of Common Stock reserved
or to be reserved for the purpose of conversion of this Note require
registration with or approval of any governmental authority under any federal or
state law before such shares may be validly delivered upon conversion,
including, without limitation, the Hart-Scott-Rodino Act, then the Company
covenants that it will in good faith and as expeditiously as possible endeavor
to secure such registration or approval, as the case may be.
(j) VALIDLY ISSUED, ETC. The Company covenants that all shares of
Common
12
<PAGE>
Stock which may be delivered upon conversion of this Note shall upon
delivery be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue or delivery thereof.
(k) NOTICE. In the event:
(1) that the Company shall pay any dividend or make any distribution to
the holders of shares of Common Stock otherwise than in cash charged
against capital surplus, consolidated net earnings or retained earnings of
the Company and its Subsidiaries; or
(2) that the Company shall offer for subscription or purchase, pro rata,
to all of the holders of shares of Common Stock any additional shares of
stock of any class or any securities convertible into or exchangeable for
stock of any class; or
(3) of any reclassification or change of outstanding shares of the class
of Common Stock issuable upon the conversion of this Note (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or of
any merger or consolidation of the Company with, or merger of the Company
into, another corporation (other than a merger or consolidation in which
the Company is the continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common Stock issuable
upon conversion of this Note), or of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially
as an entirety or of any other similar business combination transaction;
then, and in any one or more of such events, the Company will give to the Holder
written notice thereof at least 15 days prior to (A) the record date fixed with
respect to any of the events specified in (1) and (2) above, and (B) the
effective date of any of the events specified in (3) above. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
such dividend, distribution, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation or winding up.
(l) SPECIFIC PERFORMANCE. The Company acknowledges that the failure
of the Company to perform its obligations under this Section 4 will not be
compensable by the payment of monetary damages and hereby waives any defense to
a claim by the Holder that the provisions of this Section 4 be specifically
enforced.
(m) REGISTRATION RIGHTS. The Conversion Shares shall be deemed to be
"Registrable Shares" subject to the terms of the Registration Rights Agreement
between the Company and Interwest Group, Inc. dated as of May 29, 1998, as
amended.
SECTION 5. LEGENDS.
(a) Each certificate for Conversion Shares and any certificate issued
in exchange
13
<PAGE>
therefor or on conversion or upon transfer, except certificates issued in
connection with a sale registered under the Securities Act of 1933, as amended,
and except as provided below, shall bear the legends to the following effects:
1. "The shares represented by this certificate have not been registered
under the Securities Act of 1933 and may not be offered, sold, transferred
or otherwise disposed of except in compliance with said Act."
2. "The shares represented by this certificate are subject to
restrictions set forth in the Registration Rights Agreement dated as of May
29, 1996, as amended, a copy of which is on file in the office of the
Secretary of the Company."
(b) The legend stated in Section 5(a)(1) shall be removed by delivery
of one or more substitute certificates without such legend if the holder thereof
shall have delivered to the Company a copy of a letter from the staff of the
Securities and Exchange Commission or an opinion of counsel, in form and
substance reasonably satisfactory to the Company, to the effect that the legend
is not required for purposes of the Securities Act of 1933, as amended.
(c) The legend stated in Section 5(a)(2) shall be removed at such
time as the Conversion Shares are no longer subject to the Registration Rights
Agreement referenced therein.
SECTION 6. COSTS AND EXPENSES. The Company promises to pay all costs and
expenses, including reasonable attorneys' fees incurred in the collection and
enforcement of this Note. The Company and any endorsers of this Note hereby
consent to renewals and extensions of time at or after the maturity hereof,
without notice, and hereby waive diligence, presentment, protest, demand and
notice of every kind and, to the full extent permitted by law, the right to
plead any statute of limitations as a defense to any demand hereunder.
SECTION 7. THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF COLORADO.
SECTION 8. SEVERABILITY OF PROVISIONS. Any provision of this Note that is
prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of the prohibition or unenforceability without
invalidating the remaining provisions of this Note or affecting the validity or
enforceability of the provision in any other jurisdiction.
SECTION 9. HEADINGS AND REFERENCES. Headings in this Note are included
for the convenience of reference only and do not constitute a part of this Note
for any other purpose. References to sections in this Note are references to the
sections of this Note, unless the context shall require otherwise.
SECTION 10. NON-EXCLUSIVE JURISDICTION. Each of the Company and the
Holder, by acceptance hereof, (1) agrees that any legal action with respect to
this Note may be
14
<PAGE>
brought in the courts of the State of Colorado or of the United
States of America for the District of Colorado, (2) accepts for itself and in
respect of its property, generally and unconditionally, the jurisdiction of
those courts, and (3) irrevocably waives any objection, including, without
limitation, any objection to the laying of venue or based on the grounds of
FORUM NON CONVENIENS, which it may now or hereafter have to the bringing of any
legal action in those jurisdictions; PROVIDED, HOWEVER, that each of the Company
and the Holder may assert in a legal action in any other jurisdiction or venue
each defense, third-party claim or similar claim that, if not so asserted in
such legal action, may thereafter not be asserted by such party in an original
legal action in the courts referred to in clause (1) above.
SECTION 11. WAIVER OF JURY TRIAL. Each of the Company and the Holder, by
acceptance hereof, waives any right to a trial by jury in any legal action to
enforce or defend any right under this Note or any amendment, instrument,
document or agreement delivered, or which in the future may be delivered, in
connection with this Note and agrees that any legal action shall be tried before
a court and not before a jury.
SECTION 12. SUBORDINATION.
(a) Subordination to Senior Indebtedness. The indebtedness evidenced
------------------------------------
by this Note, and the payment of the principal hereof, and any interest hereon,
is wholly subordinated, junior and subject in right of payment, to the extent
and in the manner hereinafter provided, to the prior payment of the Company's
obligations to Norwest Bank, N.A. (the "Senior Indebtedness"). The Senior
Indebtedness shall continue to be Senior Indebtedness and entitled to the
benefits of these subordination provisions irrespective of any amendment,
modification or waiver of any term of the Senior Indebtedness or extension or
renewal of the Senior Indebtedness.
(b) No Payment if Default in Senior Indebtedness. No payment on
--------------------------------------------
account of principal of or interest on this Note shall be made, and this Note
shall not be redeemed or purchased directly by the Company (or any of its
subsidiaries), if at the time of such payment or purchase or immediately after
giving effect thereto, (i) there shall exist a default in any payment with
respect to any Senior Indebtedness or (ii) there shall have occurred an event of
default (other than a default in the payment of amounts due thereon) with
respect to any Senior Indebtedness, as defined in the instrument under which the
same is outstanding, permitting the holders thereof to accelerate the maturity
thereof, and such event of default shall not have been cured or waived or shall
not have ceased to exist.
(c) Payment upon Dissolution, Etc. Upon payment or distribution of
------------------------------
assets of the Company of any kind or character, whether in cash, property or
securities, to creditors upon any dissolution or winding-up or total or partial
liquidation or reorganization of the Company, whether voluntary or involuntary,
in bankruptcy, insolvency, receivership or other proceedings, all principal and
interest due upon any Senior Indebtedness shall first be paid in full, or
payment thereof in full duly provided for, before the Holder shall be entitled
to receive or, if received, to retain any payment or distribution on account of
this Note; and upon any such dissolution or winding-up or liquidation or
reorganization, any payment or distribution of assets of the Company of any kind
or character,
15
<PAGE>
whether in cash, property or securities, to which the Holder would
be entitled except for the provisions of this Section 12 shall be paid by the
Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or
other person making such payment or distribution, or by the Holder if it shall
have received such payment or distribution, directly to the holders of the
Senior Indebtedness (pro rata to each such holder on the basis of the
--- ----
respective amounts of such Senior Indebtedness held by such holder) or their
representatives to the extent necessary to pay all such Senior Indebtedness in
full after giving effect to any concurrent payment or distribution to or for the
holders of such Senior Indebtedness, before any payment or distribution is made
to the Holder.
(d) Subrogation. Subject to the payment in full of all Senior
-----------
Indebtedness and until the Note shall be paid in full, the Holder shall be
subrogated to the rights of the holders of the Senior Indebtedness (to the
extent of payments or distributions previously made to such holders of Senior
Indebtedness pursuant to the provisions of subsections (b) and (c) of this
Section 12) to receive payments or distributions of assets of the Company
applicable to the Senior Indebtedness. No such payments or distributions
applicable to the Senior Indebtedness shall, as between the Company and its
creditors, other than the holders of Senior Indebtedness and the Holder, be
deemed to be a payment by the Company to or on account of the Note; and for the
purposes of such subrogation, no payments or distributions to the holders of the
Senior Indebtedness to which the Holder would be entitled except for the
provisions of this Section 12 shall, as between the Company and its creditors,
other than the holders of the Senior Indebtedness and the Holder, be deemed to
be a payment by the Company to or on account of the Senior Indebtedness.
(e) Rights of Holders Unimpaired. The provisions of this Section 12
----------------------------
are and are intended solely for the purposes of defining the relative rights of
the Holder and the holders of Senior Indebtedness and nothing in this Section 12
shall impair, as between the Company and the Holder, the obligation of the
Company, which is unconditional and absolute, to pay to the Holder the principal
thereof and interest thereon, in accordance with the terms of this Note, nor
shall anything herein prevent the Holder from exercising all remedies otherwise
permitted by applicable law or hereunder upon default, subject to the rights set
forth above of holders of Senior Indebtedness.
(f) Holders of Senior Indebtedness. These provisions regarding
------------------------------
subordination will constitute a continuing offer to all persons who, in reliance
upon such provisions, become holder of, or continue to hold, Senior
Indebtedness; such provisions are made for the benefit of the holders of Senior
Indebtedness, and such holders are hereby made obligees under such provisions to
the same extent as if they are named herein, and they or any of them may proceed
to enforce such subordination.
(g) Payments on Note. Subject to paragraph (c), the Company may make
----------------
payments of the principal of, and any interest or premium on, this Note, if at
the time of payment, and immediately after giving effect thereto, (i) there
exists no default in any payment with respect to any Senior Indebtedness and
(ii) there shall not have occurred an event of default (other than a default in
the payment of amounts due thereon) with respect to any Senior Indebtedness, as
defined in the instrument under which the same is outstanding, permitting the
holders thereof to accelerate
16
<PAGE>
the maturity thereof, other than an event of default which shall have been cured
or waived or shall have ceased to exist.
SECTION 13. PAYMENT OF ATTORNEY FEES. The Company shall pay all
reasonable attorney fees and expenses incurred by the Company and the Holder in
negotiating the terms of this Note.
IN WITNESS WHEREOF, the Company has caused this Note to be duly executed
and delivered by its officer thereunto duly authorized as of the date and at the
place first written above.
INTERNET COMMUNICATIONS CORPORATION
By: _____________________________
Name: ___________________________
Title: ____________________________
EXHIBIT A
[FORM OF CONVERSION NOTICE]
TO: INTERNET COMMUNICATIONS CORPORATION
The undersigned owner of this Note hereby irrevocably exercises the option
to convert this Note, or portion hereof (which is $1,000 or an integral multiple
thereof) below designated, into shares of Common Stock of the Company in
accordance with the terms of this Note, and directs that the shares issuable and
deliverable upon the conversion, together with any check in payment any
unconverted portion hereof, be issued and delivered to the registered holder
hereof unless a different name has been indicated below. If shares are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect hereto.
Dated: _______________
17
<PAGE>
EXHIBIT 23.1
The Board of Directors and Stockholders
Internet Communications Corporation:
We consent to incorporation by reference in the registration statement No.
333-35113 on Form S-8 of Internet Communications Corporation of our report
dated March 20, 1998 relating to the consolidated balance sheets of Internet
Communications Corporation and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the eleven-months ended December 31, 1997, which report appears in the
December 31, 1997, annual report on Form 10-K of Internet Communications
Corporation.
KPMG PEAT MARWICK LLP
March 27, 1998
Denver, Colorado
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