SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Amendment No. )
Filed by the Registrant X
Filed by a Party other than the Registrant
Check the appropriate box:
X Preliminary Proxy Statement
__ Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
__ Definitive Proxy Statement
__ Definitive Additional Materials
__ Soliciting Materials Pursuant to Section 240.14a-11(c) of
Section 240.14a-12
Internet Communications Corporation
(Name of Registrant as Specified In Its Charter)
Internet Communications Corporation
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
__ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A.
__ $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
X Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, No Par Value per Share
2) Aggregate number of securities to which transaction applies: 6,313,289
shares
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11. (Set forth the amount on which the filing fee is
calculated and state how it was determined):
Pursuant to the Amended and Restated Agreement and Plan of Merger, dated as of
June 5, 1998 (the "Merger Agreement"), among Internet Communications Corporation
("INCC"), Rocky Mountain Internet, Inc. and Internet Acquisition Corporation,
the price per share of Common Stock, no par value per share, of INCC (the
"Common Shares"), is $6.764. Pursuant to Rule 0-11(c)(1), the filing fee of
$12,599 was calculated based on the cash payment required under the Merger
Agreement, which is equal to the product of $6.764 per
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Common Share and 6,313,289 Common Shares outstanding as of July 16, 1998,
assuming the exercise or conversion of all existing options, rights and
securities which would be exercisable or convertible into Common Shares upon
consummation of the Merger.
4) Proposed maximum aggregate value of transaction: $42,706,086
5) Total fee paid: $12,599
X Fee paid previously with preliminary materials.
__ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: __
2) Form, Schedule or Registration Statement No.: __
3) Filing Party: __
4) Date Filed:__
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INTERNET COMMUNICATIONS CORPORATION
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To approve the Merger of
INTERNET ACQUISITION CORPORATION
with and into
INTERNET COMMUNICATIONS CORPORATION
To the Record Holders of Common Stock
of Internet Communications Corporation:
NOTICE IS HEREBY GIVEN pursuant to Sections 7-107-105 and 7-111-103 of the
Colorado Business Corporation Act (the "CBCA") that on September 7, 1998 a
special meeting (the "Meeting") of all shareholders of Internet Communications
Corporation, a Colorado corporation (the "Company"), of record on July 7, 1998
(the "Record Date"), will be held at the offices of the Company at 7100 East
Belleview Avenue, Suite 201, Englewood, Colorado 80111, at 10:00 a.m., Denver,
Colorado time, to consider (i) adoption and approval of (A) the merger (the
"Merger") of Internet Acquisition Corporation, a Colorado corporation (the
"Purchaser"), into the Company, pursuant to the terms of that certain Amended
and Restated Agreement and Plan of Merger by and among the Company, Rocky
Mountain Internet, Inc. (the "Parent") and the Purchaser, dated June 5, 1998
(the "Merger Agreement"), and (B) the Merger Agreement; and (ii) such other
matters as may properly be brought before the Meeting.
It is anticipated that the Merger will be effected on September __, 1998 or as
soon thereafter as practicable.
Pursuant to a Voting Agreement dated June 5, 1998, the Company's largest
shareholder, Interwest Group, Inc. ("Group"), owning beneficially 2,873,568
shares (50.8%) of the Company's common stock, agreed to vote all of its shares
of the Company's common stock in favor of the Merger and the Merger Agreement.
Consequently, approval of the Merger and the Merger Agreement is assured.
The Board of Directors has fixed the close of business on the Record Date for
the determination of shareholders entitled to notice and to vote at the Meeting
or any adjournment thereof. Only shareholders of record at the close of business
on the Record Date, whether or not they are are entitled to vote, are entitled
to notice of the Meeting and only holders of record of Common Shares at the
close of business on the Record Date are entitled to vote at the Meeting.
COMMON SHAREHOLDERS ARE URGED, WHETHER OR NOT THEY PLAN TO ATTEND THE MEETING,
TO SIGN, DATE AND MAIL THE ENCLOSED PROXY OR VOTING INSTRUCTION CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED.
If a shareholder who has returned a proxy attends the meeting in person, such
shareholder may revoke the proxy and vote in person on all matters submitted at
the meeting.
Pursuant to the terms of the Merger Agreement, each Common Share outstanding
immediately prior to the effectiveness of the Merger and held by persons other
than the Purchaser, the Parent or any other direct or indirect subsidiary of the
Parent, or the Company will be converted into the right to receive $6.764 in
cash (the "Merger Consideration"),
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payable upon surrender of the certificate formerly evidencing such share,
subject to the right of the holder of such share (a "Dissenting Shareholder") to
seek an appraisal of the fair value thereof as described in the attached Proxy
Statement.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND
HAS DETERMINED THAT THE MERGER, CONSIDERED AS A WHOLE, IS FAIR TO AND IN THE
BEST INTERESTS OF THE SHAREHOLDERS OF THE COMPANY. In arriving at its decision,
the Board of Directors considered a number of factors, including the opinion of
Daniels & Associates, L.P., the Company's financial advisor, that the
consideration to be received in the Merger by the holders of Common Shares is
fair, from a financial point of view, to such shareholders.
After the Merger is completed, the Company's shareholders will receive written
instructions for exchanging their share certificates. The Company's shareholders
should not send in their certificates at this time or with their proxies and
should continue to hold their share certificates until they receive such
instructions.
Article 113 of the CBCA provides a procedure by which Dissenting Shareholders
who were record holders of Common Shares immediately prior to the effectiveness
of the Merger may seek an appraisal of the fair value of their shares, exclusive
of any element of value arising from the expectation or accomplishment of the
Merger, together with a fair rate of interest, if any, to be paid thereon. Any
Dissenting Shareholder who wishes to exercise this right to an appraisal must do
so by making written demand to the Company at the address set forth in the Proxy
Statement, which must be received before the taking of the vote on the Merger,
and by following certain other procedures set forth in Article 113, Title 7,
C.R.S. For purposes of Article 113, Title 7, C.R.S., this Notice of Special
Meeting of Shareholders is being mailed on or about August __, 1998 to record
shareholders of the Company on the Record Date.
APPRAISAL DEMANDS WILL NOT BE ACCEPTED UNLESS MADE BY OR ON BEHALF OF PERSONS
WHO ARE RECORD HOLDERS OF COMMON SHARES IMMEDIATELY PRIOR TO THE EFFECTIVENESS
OF THE MERGER.
Reference should be made to the section entitled "Dissenters' Rights" in the
attached Proxy Statement and to Appendix E thereto (which sets forth the text of
Article 113 of the CBCA) for a description of the procedures which must be
followed to perfect appraisal rights.
By order of the Board of Directors
John M. Couzens, President
August __, 1998
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Internet Communications Corporation
Proxy Statement
This Proxy Statement is being furnished to the shareholders of Internet
Communications Corporation, Inc., a Colorado corporation (the "Company"), as of
July 7, 1998 (the "Record Date"), in connection with the proposed merger (the
"Merger") of Internet Acquisition Corporation, a Colorado corporation (the
"Purchaser") and a wholly owned subsidiary of Rocky Mountain Internet, Inc., a
Delaware corporation (the "Parent"), with and into the Company pursuant to an
Amended and Restated Agreement and Plan of Merger, dated as of June 5, 1998 (the
"Merger Agreement"), among the Parent, the Purchaser and the Company. The Merger
will be consummated on the terms and subject to the conditions set forth in the
Merger Agreement, as a result of which at the effective time of the Merger (the
"Effective Time") (a) the Company will continue as the surviving corporation
(the "Surviving Corporation") and will become a wholly-owned subsidiary of the
Parent; and (b) each share of common stock of the Company ("Common Shares")
issued and outstanding (other than Common Shares held by the Purchaser, the
Parent or any other direct or indirect subsidiary of the Parent, or the Company)
will be converted into the right to receive $6.764 (the "Merger Consideration").
A special meeting (the "Meeting") of the shareholders of the Company, of record
on the Record Date, will be held at the offices of the Company at 7100 East
Belleview Avenue, Suite 201, Englewood, Colorado 80111, at 10:00 a.m., Denver,
Colorado time, on September __, 1998, to consider approval and adoption of the
Merger and the Merger Agreement.
The date of this Proxy Statement is August __, 1998. This Proxy Statement and
the accompanying form of proxy are being furnished by the Company and were first
mailed on or about August __, 1998 to shareholders of the Company as of the
close of business on the Record Date.
The Board of Directors of the Company (the "Board" or the "Board of
Directors"), by the unanimous vote of all of the Directors of the Company,
approved the Merger and determined that the terms of the Merger are fair to and
in the best interests of, the shareholders of the Company. Under the Colorado
Business Corporation Act (the "CBCA"), the affirmative vote of the holders of a
majority of the outstanding Common Shares is required to approve the Merger.
Pursuant to a Voting Agreement dated June 5, 1998, the Company's largest
shareholder, Interwest Group, Inc. ("Group"), owning beneficially 2,873,568
shares (50.8%) of the Company's common stock, agreed to vote all of its shares
of the Company's common stock in favor of the Merger and the Merger Agreement.
Consequently, approval of the Merger and the Merger Agreement is assured.
After the Merger is completed, the Company's shareholders will receive written
instructions for exchanging their share certificates. The Company's shareholders
should not send in their certificates at this time or with their proxies and
should continue to hold their share certificates until they receive such
instructions.
Any holder of Common Shares who does not wish to accept the Merger
Consideration for his Common Shares has the right under the CBCA to seek an
appraisal of and be paid the fair cashvalue of his Common Shares. Holders of
Common Shares seeking such appraisal are referred to herein as "Dissenting
Shareholders." To perfect this right of appraisal, a Dissenting Shareholder must
make written demand for such appraisal to the Company before the taking of the
vote on the Merger. Dissenting Shareholders are urged to carefully review this
Proxy Statement and the Appendices hereto in their entirety in considering
whether to seek an appraisal pursuant to the CBCA. See "Dissenters' Rights" and
Appendix E to this Proxy Statement.
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As of the Record Date, there were issued and outstanding 5,595,687 Common
Shares. Holders of record of Common Shares at the close of business on the
Record Date are entitled to one vote per share held on all matters submitted to
a vote of shareholders. The Common Shares are traded on the Nasdaq SmallCap
Stock Market. As a result of the consummation of the Merger, the registration of
the Common Shares under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") will be terminated.
The information contained in this Proxy Statement concerning the Parent and
the Purchaser has been furnished to the Company by the Parent, and the Company
assumes no responsibility for the accuracy or completeness of such information.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act,
and in accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices of
the Commission located at 7 World Trade Center, Suite 1300, New York, New York
10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Commission at prescribed
rates by addressing written requests for such copies to the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding the Company that are filed electronically with the
Commission. In addition, reports, proxy statements and other information
concerning the Company should also be available for inspection at the offices of
the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C. 20006.
The Common Shares are currently registered under the Exchange Act. Following
the Merger, the Company will become the wholly-owned subsidiary of the Parent,
the Common Shares will be exchanged for the Merger Consideration and will be
canceled, and there will be no public trading of the Common Shares. Accordingly,
registration of the Common Shares will be terminated upon application of the
Company to the Commission when the Merger is consummated.
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TABLE OF CONTENTS
Page
INTRODUCTION....................................................................
INFORMATION CONCERNING THE COMPANY..............................................
INFORMATION CONCERNING THE PARENT AND THE PURCHASER.............................
THE MEETING.....................................................................
BACKGROUND OF THE MERGER........................................................
RECOMMENDATION OF THE BOARD AND REASONS FOR THE
MERGER..........................................................................
OPINION OF FINANCIAL ADVISOR....................................................
INTEREST OF CERTAIN PERSONS IN THE MERGER.......................................
STRUCTURE OF THE MERGER.........................................................
ACCOUNTING TREATMENT OF THE MERGER..............................................
CERTAIN EFFECTS OF THE MERGER...................................................
FEDERAL TAX CONSEQUENCES OF THE MERGER..........................................
THE MERGER AGREEMENT............................................................
REGULATORY AND OTHER APPROVALS..................................................
DISSENTERS' RIGHTS..............................................................
MARKET PRICES OF AND DIVIDENDS ON STOCK.........................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..............................................................
INDEPENDENT PUBLIC ACCOUNTANTS..................................................
SHAREHOLDERS' PROPOSALS.........................................................
APPENDICES:
Appendix A Amended and Restated Agreement and Plan of Merger
Appendix B Fairness Opinion of Daniels & Associates, L.P...........
Appendix C Form 10-KSB of the Company for the year ended
December 31, 1997.......................................
Appendix D Form 10-Q of the Company for the quarter ended
June 30, 1998...........................................
Appendix E Dissenters Rights.......................................
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INTRODUCTION
This Proxy Statement is being furnished to the Company's shareholders as of
the Record Date in connection with the solicitation of proxies from holders of
Common Shares by the Board of Directors of the Company for use at a special
meeting of shareholders of the Company to consider the proposed Merger of the
Purchaser with and into the Company, pursuant to the Merger Agreement. The
Merger will be consummated on the terms and subject to the conditions set forth
in the Merger Agreement, as a result of which at the Effective Time (a) the
Company will continue as the Surviving Corporation and will become a wholly
owned subsidiary of the Parent, and (b) each Common Share issued and outstanding
(other than Common Shares held by the Purchaser, the Parent or any other direct
or indirect subsidiary of the Parent, or the Company) will be converted into the
right to receive the Merger Consideration in cash, without interest.
The Meeting will be held on September __, 1998, at the offices of the Company
at 7100 East Belleview Avenue, Suite 201, Englewood, Colorado 80111 at 10:00
a.m., Denver, Colorado time.
The purpose of the Meeting is to consider and vote upon (i) a proposal to
approve and adopt the Merger Agreement and the Merger, and (ii) such other
matters as may properly be brought before the Meeting.
Only holders of record of Common Shares at the close of business on the Record
Date are entitled to vote at the Meeting. On such date, there were 5,595,687
Common Shares outstanding, each of which will be entitled to one vote on each
matter to be acted upon at the Meeting. All shareholders of the Company are
entitled to notice of the Meeting.
The presence, in person or by proxy, at the Meeting of the holders of
one-third of the Common Shares outstanding and entitled to vote at the Meeting
is necessary to constitute a quorum at the meeting. The affirmative vote of the
holders of a majority of the Common Shares outstanding and entitled to vote
thereon at the Meeting is required to approve and adopt the Merger Agreement.
The Board of Directors of the Company, by the unanimous vote of all of the
Directors of the Company, approved the Merger and determined that the terms of
the Merger are fair to and in the best interests of the shareholders of the
Company. Under the CBCA, the affirmative vote of the holders of a majority of
the outstanding Common Shares is required to approve the Merger. Pursuant to a
Voting Agreement dated June 5, 1998, the Company's largest shareholder, Group,
owning 2,873,568 shares (50.8%) of the Company's common stock, agreed to vote
all of its shares of the Company's common stock in favor of the Merger and the
Merger Agreement. Consequently, approval of the Merger and the Merger Agreement
is assured.
After the Merger is completed, the Company's shareholders will receive written
instructions for exchanging their share certificates. The Company's shareholders
should not send in their certificates at this time or with their proxies and
should continue to hold their share certificates until they receive such
instructions.
The Company expects that the Merger will be consummated as promptly as
practicable after the Meeting, assuming that the conditions to the Merger set
forth in the Merger Agreement have been satisfied. See "The Merger Agreement."
Any Dissenting Shareholder has the right under the CBCA to seek an appraisal
of and be paid the fair value of his shares, together with a fair rate of
interest, if any, to be paid thereon.
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In order to perfect such right of appraisal, a Dissenting Shareholder must make
a written demand for such appraisal to the Company before the taking of the vote
on the Merger. Such demand must be sent to the Company at 7100 East Belleview
Avenue, Suite 201, Englewood, Colorado 80111, Attention: Secretary. See
"Dissenters' Rights" and Appendix E to this Proxy Statement.
The accompanying Notice of Special Meeting of Shareholders constitutes the
notice to Dissenting Shareholders required by Article 113, Title 7, C.R.S.
Dissenting Shareholders are urged to carefully review this Proxy Statement and
the Appendices hereto in their entirety in considering whether to seek an
appraisal pursuant to the CBCA. If a Dissenting Shareholder does not perfect
appraisal rights with respect to his Common Shares before the taking of the vote
on the Merger, such shares will be converted into the right to receive the
Merger Consideration at the Effective Time.
As of the Record Date, there were issued and outstanding 5,595,687 Common
Shares. Holders of record of Common Shares at the close of business on the
Record Date are entitled to one vote per share held on all matters submitted to
a vote of shareholders.
The Common Shares are traded on the Nasdaq SmallCap Stock Market. As a result
of the consummation of the Merger, the registration of the Common Shares under
the Exchange Act will be terminated.
INFORMATION CONCERNING THE COMPANY
The Company is a Colorado corporation with its principal executive offices
located at 7100 East Belleview Avenue, Suite 201, Englewood, Colorado 80111. The
telephone number of such offices is (303) 770-7600.
The Company 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.
Additional information regarding the Company is included in its Annual Report
on Form 10- KSB for the year ended December 31, 1997 and its Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998, which are attached hereto as
Appendices C and D, respectively.
INFORMATION CONCERNING THE PARENT AND THE PURCHASER
The Parent, a Delaware corporation, is a telecommunications company whose
objective is to provide a full range of Internet and telecommunications
services. The Parent is based in Denver, Colorado. The Parent's common shares
trade on the Nasdaq SmallCap Stock Market under the symbol "RMII."
The Purchaser, a Colorado corporation, was formed solely for the purpose of
engaging in the transactions contemplated by the Merger Agreement, including the
merger of the Purchaser with and into the Company, and has not conducted any
unrelated activities since its formation. All the outstanding capital stock of
the Purchaser is owned by the Parent.
The principal executive offices of the Parent and the Purchaser are located at
1099 18th Street, Suite 3000, Denver, Colorado 80202.
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THE MEETING
The Meeting will be held at 10:00 a.m., local time, on September __, 1998, at
the offices of the Company at 7100 East Belleview Avenue, Suite 201, Englewood,
Colorado 80111, for the purpose of approving and adopting the Merger Agreement,
as required under Colorado law.
Only holders of record of Common Shares outstanding at the close of business
on the Record Date (July 7, 1998) are entitled to vote at the Meeting.
On the Record Date, there were approximately 142 holders of record of Common
Shares, with 5,595,687 Common Shares issued and outstanding. Each Common Share
entitles the holder thereof to one vote on each matter submitted for shareholder
approval.
The presence at the Meeting, in person or by proxy, of the holders of
one-third of the outstanding Common Shares will constitute a quorum for the
transaction of business, and approval and adoption of the Merger Agreement
requires the affirmative vote of a majority of the issued and outstanding Common
Shares. In determining whether the Merger Agreement has received the requisite
number of affirmative votes, abstentions and broker non-votes will have the same
effect as a vote against the Merger Agreement.
At the date of this Proxy Statement, the Board of Directors of the Company do
not know of any business to be presented at the Meeting other than as set forth
in the notice accompanying this Proxy Statement. If any other matters should
properly come before the Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
All properly executed proxies that are not revoked will be voted at the
Meeting in accordance with the instructions contained therein. If a holder of
Common Shares executes and returns a proxy and does not specify otherwise, the
shares represented by such proxy will be voted "for" approval and adoption of
the Merger Agreement in accordance with the recommendation of the Board of
Directors of the Company. A holder of Common Shares who has executed and
returned a proxy may revoke it at any time before it is voted at the Meeting by
(i) executing and returning a proxy bearing a later date, (ii) filing written
notice of such revocation with the Secretary of the Company stating that the
proxy is revoked or (iii) attending the Meeting and voting in person.
In addition to solicitation by mail, the directors, officers, employees and
agents of the Company may solicit proxies from their shareholders by personal
interview, telephone, telegram or otherwise. The Company will bear the costs of
the solicitation of proxies from its shareholders. Arrangements will also be
made with brokerage firms and other custodians, nominees and fiduciaries who
hold of record securities of the Company for the forwarding of solicitation
materials to the beneficial owners thereof. The Company will reimburse such
brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket
expenses incurred by them in connection therewith.
BACKGROUND OF THE MERGER
In March 1998 management of the Company informed the Board of Directors
that the Company faced a significant liquidity crisis. The Company was
having difficulty maintaining open trade credit with its vendors, did not
have adequate cash on hand, could not finance necessary capital
expenditures and was in default of its $5 million line of credit from its
lender, Norwest Bank, N.A. ("Norwest"). Management had
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unsuccessfully sought additional financing from Norwest and requested that
Anschutz Company, the sole shareholder of Group, advance the Company
additional funds. Anschutz Company agreed to advance $1,600,000 to the
Company and the Company issued to Anschutz Company a Convertible Promissory
Note dated March 20, 1998 due March 19, 1999 (the "Anschutz Note").
The Company then announced a restructuring plan to further improve its
financial condition. The Company sold its 80% ownership of the common stock
of Omega Business Communications Services, Inc. ("Omega") to Omega's vice
president and sole minority shareholder and executed an agreement for the
transition of the business activities and employees of its wholly-owned
subsidiary, Interwest Cable Network Systems, Inc. ("ICNS"), to a newly
formed corporation owned and operated by the principal managers of ICNS.
The number of the Company's departments was reduced and 50 employees were
separated from the Company, representing 21% of the Company's workforce
(excluding Omega and ICNS).
At a July 1997 meeting, the Company's Board of Directors directed its
Executive Committee, consisting of William Maxwell, Craig Slater (a
director and member of the Executive Committee of the Company, and an
affiliate of Group, ) and Thomas Galley, to seek funding for a new
wholesale network engineering services business. The Executive Committee
subsequently determined that it might be in the best interests of the
Company to find a buyer for the entire Company because (i) the Company
continued to have less than adequate cash on hand to properly grow the
Company, (ii) the $5 million line of credit from Norwest was outstanding to
the maximum limit and Norwest provided no assurances that it would renew
the line of credit upon maturity in September 1998, (iii) the Company faced
a risk of a material liquidity crisis over the short term and (iv) the
Company continued to generate operating losses. The Executive Committee
also considered other options such as additional loans or private or public
equity offerings. These options were not pursued because the Executive
Committee determined that the Company would be unable to attract outside
capital on acceptable terms due to the Company's operating losses and tight
liquidity position.
At the direction of the Executive Committee, Company management engaged
Daniels & Associates, L.P. ("Daniels")in November 1997 to solicit funding
for the new business and, alternatively, to find a buyer for the entire
Company.
Commencing in January 1998, Daniels successfully contacted 55 parties in
the telecommunications and information technologies industry. Of the 55
parties contacted, 27 requested and receive summary information regarding
the Company. Of the 27 parties who received such information, 15 parties
signed non-disclosure agreements and received additional confidential
information regarding the Company. Finally, five of the parties originally
contacted by Daniels conducted due diligence meetings with Company
management.
Daniels did not find the necessary investors for the new business, and the
concept to launch the new business was terminated.
The due diligence meetings from the Daniels engagement resulted in one
indication of interest, from a publicly held telecommunications company
("Company A"). The Executive Committee of the Company's Board of Directors
negotiated with Company A during the first two weeks of the month of May.
The Executive Committee asked Company A to make a cash offer. Company A
indicated it would consider a cash offer but never actually did so. On May
15, 1998 the Company received an indication of interest form Company A to
exchange each share of the Company's Common Stock for
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.85 shares of Company A common stock. On that date, the closing price of
Company A common stock was $8.62 per share and the closing price per share
of the Company's Common Stock was $6.00.
In the May 18, 1998 special meeting of the Company's Board of Directors,
the Board determined to cease negotiations with Company A. The Board
determined that, although the merits of entertaining a proposal to sell all
of the Common Stock of the Company were compelling, Company A common stock
was not satisfactory consideration because (i) the Company A common stock
had a history of significant price volatility, trading between
approximately $4.188 and $10 per share in the previous 52 weeks, (ii) the
Company A common stock lacked liquidity due to the relatively small trading
volume (approximately 51,600 average daily trading volume in the same
period), (iii) Company A was incurring significant losses, and (iv) Company
A did not have sufficient cash to repay the Company's $5 million Norwest
bank loan.
Craig Slater was contacted by a privately held telecommunications company
("Company B") on April 20, 1998 to discuss Company B's possible interest in
acquiring Group's majority interest in the Company. On April 24, 1998 Mr.
Slater and John Couzens had a conference call with officers of Company B.
Mr. Slater stated that Group would not consider a sale of its interest in
the Company separate from a sale of 100% of the Company's Common Stock.
Between May 5, 1998 and May 8, 1998, Mr. Couzens and Mr. Slater met with
officers of Company B to further discuss a possible acquisition of the
Company's Common Stock, stating that the Company would consider no less
than $7.00 per share in a cash acquisition. On May 8, 1998, the closing
price per share of the Company Common Stock was $5.50.
In the middle of April 1998, Douglas Hanson, President of Parent,
approached Philip Anschutz, the sole shareholder of Anschutz Company, the
corporate parent of Group, and stated that Parent would be interested in
acquiring the Company. Mr. Anschutz informed Craig Slater who then spoke
with Mr. Hanson. On April 26, 1998 and April 27, 1998 John Couzens and Mr.
Hanson met to further discuss the acquisition of the Company by the Parent.
On April 28, 1998, Mr. Slater told Mr. Hanson that the Company would not
consider an offer below $6.80 per share in cash, and would not consider an
offer to exchange Company Common Stock for the Parent's common stock, due
to the volatility of the Parent's common stock and its lack of earnings.
The Parent's common stock had traded between approximately $4.188 and $10
per share in the previous 52 weeks and its average daily trading volume in
the same period was approximately 57,400 shares. On April 28, 1998, the
closing price per share of the Company Common Stock was $5.563. Mr. Hanson
stated that it would be necessary for the Parent to obtain financing to
complete a cash acquisition and that he had been engaged in negotions with
ING Baring Furman Selz LLC ("ING") for such financing. On April 29, 1998
Mr. Hanson, Mr. Slater and Mr. Couzens met to further discuss the possible
terms of an acquisition. On May 2, 1998 Mr. Hanson and Mr. Couzens met to
commence the Parent's financial due diligence, and Mr. Couzens supplied Mr.
Hanson with detailed Company financial information.
On May 8, 1998 the Company delivered Company budgets, monthly management
financial statements, 1998 operating plan and product details to Company B
to permit it to conduct further due diligence on the Company.
The Company's Board of Directors met on May 18, 1998. Mr. Slater informed
the Board that Company B had indicated its interest in a cash acquisition
of the Company at $6.75 per share, subject to a ten day due diligence
period, and that Parent had indicated its interest in a cash acquisition of
the Company at $6.80 per share, subject to a due
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diligence period and to obtaining financing for the acquisition. On May 18,
1998, the closing price per share of the Company Common Stock was $5.50.
The Board compared the Company B proposal, the Company A proposal and the
Parent's proposal and unanimously voted to pursue the Company B offer
subject to shortening the due diligence period to five or seven days. Mr.
Slater and Company B agreed to shorten the due diligence period to seven
days. The final Company B due diligence commenced on May 20, 1998, and on
May 27, 1998 Company B informed Mr. Slater that the $6.75 per share was too
high and that Company B would need an undetermined amount of due diligence
to derive a new per share price.
The Company's Board of Directors met the same day to discuss the Company B
response and voted unanimously to pursue the Parent's proposal at $6.80
cash per share, subject to a due diligence period. On May 27, 1998, the
closing price per share of the Company Common Stock was $6.00. The Board
directed management to condition the Company's acceptance of any proposal
on Parent obtaining a commitment of $50 million to finance the acquisition
and on receipt of a fairness opinion from an investment banking firm.
The Board was informed by Mr. Slater that the Parent had stated that it
would require that Group execute a voting agreement pursuant to which it
would agree to vote in favor of the Parent's proposal. He stated that would
consider such terms only if the Anschutz Note were amended to provide that
it would be repaid if the Parent obtained debt financing in the aggregate
principal amount greater than $50 million. The Board determined that this
potential conflict of interest did not change its view that the Parent's
proposal should be pursued in light of the fact that the Anschutz Note
would be due in any event in March 1999, and the Board approved the
amendment. Messrs. Slater, Liebhaber and Ortiz, directors of the Company,
are affiliates of Group and Anschutz Company. See "Interests of Certain
Persons in the Merger."
The Board also considered the offer by Parent to employ John Couzens
following the Merger, and determined that this potential conflict of
interest did not change its view that the Parent's proposal should be
pursued. See "Interests of Certain Persons in the Merger."
The Board considered that Parent's proposal would cause any unvested
options to become fully vested and exercisable, and that officers and
directors of the Company would benefit from the acceleration of vesting,
and determined that this potential conflict of interest did not change its
view that the Parent's proposal should be pursued. See "Interests of
Certain Persons in the Merger."
Finally, the Board considered that the proposal would cause certain
severance benefits of officers of the Company to be effective, and
determined that this potential conflict of interest did not change its view
that the Parent's proposal should be pursued. See "Interests of Certain
Persons in the Merger."
Messrs. Slater and Couzens informed the Parent on May 27, 1998 that the
Company would entertain a proposal from Parent to purchase all of the
Company's Common Stock for $6.80 per share, provided that the Parent
obtained a commitment letter from a financial institution to finance for
the acquisition.
In subsequent negotiations, the Parent required as a condition of the
acquisition that the purchase price of $6.80 per share be reduced by an
amount per share equal to one-half of the amount expected to be due to
Daniels for its efforts (approximately $2 million) less $250,000.
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The Parent provided the Company with a commitment letter for the
acquisition financing in June 1998 (the "ING Commitment"), and the parties
executed the Merger Agreement on June 5, 1998, following approval by the
Board of Directors at a meeting on May 31, 1998. On June 5, 1998, the
closing price per share of the Company Common Stock was $6.188. The Parent
is considering raising cash in excess of $50 million in a private offering
(the "Private Offering"). The Private Offering has not yet closed and there
can be no assurance that the Parent will sell such securities. The parties
amended the Merger Agreement on August 17, 1998 to provide that it is a
condition of the Company's obligation to close the Merger that either (i)
the ING Commitment must remain in full force and effect and be funded, or
(ii) the Parent must have executed a purchase agreement for the sale of
such securities in form and substance acceptable to the Company and all the
conditions to closing (other than conditions that, by their terms, cannot
be satisfied until such closing) set forth in such purchase agreement shall
have been satisfied or waived. If either of these conditions are not met,
unless the Company has breached certain representations and covenants or
certain other conditions have not been met, the Parent must pay to the
Company $1,050,000 in cash or, at the Parent's election, that number of
shares of the Parent's common stock equal to $1,050,000 divided by the
"Fair Market Value" (as defined) of such stock.
Shortly after execution of the Merger Agreement, the Company received an
inquiry from NASDAQ regarding compliance with NASDAQ listing requirements.
The Company determined that it failed to comply with a NASDAQ requirement
that it have at least $35 million of market capitalization. Following
discussions with NASDAQ, NASDAQ gave the Company until September 15, 1998
to complete the Merger or demonstrate compliance with the listing
requirements or be delisted.
Subsequent discussions with Daniels resulted in an adjustment of its fee to
$700,000. This resulted in a downward adjustment of the Merger
Consideration per share of the Company Common Stock to $6.764. On July 14,
1998, Daniels agreed to the fee reduction and delivered the fairness
opinion required as a condition of the Merger. Daniels was not involved in
the Board's consideration of the proposals from Company A, Company B or the
Parent.
RECOMMENDATION OF THE BOARD AND REASONS FOR THE MERGER
In light of the Board of Directors' review of the Company's competitive
position, the Company's financial history and current status, past and
anticipated events in the Company's industry and the prospects for the
Company as an independent entity, the Board of Directors determined that it
would be in the best interests of the shareholders to approve the Merger
Agreement.
In approving the Merger Agreement, the Board of Directors considered the
following factors:
(i) the lack of sufficient cash on hand to participate in the Company's
industry's growth. The Board believes it is unlikely the Company can
obtain sufficient debt or equity capital to grow the business because
of the Company's unsatisfacory record of operating losses, lack of
cash, inability to obtain additional credit from either Norwest or
Anschutz Company resulting in the restructuring and sale of
subsidiaries discussed in "Background of the Merger." The Company
obtained a $1.6 million loan from Anschutz Company in March 1998 and
sold common stock and warrants to Group for $3.0 million in a private
placement in April 1997. Anschutz Company has informed the Company
that it is not willing to provide
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further funds to the Company in the future and it is uncertain
whether Norwest will be willing to renegotiate its loan when it is
due in September 1998. The Company had a $4.575 million operating
loss for its fiscal year ended December 31, 1997, a $1.125 million
operating loss for its fiscal year ended January 31, 1997 and
$.977 million loss for its fiscal year ended January 31, 1996. The
Company did not have cash on the balance sheet at December 31,
1997 or June 30, 1998 or the ability to finance capital
expenditures and fund operating losses because its history of
operating losses prevented it from attracting additional capital.
Further, the Company had not realized the benefits which had been
expected to occur of combining with Interwest Communications C.S.
Corporation, following that company's acquisition in September
1996;
(ii) the need to refinance the Norwest loan in September 1998 and the
desirability of incurring up to $1.5 million per year in capital
expenditures over the next several years to invest in network
infrastructure, switching equipment, upgrading the network
operations center, building out a redundant network operations
center, and developing knowledge management systems;
(iii) the recent trend toward consolidation among network integration
companies. There have been a series of business combinations over
the past year in the intensely competitive telecommunications
industry which in turn created additional critical mass so that
the Company's competitors could compete even more aggressively
against the Company. Larger competitors in the telecommunications
industry are able to offer superior salaries, benefits, and
training to attract and retain high quality employees and obtain
new business accounts based on increasingly advanced network
infrastructure and broadened technical support and customer
service. The Company has been dependent on Colorado for its
customers, whereas, most of its competitors in the wide area
network telecommunications industry have a broader geographic
presence. Consequently, the geographic limitations of the Company
limit the Company in its ability to obtain new customers in the
wide area networking business;
(iv) the risks to the Company and its shareholders of remaining
independent in view of the Company's highly leveraged position,
the capital requirements to compete in the communications
industry, the Company's dependence on a geographic concentration
in Colorado with a single network operations center, the Company's
future capital needs and the Company's ability to compete in an
increasingly global marketplace;
(v) the Merger Agreement conditions the Company's obligations to
consummate the Merger on the Company having obtained the opinion
of a reputable investment banking firm satisfactory to the
Company as to the fairness, from a financial point of view, of
the Merger Consideration to be paid to the Company's
shareholders. A copy of the written opinion of Daniels, which
sets forth the procedures followed, matters considered,
assumptions made and limitations of the review undertaken by
Daniels, is attached hereto as Appendix B. Although the Board did
not receive the Daniels opinion or perform a detailed financial
analysis of the Merger Consideration prior to approving the
Merger Agreement, by requiring the fairness opinion as a
condition to closing the Merger, the Board was confident that the
Merger Consideration would be determined to be fair to the
Company's shareholders if the Merger were to proceed.
SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY;
(vi) the historical market prices for the Common Shares, including the
fact that the
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proposed purchase price for the Common Shares represents a premium
of 24.2% over the average daily closing price from January 1 to
July 15, 1998 of $5.50 as quoted on the Nasdaq SmallCap Stock
Market;
(vii) the lack of liquidity in the market for the Common Shares (average
daily trading volume of 17,969 shares from January 1, 1998 to July
15, 1998) and the adverse consequences thereof for the Company and
its shareholders;
(viii) the agreement of a beneficial owner of 50.8% of the Common Shares
(on a fully diluted basis) to approve the Merger;
(ix) the terms of the Merger Agreement and the transactions
contemplated thereby, including, among others, the right of the
Company's Board of Directors to accept a proposal from another
party and terminate the Merger Agreement, provided that the Parent
would be entitled to a fee of $1,050,000 in such event,
representing the fee that would be due to ING by the Parent if it
were to fail to close the transaction;
(x) the availability of dissenters' rights of appraisal in the Merger;
(xi) the anticipated benefits of the Merger to the Company's employees
and the community in which the Company operates. The Merger is
expected to increase the liklihood that the Company will not lay
off additional employees;
(xii) the risk to the Company that the Parent might not consummate the
Merger. The Merger Agreement conditions the Parent's obligations
to consummate the Merger on a commitment letter from the Parent's
lenders in the form delivered to and approved by the Company for
$42 million to fund the Merger Consideration being in full force
and effect and Douglas H. Hanson, president of Parent, having
provided $7,800,000 in debt or equity financing to the Parent. If
either condition is not met, the Company is entitled to terminate
the Merger Agreement and the Parent must pay to the Company
$1,050,000 in cash or, at the Parent's election, that number of
shares of the Parent's common stock equal to $1,050,000 divided
by the "Fair Market Value" (as defined in the Merger Agreement)
of such stock. Based on the foregoing, the Company's Board of
Directors viewed as acceptable the risk that the Parent might not
consummate the Merger;
(xiii) the risk that the Common Stock could be delisted from NASDAQ.
Shortly after execution of the Merger Agreement, the Company
received an inquiry from NASDAQ regarding compliance with listing
requirements. At the time, the Company did not meet NASDAQ's
requirement for $2 million tangible net worth or the $35 million
equity market capitalization. If the price per share of the
Common Stock were exceed $6.__, it would meet these requirements;
however, if the price were to again fall below this amount, it
would not, and could be delisted. NASDAQ has given the Company an
extension until September 15, 1998 to complete the Merger or
demonstrate compliance with the listing requirements or be
delisted. Delisting of the Common Stock from NASDAQ could have an
adverse effect on the stock price, because of reduced news
coverage of the Company and significantly reduced investor
interest; and
(xiv) the fact that the Parent's proposal was superior to the two other
indications of interest received by the Company, as discussed in
"Background of the Merger."
The Board of Directors did not assign relative weights to the above factors
or determine
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that any factor was of specific importance relative to any other factor.
Rather, the Board of Directors viewed its position and recommendations as
being based on the totality of the information presented to and considered
by it.
The Board considered the conflicts of interest presented by the matters
discussed in "Interests of Certain Persons in the Merger" and determined
that none of these potential conflicts of interest changed its view that
the Parent's proposal should be pursued.
From the standpoint of the Parent and the Purchaser, the purposes of the
Merger are to enable the Parent to acquire control of the Company and the
entire common equity interest in the Company; diversify its
telecommunications products and services offering; expand its geographical
presence; increase its network size and sophistication; broaden its
customer base and enhance its management team. The Parent regards the
acquisition of the Company as an attractive opportunity to acquire a
significant and well-established business. The Parent believes the
increased scale of the combined businesses will enable the Parent to
compete more effectively in the telecommunications business both
domestically and internationally. The business of the Parent and the
Company operate in similar markets and geographies and the Merger is
expected to provide considerable synergies and enhance performance.
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OPINION OF FINANCIAL ADVISOR
On November 26, 1997, the Company entered into an agreement engaging Daniels
to act as the Company's exclusive representative for the purpose of identifying
and seeking out prospective purchasers interested in entering into a transaction
with the Company (the "Engagement Agreement"). On July 7, 1998, the Company
entered into a separate agreement with Daniels (the "July Agreement") by which
Daniels was engaged to render an opinion to the Board of Directors of the
Company as to the fairness of the proposed Merger to the shareholders of the
Company, from a financial point of view, based on the Merger Consideration being
offered. No limitations have been imposed by the Company's Board upon Daniels
regarding the investigation to be made or the procedures to be followed by
Daniels in fulfilling its review of the Merger.
THE FULL TEXT OF DANIELS' OPINION CONCERNING THE PROPOSED MERGER IS ATTACHED
HERETO AS APPENDIX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. DANIELS' OPINION SETS FORTH A DESCRIPTION OF THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN. HOLDERS OF THE COMPANY'S
STOCK ARE URGED TO READ THE OPINION IN ITS ENTIRETY. DANIELS' OPINION DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER OF THE COMPANY AS TO HOW SUCH
SHAREHOLDER SHOULD VOTE AT THE UPCOMING MEETING. THE SUMMARY OF THE OPINION SET
FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In rendering its opinion, Daniels, among other things, performed the
following:
(1) Reviewed the following agreements relating to the proposed Merger: (a)
the Merger Agreement, and related schedules thereto, (b) the Voting Agreement
between Interwest Group, Inc. and the Parent, dated June 5, 1998, and (c) the
Commitment Letter from ING Barings, et al., to the Parent, dated June 5, 1998,
and the attached Summary Term Sheet, and certain amendment letters to the
Commitment Letter, dated June 19, 1998 and June 24, 1998;
(2) Reviewed a draft of the Proxy Statement of the Company, dated July 14,
1998;
(3) Reviewed the following agreements and documents dated prior to the
date of the Merger Agreement: (a) Convertible Promissory Note granted to
Anschutz Company by the Company, dated March 20, 1998, (b) Employment Agreement
between the Parent and John Couzens, dated June 3, 1998, (c) certain letters
containing indications of interest and exhibits attached to such letters from
various prospective purchasers, and (d) Research Report on the Company prepared
by Neidiger Tucker Bruner, Inc., dated May 27, 1998;
(4) Reviewed the annual report on Form 10-KSB for the fiscal year ended
December 31, 1997, the Form 10-Q report dated March 31, 1998, and the Form 8-K
report, dated June 10, 1998, all as filed with the Securities and Exchange
Commission, as well as unaudited financial statements for the months of April
and May of 1998 as prepared by management of the Company;
(5) Reviewed the Company's budget for the nine months ended December 31,
1998;
(6) Conducted discussions with certain members of senior management of
both the Company and the Parent regarding the business and prospects of the
respective companies;
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<PAGE>
(7) Reviewed minutes of meetings of the Board of Directors of the Company
which took place on May 31, 1998, March 31, 1997, September 23, 1997, March 15,
1998 and March 25, 1998, as well as minutes of an Executive Committee meeting
which took place on November 21, 1997.
(8) Compared the results of operations of the Company with those of
certain companies which Daniels deemed to be reasonably similar to the Company;
(9) Compared the proposed financial terms of the Merger contemplated by
the Merger Agreement with the terms of certain other acquisitions which Daniels
deemed to be relevant;
(10) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as Daniels deemed
necessary for purposes of its opinion.
The following is a description of the analysis performed in connection with the
rendering of Daniels' opinion, delivered on July 14, 1998 by Daniels to the
Company's Board of Directors.
Comparable Public Company Market Multiples. Daniels compared the financial and
market performance of the Company with that of a group of comparable
publicly-traded communications and computer network integration companies.
This group of comparable companies was selected by Daniels based on
similarities to the Company in product and service offering, target market
and size as evidenced by total revenues and market capitalization. Daniels
examined certain publicly available financial and operating data of such
comparable companies, in particular: (i) the ratio ("P/E Ratio") of current
stock prices per share to (a) the annualized three months ended March 31,
1998 (or latest available three month period) ("annualized run-rate")
earnings per share ("EPS") and (b) 1999 estimated EPS (as reported by
Institutional Brokers Estimate System "I/B/E/S"); and (ii) the ratio of the
market capitalization plus total liabilities, minority interests and
preferred stock (collectively, "Enterprise Value") to annualized run-rate
earnings before interest, taxes, depreciation and amortization ("EBITDA").
This analysis showed: a range of annualized run-rate P/E Ratios from 12.8x
to 43.8x, with a median of 22.5x for the comparable companies (implying a
Company purchase price per share ranging from $1.60 to $5.45, with a median
of $2.81), as compared to 54.3x for the Company based on a purchase price
per Company share of $6.764; a range of 1999 estimated P/E Ratios from 8.7x
to 22.4x, with a median of 15.8x for the comparable companies (implying a
Company purchase price per share ranging from $1.33 to $3.43, with a median
of $2.42), as compared to 44.1x for the Company based on a purchase price
per Company share of $6.764; and Enterprise Value to annualized run-rate
EBITDA ratios ranging from 3.4x to 27.2x, with a median ratio of 10.5x for
the comparable companies (implying a Company purchase price per share
ranging from $1.50 to $11.57, with a median of $4.48), as compared to 15.8x
for the Company based on a purchase price per Company share of $6.764.
Comparable Private Market Transaction Multiples. Daniels reviewed recent
comparable acquisition transactions in the United States communications and
computer network integration industry which were selected based on
similarities among the acquired companies to the Company in product and
service offering, target market and size as evidenced by total revenues and
market capitalization. These comparable acquisition transactions represent
a range of Enterprise Value to run-rate EBITDA ratios of 3.9x to 18.3x,
with a median ratio of 9.5x, as compared to 15.8x for the Company based on
a purchase price per Company share of $6.764. These comparable acquisition
multiples imply a Company purchase price per share ranging from $1.70 to
$7.80, with a median of $4.10.
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Discounted Cash Flow Analysis. Using a discounted cash flow ("DCF") methodology,
Daniels valued the Company by estimating the present value of future free
cash flows available to the Company if the Company were to continue on a
stand-alone basis. Daniels valued the Company in accordance with the
Company's 1998 budget and management's operating assumptions for the period
1999 through 2002. These assumptions included the following: annual growth
rate in revenues of 15%; a gross margin of 33%; selling, general and
administrative expenses equal to 26% of revenues in 1999 and 24% of
revenues in 2000, 2001 and 2002; and annual capital expenditures of $1.25
million. Free cash flow represents operating cash flow, or EBITDA, less
capital expenditures. Daniels aggregated (x) the present value of the free
cash flows over the applicable period with (y) the present value of the
range of terminal values described below. The range of terminal values was
calculated by applying multiples (ranging from 9.0x to 11.0x) to the
Company's EBITDA for the last year of the period. This range of multiples
represents Daniels' estimate of the trading value of the Company at the end
of the period given its growth rate and profitability at that point. The
resulting range of terminal values represents an estimate of the Company's
Enterprise Value at the end of the period. As part of the DCF analysis,
Daniels used discount rates reflecting Daniels' estimate of the range of
weighted average cost of capital a reasonable acquiror of the Company would
use in determining the value of the Company. These discount rates range
from 14.0% to 18.0%. The DCF analysis resulted in values ranging from $4.96
to $6.68 per Company share.
In rendering its opinion, Daniels considered the recent liquidity problems
experienced by the Company, its history of operating losses and its recent
restructuring. Daniels also considered the results of its discussions with 55
parties in the telecommunications and information technologies industries
regarding their potential interest in acquiring the Company. Of the 55 parties
contacted beginning January 1998, 27 requested and received summary information
regarding the Company. Of the 27 parties who received such information, 15
parties signed non-disclosure agreements and received additional confidential
information regarding the Company. Five of these parties who received such
additional information conducted initial due diligence meetings with Company
management. Only one of these parties, Company A, indicated an interest in
acquiring the Company, as discussed above.
The results of the three forms of market and financial analysis discussed above
support Daniels' opinion attached hereto as Appendix B. These results are
confirmed and further supported by the results of discussions concerning a
potential acquisition of the Company conducted by Daniels and the Company's
management with a total of 55 parties in the telecommunications and information
technologies industries.
Daniels is a leading investment banking and brokerage firm specializing in
communications businesses. Daniels is regularly engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive bids, private placements, and valuations
for corporate, estate and other purposes. On the basis of the expertise and
experience of Daniels in the communications industry, the Company selected
Daniels to analyze whether the Merger Consideration being offered to the
Company's shareholders pursuant to the terms of the Merger Agreement is fair
from a financial point of view to such shareholders.
Pursuant to the terms of the July Agreement, upon the closing of the merger,
Daniels will earn the right to receive cash compensation totalling $700,000. The
Company has also agreed to indemnify Daniels and its partners, employees,
agents, affiliates and controlling persons against certain expenses and
liabilities in connection with its services rendered pursuant to
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both the Engagement Agreement and the July Agreement. Daniels has informed the
Company that in rendering fairness opinions, Daniels employs an independent
opinion review committee composed of seven senior officers of the firm; that
this committee follows standardized processes and procedures to determine if a
fairness opinion can be issued; that this process involves each member of the
committee independently considering and discussing the results of the various
forms of analysis that form the basis of the fairness opinion and voting on the
issuance of such opinion; and that any compensation to be earned by Daniels as a
result of a transaction is specifically not considered. Based on this, the Board
of Directors concluded that it could rely on Daniels' opinion notwithstanding
the potential conflict of interest created by Daniels' receipt of compensation
only if the Merger is closed.
INTEREST OF CERTAIN PERSONS IN THE MERGER
Certain existing and former members of the Company's management and Board (as
well as other employees of the Company) have certain interests that are
described below that may present them with actual or potential conflicts of
interest in connection with the Merger.
Stock Options and Warrants
Pursuant to the Merger Agreement, the Company agreed to use its best efforts
to cause all outstanding options and warrants to purchase Common Shares to be
converted by the Merger into the right to receive for each Common Share covered
thereby a cash amount equal to the excess of the Merger Consideration over the
option or warrant exercise price. All outstanding options that are currently not
vested will become vested on consummation of the Merger. The executive officers
and directors of the Company will receive net amounts in settlement of such
options as follows:
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Value of Options Number of Options
Vested As A Result Vested As A Result
Name/Title of The Merger of The Merger
- ---------- ------------- -------------
John M. Couzens, President and CEO.... $ 50,560 40,000
Timothy Kershisnik, CFO............... $ 34,065 22,500
Timothy Griffin, Vice President of
Sales and Marketing................... $ 44,100 25,000
Mary Beth Loesch, Vice President
of Operations ........................ $155,700 75,000
Peter A. Guglielimi, Director......... $ 2,146 3,333
William J. Maxwell, Director.......... $ 4,630 3,333
In addition, Group will receive $67,200 in settlement of its warrants to
purchase 63,158 Common Shares.
Couzens Agreement
. The Purchaser entered into a letter agreement (the "Couzens Agreement") with
John M. Couzens, President of the Company, to serve as President and Chief
Operating Officer of the Parent and the Company and as a director. The Couzens
Agreement provides for an annual base salary of $150,000 and a grant of an
option to acquire 200,000 shares of the Parent's common stock with an exercise
price of $9.125, the price on the date the Merger Agreement was signed. The
closing price of the Parent's common stock on August 17, 1998 was $14.25. The
Couzens Agreement also provides that if Mr. Couzens is terminated within the
first year of his employment, he will receive a severance payment of one year's
salary, subject to non-competition and other restraints.
Voting Agreement
Group agreed to vote all the voting securities of the Company owned by it (A) in
favor of the Merger and adoption of the Merger Agreement, (B) against any
business combination proposal or other matter that may interfere or be
inconsistent with the Merger or the Merger Agreement, at any meeting of
shareholders of the Company and any adjournment or adjournments thereof and (C)
except with the Parent's approval, against any amendment to the articles of
incorporation or bylaws of the Company.
Directors' and Officers' Indemnification
Pursuant to the Merger Agreement, for a period of six years after the Effective
Date, the Surviving Corporation must cause to be maintained in effect (i) the
current provisions regarding elimination of liability of directors and
indemnification of officers, directors and employees contained in the articles
of incorporation and by-laws of the Company and (ii) the current policies of
directors' and officers' liability insurance and fiduciary liability insurance
maintained by the Company (provided that the Surviving Corporation may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are, in the aggregate, no less
advantageous to the insured) with respect to claims arising from facts or events
that occurred on or before the Effective Date.
Anschutz Note
In March 1998 the Company borrowed $1,600,000 from Anschutz Company, an
affiliate of Group, and issued to Anschutz Company a Convertible Promissory Note
dated March 20, 1998 in the original principal amount of $1,600,000 and due
March 19, 1999 (the "Anschutz Note"). As permitted by the Merger Agreement, the
Company has amended the Anschutz
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Note to provide that (i) if the Parent shall have obtained debt financing at or
before the Effective Time in the aggregate principal amount greater than
$50,000,000, then such note shall be due at the Effective Time and (ii) if the
Parent shall have obtained debt financing in the aggregate principal amount
greater than $50,000,000 after the Effective Time but before March 19, 1999,
then such note shall be due on closing of such financing. Messrs. Slater,
Liebhaber and Ortiz, directors of the Company, are affiliates of Group and
Anschutz Company. It is a condition to closing under the Merger Agreement that
if the Parent shall have obtained debt financing at or before the closing in the
aggregate principal amount greater than $50million in one transaction or a
series of related transactions, then the Anschutz Note must be paid in full.
STRUCTURE OF THE MERGER
In the Merger, each outstanding Common Share not held, directly or indirectly,
by the Purchaser, the Parent or any other direct or indirect subsidiary of the
Parent, or the Company, will be converted into the right to receive the Merger
Consideration in cash, without interest. Each share of common stock of the
Purchaser issued and outstanding immediately prior to the Effective Time will be
converted into and become one Common Share of the Company in the Merger. The
Company will thereupon become a wholly-owned subsidiary of the Parent and the
Parent will own the entire common equity interest in the Company.
The acquisition of the Common Shares is structured as a cash merger, with the
Company as the Surviving Corporation, to ensure that the Parent will acquire all
outstanding Common Shares from all public holders thereof without materially
disrupting the Company's operations.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for under the "purchase" method of accounting,
whereby the purchase price for the Company will be allocated to the identifiable
assets and liabilities of the Company and its subsidiaries based on their
respective fair values.
CERTAIN EFFECTS OF THE MERGER
If the Merger is consummated, holders of Common Shares will not have an
opportunity to continue their common equity interest in the Company as an
ongoing operation and therefore will not have the opportunity to share in its
future earnings and potential growth, if any.
FEDERAL TAX CONSEQUENCES OF THE MERGER
The Company, based on advice of its counsel, is providing the following
summary of the principal federal income tax consequences of the Merger to
holders of Common Shares and options or warrants to acquire Common Shares. The
discussion is based on the current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury Regulations
("Regulations") and public administrative and judicial interpretations of the
Code and Regulations, all of which are subject to change, which changes could be
applied retroactively.
This discussion of tax consequences is for general information only. This
discussion assumes that the Common Shares, options and warrants are held for
investment as a capital asset. The tax consequences to a particular holder of
such assets will depend on the holder's particular
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facts and circumstances, and this discussion may not apply to particular
categories of holders subject to special treatment under the Code; for example
(but not limited to), foreign persons, retirement plans, regulated investment
companies, holders of Section 1202 small business stock, holders of compensatory
stock, options or warrants, and dealers in securities. This summary does not
discuss any aspects of state, local, foreign or other tax laws. The discussion
assumes that the Company is not a collapsible corporation under section 341 of
the Code. This discussion of tax consequences does not address the tax
consequences likely applicable to foreign holders of Common Shares, options or
warrants, and such holders should consult their own tax advisors regarding the
potential applicability of withholding taxes to receipt of Merger Consideration.
Further, in order to avoid withholding taxes, even a non-foreign holder of
Common Shares may be required to demonstrate that such holder of Common Shares
is an exempt recipient under applicable withholding provisions of the Code and
Regulations.
Tax Consequences Applicable to Holders of Common Shares.
The receipt of cash in payment for the value of Common Shares (whether
received as Merger Consideration or as a result of an appraisal demand)
generally will be a taxable sale for federal income tax purposes. In general, a
holder of Common Shares will recognize gain or loss for federal income tax
purposes equal to the difference between the amount of cash received for the
value of the Common Shares and the holder's adjusted tax basis in such Common
Shares. In general, a holder's "adjusted tax basis" is the cost expended to
purchase such Common Shares, although there are numerous special circumstances
that result in the application of special rules for determining adjusted tax
basis (e.g. a carryover basis in the case of certain stock acquisitions, a
stepped up basis to date of death fair market value in the case of certain stock
acquired through a taxable estate, and inclusion of taxable compensation value
in the case of stock acquired as compensation).
Provided the Common Shares constitute capital assets in the hands of the
holder thereof, such gain or loss will be capital gain or loss, and will be
long-term capital gain or loss if, on the date of the sale pursuant to the
Merger, the Common Shares were held for more than one year. Long-term capital
gain realized by individuals, estates or trusts with respect to Common Shares is
generally taxed at a maximum federal income tax rate of 20%, except that the
maximum federal income tax rate is 10% with respect to income that would
otherwise be in the 15% marginal federal income tax bracket. State and local
taxes are in addition to the federal income tax, and often do not provide any
special tax rates for long-term capital gains. If a shareholder realizes a
long-term capital loss on the sale of the Common Shares, the deduction of the
capital loss may be limited under the Code. For example, the deduction of
long-term capital losses for individuals is generally limited to the amount of
the capital gains generated during the tax year plus $3,000.
Tax Consequences Applicable to Holders of Options and Warrants.
In general, pursuant to separate communications made by the Company to holders
of outstanding options and warrants, these holders may either: (i) convert the
option or warrant into Common Shares in advance of the Merger, and then will be
treated in the same manner as other holders of Common Shares in the Merger, (ii)
receive a cash payment upon or after closing of the Merger, whether in
connection with a conversion of the option or warrant or in consideration of
cancellation of the option or warrant, equal to the excess of the Merger
Consideration attributable to the Common Shares underlying the option or warrant
over the option or warrant exercise price, or (iii) retain the option or
warrant, which in many cases will result in expiration of the option or warrant.
If the option or warrant is converted into Common Shares in advance of the
Merger, the tax consequences of the Merger with respect to the Common Shares
generally would be as outlined above, with the acknowledgment that
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the holder of such Common Shares would not have a holding period longer than one
year and any resulting gain or loss would therefore be a short-term gain or
loss. If the option or warrant is terminated or converted into a right to
receive cash, then the holder of such option or warrant is likely to be taxable
on the difference between the amount of the cash received and the adjusted tax
basis of the holder in the option or warrant, if any. The character of the gain
would depend on the facts and circumstances of the acquisition of the option or
warrant.
However, the foregoing discussion does not necessarily address the special tax
treatment applicable to holders of certain warrants and options issued to
employees as compensation. In the case of nonqualified options issued as
compensation, the exercise of such options in advance of the Merger will trigger
compensation income, subject to wage withholding, equal to the excess of the
fair market value of the stock on the date of exercise over the exercise price.
The adjusted tax basis in the Common Shares received as a result of the exercise
of the option is generally equal to the exercise price plus the amount of
compensation reported as taxable income on the exercise. The receipt of cash
upon conversion or termination of the option will also constitute compensation
income, subject to wage withholding.
In the case of holders of incentive stock options, the exercise of the
incentive stock option will not immediately result in any recognition of taxable
income. However, the receipt of the Merger Consideration will result in a
"disqualifying disposition" of the stock received on exercise of the incentive
stock option. Accordingly, the net amount realized with respect to the incentive
stock option will generally be treated as compensation income to the extent of
the excess of the fair market value of the stock on the date the incentive stock
option was exercised (or, if less, the Merger Consideration) over the exercise
price. The compensation income is not subject to withholding. Any net amount
realized in excess of the compensation amount will be taxed as short-term
capital gain.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL THE POTENTIAL TAX EFFECTS RELEVANT THERETO. THUS,
HOLDERS OF COMMON SHARES, OPTIONS AND WARRANTS ARE URGED AND EXPECTED TO CONSULT
THEIR OWN TAX ADVISORS TO DETERMINE THE SPECIFIC TAX CONSEQUENCES OF THE MERGER
TO THEM UNDER FEDERAL, STATE, LOCAL OR OTHER TAX LAWS AND THE EFFECT OF ANY
CHANGE IN THE APPLICABLE TAX LAWS SINCE THE DATE HEREOF.
THE MERGER AGREEMENT
Set forth below is a description of the principal terms of the Merger
Agreement which are of continuing applicability. This description is qualified
in its entirety by reference to the Merger Agreement, which is attached as
Appendix A hereto and is incorporated herein by this reference.
General. The Merger Agreement provides that, subject to the terms and
conditions thereof, the Purchaser shall be merged with and into the Company,
which shall be the Surviving Corporation, on the Effective Date. Pursuant to the
Merger, (i) the Amended and Restated Certificate of Incorporation of the
Purchaser will be the Amended and Restated Certificate of Incorporation of the
Surviving Corporation until thereafter amended as provided by law, and (ii) the
By-laws of the Purchaser will be the By-laws of the Surviving Corporation until
thereafter amended. The directors of the Purchaser on the Effective Date will
become the directors of the Surviving Corporation until their respective
successors are duly elected and qualified. The officers of the Company on the
Effective Date will continue as the officers of
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the Surviving Corporation, to serve in accordance with the By-Laws thereof until
their respective successors are duly elected and qualified. The Merger will have
the effects set forth in the CBCA.
Conversion of Common Shares. The Merger Agreement provides that each
outstanding Common Share (other than Common Shares which are held by the Company
as treasury shares, all authorized and unissued Common Shares and any Common
Shares owned by the Purchaser, the Parent or any other direct or indirect
subsidiary of the Parent and Common Shares held by shareholders who exercise
their statutory dissenters' rights as described below) will be converted into
the right to receive the Merger Consideration.
The Merger Agreement provides that each issued and outstanding share of
capital stock of the Purchaser shall be converted into one validly issued, fully
paid and non-assessable Common Share of the Surviving Corporation.
The Merger Agreement provides that any issued and outstanding Common Shares
("Dissenting Shares") held by a Dissenting Shareholder shall not be converted as
described above but shall become, at the Effective Date, by virtue of the Merger
and without any further action, the right to receive such consideration as may
be determined to be due to such Dissenting Shareholder pursuant to the CBCA;
provided, however, that Common Shares outstanding immediately prior to the
Effective Date and held by a Dissenting Shareholder who shall, after the
Effective Date, withdraw his demand for appraisal or lose his right of
appraisal, in either case pursuant to the CBCA, shall be deemed to be converted
as of the Effective Date, into the right to receive the Merger Consideration.
The Merger Agreement provides that the Company will not, without the prior
written consent of the Parent, voluntarily make any payment with respect to, or
settle, offer to settle or otherwise negotiate, any demands by Dissenting
Shareholders.
Shareholders' Meeting. Pursuant to the Merger Agreement, the Company has
agreed to take all action necessary in accordance with applicable law and its
Articles of Incorporation and By-Laws, as amended, to convene a meeting of the
holders of the Common Shares as promptly as practicable to consider and vote
upon the adoption of the Merger Agreement. The Company has agreed that in this
Proxy Statement, the Company will, through its Board, recommend that the holders
of the Common Shares adopt the Merger Agreement, except to the extent that the
Board of Directors will have withdrawn or modified its approval or
recommendation of the Merger Agreement after determining that it has a duty in
the proper discharge of its fiduciary responsibilities under applicable law to
withdraw or modify such approval or recommendation.
Interim Operations of the Company. In the Merger Agreement, the Company has
agreed that, except as expressly provided in the Merger Agreement or consented
to in writing by the Parent, prior to the Effective Date, (i) the businesses of
the Company and its subsidiaries will be conducted only in the ordinary and
usual course of business and (ii) the Company will not (A) (1) increase the
compensation payable to or to become payable to any director or executive
officer, except for increases in salary or wages payable or to become payable in
the ordinary course of business and consistent with past practice; (2) grant any
severance or termination pay (other than pursuant to the normal severance policy
of the Company or its subsidiaries as in effect on the date of the Merger
Agreement) to, or enter into or amend any employment or severance agreement
with, any director, officer or employee; (3) establish, adopt or enter into any
new employee benefit plan or arrangement; or (4) except as may be required by
applicable law and actions that are not inconsistent with the provisions of the
Merger Agreement, amend, or take any other actions (other than the acceleration
of vesting or waiving of performance criteria permitted pursuant to the employee
benefit plans upon a change in control of the Company) with respect to, any of
the Company's employee benefit
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plans; (B) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
subsidiary to the Company or another subsidiary; (C) (1) redeem, purchase or
otherwise acquire any shares of its capital stock or any securities or
obligations convertible into or exchangeable for any shares of its capital
stock, or any options, warrants or conversion or other rights to acquire any
shares of its capital stock or any such securities or obligations (except in
connection with the exercise of outstanding stock options or warrants in
accordance with their terms); (2) effect any reorganization or recapitalization;
or (3) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in lieu
of or in substitution for, shares of its capital stock; (D) (1) issue, deliver,
award, grant or sell, or authorize or propose the issuance, delivery, award,
grant or sale (including the grant of any security interests, liens, claims,
pledges, limitations in voting rights, charges or other encumbrances) of, any
shares of any class of its capital stock (including shares held in treasury),
any securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire any such shares (except as
permitted for the issuance of shares upon the exercise of stock options
outstanding as of the date of the Merger Agreement), the exercise of warrants or
the exercise of options under the Company's stock option plans; or (2) amend or
otherwise modify the terms of any such rights, warrants or options the effect of
which shall be to make such terms more favorable to the holders thereof; (E)
acquire or agree to acquire, by merging or consolidating with, by purchasing an
equity interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets of any other person (other than the purchase of assets from suppliers or
vendors in the ordinary course of business) in each case which are material,
individually or in the aggregate, to the Company and its subsidiaries, taken as
a whole; (F) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of, any of its material assets or any material assets of any
of its subsidiaries, except for dispositions in the ordinary course of business
and consistent with past practice; (G) adopt or propose to adopt any amendments
to its Articles of Incorporation or By-Laws which would alter the terms of its
capital stock or would have an adverse impact on the consummation of the
transactions contemplated by the Merger Agreement; (H) incur any obligation for
borrowed money or purchase money indebtedness in excess of $25,000, whether or
not evidenced by a note, bond, debenture or similar instrument; (I) enter into
any material arrangement, agreement or contract with any third party (other than
customers in the ordinary course of business) in excess of $25,000 that provides
for an exclusive arrangement with that third party or is substantially more
restrictive on the Company or substantially less advantageous to the Company
than arrangements, agreements or contracts existing on the date hereof unless
such arrangement is entered into in the ordinary course of business; or (J)
agree in writing or otherwise to do any of the foregoing.
No Solicitation. In the Merger Agreement, the Company has agreed that the
Company will not solicit, initiate or knowingly encourage any inquiries,
discussions or negotiations with any person (other than the Purchaser or the
Parent) concerning any Acquisition Proposal (as defined below) or solicit,
initiate or knowingly encourage any effort or attempt by any other person to do,
make or seek an Acquisition Proposal or, unless required in order for the Board
to comply with its fiduciary responsibilities, with a view to pursuing an
Acquisition Proposal with such person, engage in discussions or negotiations
with or disclose any nonpublic information relating to the Company or any of its
subsidiaries to such person or authorize or permit any of the officers,
directors or employees of the Company or any of its subsidiaries or any
investment banker, financial adviser, attorney, accountant or other
representative retained by the Company or any of its subsidiaries to take any
such action. The Company has agreed to immediately communicate to the Parent in
writing the terms of any Acquisition Proposal which it may receive and to not
accept any such Acquisition Proposal unless the
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Parent has had three days notice of such Acquisition Proposal and its terms. As
used in the Merger Agreement, "Acquisition Proposal" means any bona fide written
proposal or offer from a third party relating to (i) the acquisition or purchase
of all or substantially all of the assets of, or more than a 50% equity interest
(including any Common Shares theretofore acquired) in the Company, (ii) a
merger, consolidation or similar business combination with the Company or (iii)
a tender or exchange offer for the Company conditioned on ownership of more than
50% of the outstanding Common Shares following such tender or exchange offer.
Representations and Warranties. In the Merger Agreement, the Company has made
customary representations and warranties to the Parent and the Purchaser with
respect to, among other things, its organization, authorization, capitalization,
potential conflicts, change of control provisions in contracts, public filings,
information in this Proxy Statement, compliance with laws and litigation. None
of the representations and warranties in the Merger Agreement will survive the
Effective Date of the Merger.
Conditions to the Merger. Pursuant to the terms of the Merger Agreement, the
obligations of each party to effect the Merger are subject to the fulfillment at
or prior to the Effective Date of the following conditions: (i) the holders of
the Common Shares must have duly approved the Merger; (ii) no preliminary or
permanent injunction or other order by a court of competent jurisdiction which
prevents the consummation of the Merger shall have been issued and remain in
effect (each party agreeing to use its reasonable best efforts to have any such
injunction lifted); and (iii) no action shall have been taken nor shall any
statute, rule or regulation have been enacted by the government of the United
States or any state thereof that makes the consummation of the Merger illegal in
any material respect. The obligations of the Purchaser and the Parent to effect
the Merger shall be subject to the fulfillment at or prior to the Effective Date
of the following additional conditions: (i) the representations and warranties
of the Company set forth in the Merger Agreement must be true and correct in all
material respects on the Effective Date (or on such other date specified in the
Company's representations in the Merger Agreement) with the same force and
effect as though made on and as of such date, and the Purchaser and the Parent
must have received a certificate to that effect from the Chief Executive Officer
and the Treasurer of the Company; (ii) all of the covenants and agreements of
the Company to be performed or complied with pursuant to the Merger Agreement
prior to the Effective Date must have been duly performed and complied with in
all material respects, except for any such failure that would not have a Company
Material Adverse Effect (as defined in the Merger Agreement), and the Purchaser
and the Parent must have received a certificate to that effect from the Chief
Executive Officer and the Treasurer of the Company; (iii) holders of no more
than 10% of the Common Shares, in the aggregate, shall have filed with the
Company written objections to the Merger and made written demands for payment of
the fair value of their shares in the manner permitted by the CBCA; (iv) all of
the Directors of the Company on the Effective Date must have resigned; (v) since
the date of the Merger Agreement, there shall have been no material adverse
effect on the Company; (vi) the Company shall have received an opinion from a
reputable investment banking firm satisfactory to the Company as to the
fairness, from a financial point of view, of the Merger Consideration to be paid
to the Company's shareholders; and (vii) the Purchaser shall have received from
Interwest Group, Inc. an irrevocable proxy in the form attached to the Merger
Agreement. The obligation of the Company to effect the Merger shall be subject
to the fulfillment at or prior to the Effective Date of the following additional
conditions: (i) the representations and warranties of the Purchaser and the
Parent set forth in the Merger Agreement shall be true and correct in all
material respects on the Effective Date (or on such other date specified in the
Parent's or the Purchaser's representations in the Merger Agreement) with the
same force and effect as though made on and as of such date, and the Company
shall have received certificates to that effect from the Chief Executive Officer
and the Treasurer of the Parent and the President of the Purchaser; (ii) all of
the
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covenants and agreements of the Purchaser and the Parent to be performed or
complied with pursuant to the Merger Agreement prior to the Effective Date shall
have been duly performed and complied with in all material respects, and the
Company shall have received certificates to that effect from the Chief Executive
Officer and the Treasurer of the Parent and the President of the Purchaser;
(iii) either (A) the commitment letter dated June 5, 1998 from ING Barings
(U.S.) Capital Corporation et al. to Parent in the form delivered to and
approved by the Company for $42 million to fund the acquisition of Common Shares
hereunder (the "Commitment") shall remain in full force and effect and shall be
funded and Douglas H. Hanson shall have provided $7,800,000 in debt or equity
financing to the Purchaser, or (B) the Purchaser and shall have executed a
Purchase Agreement for the sale of more than $50 million of debt or equity
securities in form and substance acceptable to the Company and with a purchaser
acceptable to the Company and all the conditions to closing the transactions
contemplated by such Purchase Agreement (other than conditions that, by their
terms, cannot be satisfied until such closing) set forth in such Purchase
Agreement shall have been satisfied or waived, and (iv) if the Parent shall have
obtained debt financing at or before the closing of the Merger in the aggregate
principal amount greater than $50,000,000 in one transaction or a series of
related transactions, then the Anschutz Note must have been paid in full.
Termination. The Merger Agreement may be terminated at any time prior to the
Effective Date, whether before or after approval by the shareholders of the
Company, if required, (i) by mutual consent of the Parent and the Board; (ii) by
the Parent or the Company if the Merger shall not have been consummated on or
before September 15, 1998, which date may be extended by mutual agreement of the
Boards of Directors of the Company and the Parent; (iii) by the Company if,
prior to the Effective Date, the Company, its Board or its shareholders shall
receive an Acquisition Proposal and the Board determines that it has a duty in
the proper discharge of its fiduciary responsibilities under applicable law to
consider such other proposal or offer, and then such Board either (A) accepts
such proposal or offer, (B) recommends to the shareholders acceptance of such
proposal or offer or (C) in the case of a tender or exchange offer, takes no
position with respect thereto and all conditions (other than terminating the
Merger Agreement) of such tender or exchange offer have been satisfied, in which
event the Merger Agreement shall be terminated without any liability to the
Company or the Company's Board as a result of such termination except as
otherwise provided below; (iv) by the Parent upon a breach of any material
representation, warranty, covenant or agreement on the part of the Company set
forth in the Merger Agreement or if any representation or warranty of the
Company shall have become untrue and such breach or untruth shall have caused a
Company Material Adverse Effect or if the directors of the Company shall not
have resigned on the Effective Date; (v) by the Company upon (A) a breach of any
material representation, warranty, covenant or agreement on the part of the
Parent set forth in this Agreement or if any representation or warranty of the
Parent shall have become untrue and such breach or untruth shall have caused a
Parent Material Adverse Effect (as defined in the Merger Agreement), (B) the
Commitment ceasing to be in full force and effect or not being funded, (C)
Douglas H. Hanson not having provided $7,800,000 in debt or equity financing to
the Parent or (D) if the Parent shall have obtained debt financing at or before
the Closing in the aggregate principal amount greater than $50,000,000, then the
Anschutz Note not having been paid in full. If the Merger Agreement is
terminated pursuant to (iii) or (iv) above, the Company shall pay to Parent
$1,050,000 in cash. If the Merger Agreement is terminated pursuant to (v) above,
the Parent shall pay to the Company $1,050,000 in cash or, at the Parent's
election, that number of shares of the Parent's common stock equal to $1,050,000
divided by the "Fair Market Value" (as defined below) of such stock. The "Fair
Market Value" of the Parent's common stock shall be the average closing price of
the stock reported by NASDAQ for the 15 trading days after announcement of such
termination. If the Parent elects to deliver shares of stock pursuant to this
provision, it must file at its expense a registration statement with respect to
any such shares under the Securities Act of 1933 within 15 days after
termination by the Company of the Merger Agreement, must
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use its best efforts to have such registration statement be declared effective
and to keep it effective for not less than two years and must indemnify the
Company and its affiliates pursuant to an indemnity agreement typical of a
registration rights agreement..
Amendment. The Merger Agreement may be amended by the parties thereto, by
action taken by the respective Boards of Directors of the Purchaser, the Parent
and the Company, at any time before or after approval hereof by the holders of
Common Shares, but, after any such approval, no amendment shall be made which
changes the Merger Consideration without the further approval of such holders.
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties thereto.
REGULATORY AND OTHER APPROVALS
Except for the filing of the Articles of Merger with the Secretary of State of
the State of Colorado, there are no federal or state regulatory requirements
which remain to be complied with in order for the Merger to be consummated in
accordance with the terms of the Merger Agreement.
DISSENTERS' RIGHTS
Pursuant to Article 113 of the CBCA, each shareholder has the right and is
entitled to dissent from the consummation of the Merger and receive payment of
the fair value of the Common Shares owned by any such shareholder ("Dissenters'
Rights"). In the event a shareholder elects to exercise Dissenters' Rights, such
shareholder must comply with the applicable procedures set forth in Sections
7-113-201 through 7-113-209 of the CBCA, as summarized below, in order to
receive payment of the fair value of any Common Shares. In compliance with
Section 7-113-201 of the CBCA, a copy of Article 113 of the CBCA is set forth in
its entirety in Appendix E to this Proxy Statement.
THE FOLLOWING IS ONLY A SUMMARY OF THE PROCEDURES FOR DISSENTING SHAREHOLDERS
PRESCRIBED BY SECTIONS 7-113-101 THROUGH 7-113-302 OF THE CBCA AND IS QUALIFIED
IN ITS ENTIRETY BY THE FULL TEXT OF ARTICLE 113 OF THE CBCA AS SET FORTH IN
APPENDIX E TO THIS PROXY STATEMENT.
Section 7-113-102 of the CBCA provides that each record or beneficial
shareholder of the Company is entitled to dissent from the Merger and demand
payment of the fair value of the shares of Common Stock owned by such
shareholder. In accordance with Section 7-113-202 of the CBCA, in order for a
shareholder to exercise Dissenters' Rights, such shareholder must, prior to the
taking of the vote of the shareholders on the Merger, deliver to the Company
written notice of such shareholder's intent to demand payment for shares in the
event the Merger is approved and shall not vote such shareholder's shares in
favor of the Merger.
In accordance with Section 7-113-203 of the CBCA, within ten days after the
Merger is effected, the Company must deliver a written dissenter's notice
("Dissenter's Notice") to all shareholders who satisfy the requirements of
Section 7-113-202 of the CBCA. The Dissenter's Notice must state that the Merger
was authorized and the effective date of the Merger, set forth the address at
which the Company will receive payment demands and where stock certificates
shall be deposited, supply a form for demanding payment, which form shall
request an address from the dissenting shareholder to which payment is to be
made, and set the date by which the Company must receive the payment demand and
stock certificates, which date shall not be less than 30 days after the date the
Dissenter's Notice was delivered.
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Furthermore, the Dissenter's Notice may require that all beneficial
shareholders, if any, certify as to the assertion of Dissenters' Rights, and be
accompanied by Article 113 of the CBCA.
Pursuant to Section 7-113-204 of the CBCA, a shareholder receiving the
Dissenter's Notice must demand payment in writing and deposit such shareholder's
stock certificates in accordance with the terms of the Dissenter's Notice. A
shareholder who does not comply with the foregoing requirements is not entitled
to the fair value of such shareholder's shares under Article 113 of the CBCA.
Upon the later of the effective date of the Merger, or upon receipt of a
demand for payment by a dissenting shareholder, the Company must pay each
dissenting shareholder who complies with Section 7-113-204 the amount the
Company estimates to be the fair value of such shares, plus accrued interest in
accordance with Section 7-113-206 of the CBCA. The payment must be accompanied
by (i) the Company's balance sheet as of the fiscal year ending not more than
sixteen months before the date of payment, an income statement for that year, a
statement of change in shareholders' equity for that year, and the latest
available interim financial statement; (ii) a statement of the Company's
estimate of the fair value of the shares; (iii) an explanation by the Company of
how the interest was calculated; (iv) a statement of the dissenting
shareholder's right to demand payment under Section 7-113-209 of the CBCA; and
(v) a copy of Article 113 of the CBCA.
In the event a dissenting shareholder is dissatisfied with the Company's
payment or offer of payment, such dissenting shareholder, pursuant to Section
7-113-209 of the CBCA, may notify the Company in writing within 30 days after
the Company makes or offers to pay each dissenting shareholder, of such
shareholder's own estimate of the fair value of such shares and the amount of
interest due, and demand payment of such shareholder's estimate, less any
payment already made by the Company under Section 7-113-206, or reject the
Company's offer under Section 7-113-208 and demand payment for the fair value of
the shares and interest due. A dissatisfied dissenting shareholder may effect
the foregoing if: (i) the dissenting shareholder believes that the amount paid
or offered is less than the fair value of the shares or that the interest due is
incorrectly calculated; (ii) the Company has failed to make payment within 60
days after the date set for demanding payment; or (iii) the Company does not
return the deposited stock certificates within the time specified by Section
7-113-207 of the CBCA. In the event a demand for payment under Section 7-113-209
remains unresolved, the Company may commence a court proceeding to determine the
fair value of the shares and accrued interest within 60 days after receiving the
payment demand from a dissenting shareholder.
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MARKET PRICES OF AND DIVIDENDS ON STOCK
The Common Shares are traded on the NASDAQ Small-Cap Market under the symbol
"INCC." The following table represents the range of high and low bid prices in
dollars for the Company Common Stock for the eight fiscal quarters ended June
30, 1998:
Quarter Ended
Oct-31-96 Jan-31-97 Apr-30-97 Jul-31-97
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
6.81 5.00 6.88 4.88 5.56 4.13 8.88 4.63
Quarter Ended
Oct-31-97 Dec-31-97 Mar-31-98 Jun-30-98
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
9.50 7.31 8.00 4.56 6.31 4.25 8.75 4.50
On June 5, 1998, the last full day before the public announcement of the
Purchaser's intention to acquire the Common Shares, the closing sale price per
Common Share on the Nasdaq National Market was $6.1875. On August 17, 1998, the
closing bid price per Common Share on the Nasdaq National Market was $6.625 per
Common Share. Shareholders are urged to obtain current market quotations for the
Common Shares.
The Company has paid no cash dividends on its Common Stock and has no present
intention of paying cash dividends in the foreseeable future. It is the present
policy of the Board of Directors to retain all earnings to provide for the
growth of the Company. Payment of cash dividends in the future will depend upon,
among other things, the Company's future earnings, requirements for capital
improvements and financial condition. Current loan agreements require lender
approval of dividend payments.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of the Record Date with
respect to each director and executive officer, each person who is known to the
Company to be the beneficial owner of more than five percent of the Common
Shares, and all directors and executive officers as a group.
Amount of
Beneficial Percent of
Ownership Class of
JOHN M. COUZENS (1).................... 66,797 1.2%
President and Drector
7100 E. Belleview Ave.
Suite 201
Greenwood Village, CO 80111
THOMAS C. GALLEY (2)................... 756,178 13.8%
Director
7100 E. Belleview Ave.
Suite 201
Greenwood Village, CO 80111
PETER A. GUGLIELMI (3)................. 9,861 *
Director
4951 Indiana Avenue
Lisle, IL 60532
WILLIAM J. MAXWELL (4)................. 5,439 *
Director
500 18/th/ Avenue, NE
Suite 2600
Bellevue, WA 98004
CRAIG D. SLATER (5).................... 2,875,519 50.8%
Director
555 17/th/ St.
Suite 2400
Denver, CO 80202
ROBERT L. SMITH........................ -- *
Director
7100 E. Belleview
Suite 201
Greenwood Village, CO 80111
REYNALDO U. ORTIZ (6).................. 2,873,568 50.8%
Director
555 17/th/ St.
Suite 2400 Denver, CO 80202
RICHARD LIEBHABER (7).................. 2,873,568 50.8%
Director
555 17/th/ St. Suite
2400 Denver, CO 80202
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Amount of
Beneficial Percent of
Ownership Class of
T. TIMOTHY KERSHISNIK (8)............. 7,500 *
Chief Financial Officer
7100 E. Belleview Ave.
Suite 201
Greenwood Village, CO 80111
MARY BETH LOESCH (9).................. 26,000 *
Vice President - _____________
7100 E. Belleview Ave.
Suite 201
Greenwood Village, CO 80111
TIM GRIFFIN (10)...................... 25,000 *
Vice President - _____________
7100 E. Belleview Ave.
Suite 201
Greenwood Village, CO 80111
INTERWEST GROUP, INC. (11)............ 2,873,568 50.8%
555 17th St.
Suite 2400
Denver, CO 80202
ALL DIRECTORS AND EXECUTIVE OFFICERS
AS A GROUP (12)....................... 3,772,294 65.8%
*Less than one percent.
(1) Share ownership includes 36,797 shares and an option to purchase 70,000
shares of which 30,000 is presently exercisable.
(2) Share ownership includes 379,177 shares of Company Common Stock owned
beneficially and of record, 132,358 shares owned beneficially by virtue of
his wife's ownership of said shares and 244,643 shares owned beneficially
and of record in joint tenancy with his wife.
(3) Share ownership includes 1,194 shares and an option to purchase 12,000
shares of which 8,667 is presently exercisable.
(4) Share ownership includes 2,105 shares and an option to purchase 10,000
shares of which 3,334 is presently exercisable.
(5) Mr. Slater is a director of Group. However, Mr. Slater disclaims beneficial
ownership of all shares except 1,951 shares which he owns beneficially and
of record.
(6) Mr. Ortiz is a director of a subsidiary of Anschutz Company. Anschutz is
the sole shareholder of Group. Mr. Ortiz disclaims beneficial ownership of
all shares held by Group.
(7) Mr. Liebhaber is a director of a subsidiary of Anschutz Company. Anschutz
is the sole shareholder of Group. Mr. Liebhaber disclaims beneficial
ownership of all shares held by Group.
(8) Consists of an option to purchase 30,000 shares of which 7,500 is presently
exercisable.
(9) Share ownership includes 1,000 shares of Company Common Stock owned
beneficially and of record and an option to purchase 100,000 shares of
which 25,000 is presently exercisable.
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(10) Share ownership includes an option to, purchase 50,000 shares of which
25,000 is presently exercisable.
(11) Share ownership includes 2,810,410 shares of Company Common Stock owned
beneficially and of record and warrants to purchase 63,158 shares. Philip
F. Anschutz, the sole shareholder of Anschutz Company, the corporate parent
of Group, 555 17th Street, Suite 2400, Denver, Colorado 80202, exercises
sole voting and dispositive control over these shares. The number of shares
listed does not include 376,471 Common Shares which Anschutz Company would
receive upon conversion of its $1.6 million convertible promissory note due
March 1999. 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 share. In the case of conversion, as Anschutz Company is the corporate
parent of Group, the ownership position of Group would increase by 376,471
shares. (12) Represents 12 persons as of July 7, 1998. Share ownership
includes 2,875,519 shares reported in the table with respect to Messrs.
Slater, Liebhaber and Ortiz, who disclaim beneficial ownership of all such
shares shares, except that Mr. Slater acknowledges beneficial ownership of
1,951 of such shares.
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of KPMG Peat Marwick LLP will be present
at the Meeting and available to answer questions.
SHAREHOLDERS' PROPOSALS
If the Merger is not consummated, any proposals of holders of Common Shares
intended to be presented at the Annual Meeting of Shareholders of the Company to
be held in 1999 must have been received by the Company, addressed to the
Secretary at 7100 East Belleview Avenue, Suite 201, Englewood, Colorado 80111,
no later than January 19, 1999, to be considered for inclusion in the proxy
statement and form of proxy relating to that meeting.
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APPENDIX A
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER dated as of June 5, 1998
(this "Agreement") by and among ROCKY MOUNTAIN INTERNET, INC., a Delaware
corporation ("Purchaser"), INTERNET ACQUISITION CORPORATION, a Colorado
corporation and wholly-owned subsidiary of Purchaser ("Acquisition"), and
INTERNET COMMUNICATIONS CORPORATION, a Colorado corporation (the "Company").
(Acquisition and the Company are hereinafter collectively referred to as the
"Constituent Corporations.")
WHEREAS, the Board of Directors of each Constituent Corporation believes
that the merger of Acquisition with and into the Company (the "Merger") is in
the best interests of such Constituent Corporation and its shareholders; and
WHEREAS, Purchaser and the Boards of Directors of the Constituent
Corporations (a) desire to enter into this Agreement and (b) have approved the
Merger, all upon the terms and subject to the conditions set forth herein; and
WHEREAS, the parties entered into an Agreement and Plan of Merger dated as
of June 5, 1998 and now wish to amend and restate the same.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date, Acquisition shall be merged with and into the
Company, which shall be the surviving corporation (the Company in such capacity
being hereinafter sometimes called the "Surviving Corporation"). From and after
the Effective Date, the status, rights and liabilities of, and the effect of the
Merger on, each of the Constituent Corporations in the Merger and the Surviving
Corporation shall be as provided in Section 7-111-106 of the Colorado Business
Corporation Act ("CBCA").
Section 1.2 Consummation of the Merger. As soon as practicable (but in any
event within five business days) after the receipt of approval by the Company's
shareholders and satisfaction of the other conditions hereinafter set forth, the
parties hereto shall cause the Merger to be consummated by the approval and
filing with the Secretary of the State of Colorado of articles of merger in such
form as required by and executed in accordance with the relevant provisions of
applicable law (the time of such filing being the "Effective Date").
ARTICLE II
ARTICLES OF INCORPORATION AND BY-LAWS
OF THE SURVIVING CORPORATION
Section 2.1 Articles of Incorporation. The Articles of Incorporation of
Acquisition in effect on the Effective Date shall be the Articles of
Incorporation of the Surviving Corporation, until thereafter amended as provided
by law.
Section 2.2 By-Laws. The By-Laws of Acquisition in effect on the Effective
Date shall be the By-Laws of the Surviving Corporation, until thereafter amended
as provided by law and the Surviving Corporation's Articles of Incorporation.
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Section 2.3 Officers and Board of Directors. The directors of Acquisition
on the Effective Date shall become the directors of the Surviving Corporation
until their respective successors are duly elected and qualified. The officers
of the Company on the Effective Date shall continue as the officers of the
Surviving Corporation, to serve in accordance with the ByLaws thereof until
their respective successors are duly elected and qualified.
ARTICLE III
CONVERSION OF SHARES
Section 3.1 Conversion of Shares. As of the Effective Date, by virtue of
the Merger and without any action on the part of Purchaser, Acquisition, the
Company or the holders of any securities of the Company:
(a) All outstanding shares of the Company's common stock (the
"Shares") which are held by the Company as treasury shares, all authorized
and unissued Shares and any Shares owned by Purchaser, Acquisition or any
other direct or indirect subsidiary of Purchaser, shall be canceled.
(b) Each other outstanding Share (other than Shares held by Dissenting
Shareholders (as defined in Section 3.3)) shall be converted into the right
to receive $6.764 (the "Merger Consideration").
(c) Each issued and outstanding share of capital stock of Acquisition
shall be converted into one validly issued, fully paid and non-assessable
share of common stock of the Surviving Corporation.
Section 3.2 Payment for Shares. The Purchaser shall authorize one or more
persons to act as paying agent in connection with the Merger (the "Paying
Agent"). As soon as practicable after the Effective Date, the Purchaser shall
deposit the Merger Consideration with the Paying Agent, in trust for the benefit
of holders of Shares. As soon as practicable after the Effective Date, the
Paying Agent shall distribute to each former holder of Shares, upon surrender to
the Paying Agent of the certificate or certificates which immediately prior to
the Effective Date represented such outstanding Shares, for cancellation, the
aggregate amount of cash into which such holder's Shares shall have been
converted in the Merger. Until so surrendered, each certificate, which
immediately prior to the Effective Date represented outstanding Shares, shall
represent solely the right to receive, upon surrender, the aggregate amount of
cash into which the Shares represented thereby shall have been converted and
such shares shall not be entitled to any other rights with respect to the
Company. No interest shall accrue or be paid on the cash payable upon the
surrender of the certificate or certificates. The Paying Agent shall pay as soon
as practicable after the Effective Date the amounts due in respect of the
outstanding stock options granted by the Company (the "Outstanding Options")
referred to in Section 6.6.
Section 3.3 Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding shares of capital
stock of the Company held by a shareholder who has not voted in favor of nor
consented to the Merger and who complies with all the provisions of the CBCA
concerning the right of holders of such stock to dissent from the Merger and
require appraisal of their shares (a "Dissenting Shareholder"), shall not be
converted as described in Section 3.1 but shall become, at the Effective Date,
by virtue of the Merger and without any further action, the right to receive
such consideration as may be determined to be due to such Dissenting Shareholder
pursuant to the CBCA; provided, however, that Shares outstanding immediately
prior to the Effective Date and held by a Dissenting Shareholder who shall,
after the Effective Date, withdraw his demand for appraisal or lose his right of
appraisal, in either case pursuant to the CBCA, shall
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be deemed to be converted as of the Effective Date, into the right to receive
the Merger Consideration. The Company shall give Purchaser (a) prompt notice of
any written demands for appraisal of shares of capital stock of the Company
received by the Company and (b) the opportunity to direct all negotiations and
proceedings with respect to any such demands. The Company shall not, without the
prior written consent of Purchaser, voluntarily make any payment with respect
to, or settle, offer to settle or otherwise negotiate, any such demands.
Section 3.4 Closing of the Company's Transfer Books. Upon the Effective
Date, the stock transfer books of the Company shall be closed and no transfer of
Shares (other than shares of common stock into which the capital stock of
Acquisition is to be converted pursuant to the Merger) shall thereafter be made.
Section 3.5 Status of Share Certificates. From and after the Effective
Date, the holders of certificates evidencing ownership of Shares outstanding
immediately prior to the Effective Date shall cease to have any rights with
respect to such Shares except as otherwise provided for herein or by applicable
law.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND ACQUISITION
Except as set forth in the disclosure schedule delivered to the Company by
the Purchaser on the date hereof (the "Purchaser Disclosure Schedule") or in the
Purchaser Reports (as defined below), the Purchaser and Acquisition jointly and
severally represent and warrant to the Company as follows:
Section 4.1 Organization. Each of Purchaser and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its organization and has the requisite corporate power to carry
on its business as it is now being conducted. Acquisition is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and is a wholly-owned subsidiary of Purchaser.
Section 4.2 Authority Relative to this Agreement. Purchaser and Acquisition
have the requisite corporate power and authority to execute and deliver this
Agreement, to perform their obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Purchaser and Acquisition and the consummation by Purchaser and Acquisition
of the transactions contemplated hereby have been duly authorized by all
necessary corporate and, to the extent necessary, shareholder action of
Purchaser and Acquisition and no other acts or corporate proceedings on the part
of Purchaser or Acquisition are necessary to authorize the Merger or this
Agreement or to consummate the transactions contemplated hereby. This Agreement
has been duly executed and delivered by Purchaser and Acquisition and is a valid
and binding obligation of Purchaser and Acquisition, enforceable against them in
accordance with its terms, subject to bankruptcy remedies and rights of
creditors and general principles of equity.
Section 4.3 No Conflicts; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Purchaser and
Acquisition does not, and the consummation of the transactions contemplated
hereby will not (i) conflict with or violate the certificate of incorporation or
bylaws of Purchaser, (ii) in any material respect, conflict with or violate any
federal, state, foreign or local law, statute, ordinance, rule, regulation,
order, judgment or decree (collectively, "Laws") applicable to Purchaser or any
of its subsidiaries or by which any of their properties is bound or subject or
(iii) result in any material breach of or constitute a material default (or an
event that with notice or lapse of
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time or both would become a material default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, or require
payment under, or result in the creation of a lien or encumbrance on any of the
properties or assets of Purchaser or any of its subsidiaries pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Purchaser or any of its
subsidiaries is a party or by or to which Purchaser or any of its subsidiaries
or any of their properties is bound or subject, except for any such conflicts,
violations, breaches, defaults, events, rights of termination, amendment,
acceleration or cancellation, payment obligations or liens or encumbrances
described in clauses (ii) or (iii) that would not, in the aggregate, prevent the
Purchaser and Acquisition from performing, in any material respect, their
respective obligations under this Agreement or would not have a material adverse
effect on the business or financial condition of Purchaser and its subsidiaries,
taken as a whole (a "Purchaser Material Adverse Effect").
(b) The execution and delivery of this Agreement by Purchaser and
Acquisition does not, and consummation of the transactions contemplated hereby
will not, require either Purchaser or Acquisition to obtain any consent,
license, permit, approval, waiver, authorization or order of, or to make any
filing with or notification to, any governmental or regulatory authority,
domestic or foreign (collectively, "Governmental Entities"), except (i) for
applicable requirements, if any, of the Securities Act of 1933, as amended (the
"Securities Act"), the Exchange Act, state securities or blue sky laws ("Blue
Sky Laws"), and the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act"), and the filing and recordation of
appropriate merger documents as required by the CBCA, and (ii) where the failure
to obtain such consents, licenses, permits, approvals, waivers, authorizations
or orders, or to make such filings or notifications, would not, either
individually or in the aggregate, constitute a Purchaser Material Adverse
Effect.
Section 4.4 Information. (a) None of the information to be supplied by
Purchaser or Acquisition for inclusion in a proxy statement in connection with
the meeting of the Company's shareholders described in Section 6.2 hereof (the
"Proxy Statement") or any amendments thereof or supplements thereto, will, at
the time of the meeting of shareholders to be held in connection with the Merger
or the mailing to shareholders, as the case may be, contain any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) Since their inception, Purchaser and its subsidiaries have filed all
forms, reports, statements and other documents required to be filed with the
Securities and Exchange Commission ("SEC"), except where the failure to file
such documents would not have a Purchaser Material Adverse Effect (all such
forms, reports, statements and other documents being referred to herein,
collectively, as the "Purchaser Reports"). The Purchaser Reports, including all
Purchaser Reports filed after the date of this Agreement and prior to the
Effective Date, (i) were or will be prepared in all material respects in
accordance with the requirements of applicable Law (except that some filings
were made late) and (ii) did not at the time they were filed, or will not at the
time they are filed, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, except where any such statement or omission would not have
a Purchaser Material Adverse Effect. Notwithstanding this Section 4.4(b),
Purchaser shall not be deemed to represent or warrant the preparation or
accuracy of any Purchaser Report, statement, document or other information
included in the Purchaser Reports that were provided to the Purchaser for
inclusion therein by a third party. Since the date of the last Purchaser Report
(x) there has occurred no Purchaser Material Adverse Effect and the Purchaser
has incurred no material liabilities outside the ordinary course of the
Purchaser's
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business, (y) the Purchaser has not entered into any material contracts that
would be required to be filed with the Purchaser's next Form 10-Q and (z) the
Purchaser has had no transactions with related parties that would be required to
be reported in the Purchaser's next proxy statement in accordance with Section
404 of Regulation S-K. The list of the Purchaser's subsidiaries set forth in the
Purchaser Reports is accurate and complete as of the date hereof, with the
addition of Acquisition and Rocky Mountain Broadband, Inc., both Colorado
corporations.
Section 4.5 Litigation. There is no claim, action, suit, litigation,
proceeding, arbitration or, to the knowledge of Purchaser, any investigation of
any kind at law or in equity (including actions or proceedings seeking
injunctive relief), pending or, to the knowledge of Purchaser, threatened
against Purchaser or any of its subsidiaries or any properties or rights of
Purchaser or any of its subsidiaries (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not
reasonably be expected to have a Purchaser Material Adverse Effect), and neither
Purchaser nor any of its subsidiaries is subject to any continuing order of,
consent decree, settlement agreement or other similar written agreement with,
any Governmental Entity, or any judgment, order, writ, injunction, decree or
award of any Governmental Entity or arbitrator, including, without limitation,
cease and desist or other orders, except for matters which would not have a
Purchaser Material Adverse Effect.
Section 4.6 Financing. The commitment letter dated June 5, 1998 from ING
Barings (U.S.) Capital Corporation et al. to Purchaser in the form delivered to
and approved by the Company for $42 million to fund the acquisition of Shares
hereunder (the "Commitment") is in full force and effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in the disclosure schedule delivered to Purchaser by
the Company on the date hereof (the "Company Disclosure Schedule") or in the
Company Reports (as defined below), the Company represents and warrants to
Purchaser and Acquisition as follows:
Section 5.1 Organization. Each of the Company and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its organization and has the requisite corporate power to carry
on its business as it is now being conducted.
Section 5.2 Authority Relative to this Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby (subject to the approval of the Merger, this Agreement and
the transactions contemplated hereby by the affirmative vote of the holders of a
majority of the outstanding shares of common stock of the Company ("Shareholder
Approval")). The Company's Board of Directors has unanimously recommended
approval and adoption of this Agreement by the Company's shareholders entitled
to vote on the Merger. Subject to Shareholder Approval, the execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action and no other corporate proceedings on the part of the Company
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Company and is a valid and binding obligation of the Company, enforceable
against it in accordance with its terms, subject to bankruptcy remedies and
rights of creditors and general principles of equity.
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Section 5.3 No Conflicts; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company does not,
and the consummation of the transactions contemplated hereby will not (i)
conflict with or violate the articles of incorporation or bylaws of the Company,
(ii) in any material respect, conflict with or violate any federal, state,
foreign or local law, statute, ordinance, rule, regulation, order, judgment or
decree (collectively, "Laws") applicable to the Company or any of its
subsidiaries or by which any of their properties is bound or subject or (iii)
result in any material breach of or constitute a material default (or an event
that with notice or lapse of time or both would become a material default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or require payment under, or result in the creation of a lien
or encumbrance on any of the properties or assets of the Company or any of its
subsidiaries pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which the Company or any of its subsidiaries is a party or by or to which the
Company or any of its subsidiaries or any of their properties is bound or
subject, except for the Company's debt to Norwest Bank of Colorado, N.A., and
except for any such conflicts, violations, breaches, defaults, events, rights of
termination, amendment, acceleration or cancellation, payment obligations or
liens or encumbrances described in clauses (ii) or (iii) that would not, in the
aggregate, prevent the Company from performing, in any material respect, its
obligations under this Agreement or would not have a material adverse effect on
the business or financial condition of the Company and its subsidiaries taken as
a whole (a "Company Material Adverse Effect").
(b) The execution and delivery of this Agreement by the Company does not,
and consummation of the transactions contemplated hereby will not, require the
Company to obtain any consent, license, permit, approval, waiver, authorization
or order of, or to make any filing with or notification to, any governmental or
regulatory authority, domestic or foreign (collectively, "Governmental
Entities"), except (i) for applicable requirements, if any, of the Securities
Act of 1933, as amended (the "Securities Act"), the Exchange Act, state
securities or blue sky laws ("Blue Sky Laws"), and the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "Hart-Scott-Rodino Act"),
and the filing and recordation of appropriate merger documents as required by
the CBCA, and (ii) where the failure to obtain such consents, licenses, permits,
approvals, waivers, authorizations or orders, or to make such filings or
notifications, would not, either individually or in the aggregate, constitute a
Company Material Adverse Effect.
Section 5.4 Information. (a) None of the information to be included in the
Proxy Statement or any amendments thereof or supplements thereto, will, at the
time of the meeting of shareholders to be held in connection with the Merger or
the mailing to shareholders, as the case may be, contain any untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Proxy Statement and any amendments thereof or
supplements thereto will comply as to form in all material respects with the
provisions of the Exchange Act.
(b) Since their inception, the Company has filed all forms, reports,
statements and other documents required to be filed with the SEC, except where
the failure to file such documents would not have a Company Material Adverse
Effect (all such forms, reports, statements and other documents being referred
to herein, collectively, as the "Company Reports"). The Company Reports,
including all Company Reports filed after the date of this Agreement and prior
to the Effective Date, (i) were or will be prepared in all material respects in
accordance with the requirements of applicable Law (except that some filings
were made late) and (ii) did not at the time they were filed, or will not at the
time they are filed, contain any untrue
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statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except where any
such statement or omission would not have a Company Material Adverse Effect.
Notwithstanding this Section 5.4(b), the Company shall not be deemed to
represent or warrant the preparation or accuracy of any Company Report,
statement, document or other information included in the Company Reports that
were provided to the Company for inclusion therein by a third party. Since the
date of the last Company Report (x) there has occurred no Company Material
Adverse Effect and the Company has incurred no material liabilities outside the
ordinary course of the Company's business, (y) the Company has not entered into
any material contracts that would be required to be filed with the Company's
next Form 10-Q and (z) the Company has had no transactions with related parties
that would be required to be reported in the Company's next proxy statement in
accordance with Section 404 of Regulation S-K. The list of the Company's
subsidiaries set forth in the Company Reports is accurate and complete as of the
date hereof.
Section 5.5 Litigation. There is no claim, action, suit, litigation,
proceeding, arbitration or, to the knowledge of the Company or any of its
subsidiaries, any investigation of any kind at law or in equity (including
actions or proceedings seeking injunctive relief), pending or, to the knowledge
of the Company, threatened against the Company or any properties or rights of
the Company or any of its subsidiaries (except for claims, actions, suits,
litigation, proceedings, arbitrations or investigations which would not
reasonably be expected to have a Company Material Adverse Effect), and neither
the Company nor or any of its subsidiaries is subject to any continuing order
of, consent decree, settlement agreement or other similar written agreement
with, any Governmental Entity, or any judgment, order, writ, injunction, decree
or award of any Governmental Entity or arbitrator, including, without
limitation, cease and desist or other orders, except for matters which would not
have a Company Material Adverse Effect.
Section 5.6 Capitalization. (a) The authorized capital stock of the Company
consists of (A) 20,000,000 shares of Common Stock, no par value, and (B)
100,000,000 shares of preferred stock, par value $.0001 per share, of which no
shares are issued and outstanding;
(b) The numbers of shares of Common Stock as of the date hereof (i) issued
and outstanding, (ii) held in the treasury of the Company and (iii) reserved for
issuance upon exercise of outstanding stock options, warrants and other
derivative securities granted by the Company (the "Outstanding Options"),
together with the exercise prices therefor, are set forth in the Company
Disclosure Schedule. Except as set forth in the Company Disclosure Schedule, the
Company has no outstanding subscriptions, options, calls, commitments, rights,
warrants, rights plans or antitake over plans obligating the Company to issue
capital stock. All of the Company's outstanding capital stock is validly issued,
fully paid and nonassessable and free of preemptive rights.
Section 5.7 Compliance. The Company is not in conflict with, or in default
or violation of any Law applicable to the Company or by or to which any of its
material properties is bound or subject (including, without limitation, the
Worker Adjustment and Retraining Notification Act of 1988, as amended), except
for any such conflicts, defaults or violations which would not have a Company
Material Adverse Effect.
Section 5.8 Parachute, Change of Control Payments. The Company has no
contracts, arrangements or understandings pursuant to which any person may
receive any amount or entitlement from the Company or any of its subsidiaries
that may be characterized as an "excess parachute payment" within the meaning of
the Internal Revenue Code as a result of any of the transactions contemplated by
this Agreement, nor is any person entitled to receive any additional payment
from the Company or its subsidiaries in the event that the 20%
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parachute excess tax is imposed on such person. Neither the Company nor any of
its subsidiaries has or will have any obligation to pay any person or entity any
amount under any agreement or arrangement as a result of the transactions
contemplated hereby, except for the repayment of the Anschutz Note and the Bank
Note (as defined below) and except for payments to financial, accounting and
legal advisors.
ARTICLE VI COVENANTS
Section 6.1 Conduct of Business by the Company Pending the Merger.
Subsequent to the date hereof and prior to the Effective Date, unless Purchaser
shall otherwise consent in writing, which consent shall not be unreasonably
withheld, and except as otherwise specifically contemplated by this Agreement:
(a) the businesses of the Company and its subsidiaries shall be conducted
only in, and neither the Company nor any of its subsidiaries shall take any
action except in, the ordinary and usual course of business.
(b) the Company shall use reasonable efforts to preserve its business,
organization and goodwill.
(c) the Company shall confer on a regular basis with the Purchaser
regarding material positive and negative developments respecting the Company's
business.
(d)the Company shall not
(1) (i) increase the compensation payable to or to become payable to
any director or executive officer, except for increases in salary or wages
payable or to become payable in the ordinary course of business and
consistent with past practice; (ii) grant any severance or termination pay
(other than pursuant to the normal severance policy of the Company or its
subsidiaries as in effect on the date of this Agreement) to, or enter into
or amend any employment or severance agreement with, any director, officer
or employee; (iii) establish, adopt or enter into any new employee benefit
plan or arrangement; or (iv) except as may be required by applicable law,
amend, or take any other actions (other than the acceleration of vesting or
waiving of performance criteria permitted pursuant to the Company's
employee benefit plans upon a change in control of the Company) with
respect to, any of the Company's employee benefit plans;
(2) declare or pay any dividend on, or make any other distribution in
respect of, outstanding shares of capital stock, except for dividends by a
subsidiary to the Company or another subsidiary;
(3) (i) redeem, purchase or otherwise acquire any shares of its
capital stock or any securities or obligations convertible into or
exchangeable for any shares of its capital stock, or any options, warrants
or conversion or other rights to acquire any shares of its capital stock or
any such securities or obligations (except in connection with the
Outstanding Options in accordance with their terms); (ii) effect any
reorganization or recapitalization; or (iii) split, combine or reclassify
any of its capital stock or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution for,
shares of its capital stock;
(4) (i) issue, deliver, award, grant or sell, or authorize or propose
the issuance, delivery, award, grant or sale (including the grant of any
security interests, liens, claims, pledges, limitations in voting rights,
charges or other encumbrances) of, any shares of any class of its capital
stock (including shares held in treasury), any securities
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convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire any such shares (except as permitted
for the issuance of shares upon the exercise of Outstanding Options as of
the date of this Agreement); or (ii) amend or otherwise modify the terms of
any such rights, warrants or options the effect of which shall be to make
such terms more favorable to the holders thereof;
(5) acquire or agree to acquire, by merging or consolidating with, by
purchasing an equity interest in or a portion of the assets of, or by any
other manner, any business or any corporation, partnership, association or
other business organization or division thereof, or otherwise acquire or
agree to acquire any assets of any other person (other than the purchase of
assets from suppliers or vendors in the ordinary course of business) in
each case which are material, individually or in the aggregate, to the
Company and its subsidiaries, taken as a whole;
(6) sell, lease, exchange, mortgage, pledge, transfer or otherwise
dispose of, or agree to sell, lease, exchange, mortgage, pledge, transfer
or otherwise dispose of, any of its material assets or any material assets
of any of its subsidiaries, except for dispositions in the ordinary course
of business and consistent with past practice;
(7) solicit, initiate or knowingly encourage any inquiries,
discussions or negotiations with any person (other than Purchaser or
Acquisition) concerning any Acquisition Proposal (as defined in Section
8.1(c)) or solicit, initiate or knowingly encourage any effort or attempt
by any other person to do, make or seek an Acquisition Proposal or, unless
required in order for the Board of Directors of the Company to comply with
its fiduciary responsibilities, with a view to pursuing an Acquisition
Proposal with such person, engage in discussions or negotiations with or
disclose any nonpublic information relating to the Company or any of its
subsidiaries to such person or authorize or permit any of the officers,
directors or employees of the Company or any of its subsidiaries or any
investment banker, financial adviser, attorney, accountant or other
representative retained by the Company or any of its subsidiaries to take
any such action. The Company shall immediately communicate to Purchaser in
writing the terms of any Acquisition Proposal which it may receive and
shall not accept any such Acquisition Proposal unless the Purchaser has had
three days notice of such Acquisition Proposal and its terms;
(8) adopt or propose to adopt any amendments to its Articles of
Incorporation or By-Laws which would alter the terms of its capital stock
or would have an adverse impact on the consummation of the transactions
contemplated by this Agreement;
(9) incur any obligation for borrowed money or purchase money
indebtedness in excess of $25,000, whether or not evidenced by a note,
bond, debenture or similar instrument;
(10) enter into any arrangement, agreement or contract with any third
party (other than customers in the ordinary course of business) in excess
of $25,000 that provides for an exclusive arrangement with that third party
or is substantially more restrictive on the Company or substantially less
advantageous to the Company than arrangements, agreements or contracts
existing on the date hereof unless such arrangement is entered into in the
ordinary course of business; or
(11) agree in writing or otherwise to do any of the foregoing;
provided, however, that notwithstanding any other provision of this Agreement,
the Company's Convertible Promissory Note dated March 20, 1998 in the original
principal
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amount of $1,600,000 to Anschutz Company (the "Anschutz Note") may be amended to
provide that (x) if the Purchaser and its affiliates shall have obtained debt
financing at or before the Closing in the aggregate principal amount greater
than $50,000,000 in one transaction or a series of related transactions, then
such note shall be due and payable in full at the Closing and (y) if the
Purchaser and its affiliates shall have obtained debt financing in the aggregate
principal amount greater than $50,000,000 in one transaction or a series of
related transactions after the Closing but before the scheduled maturity of such
note, then such note shall be due and payable in full on the date of the closing
of such transaction or series of related transactions.
Section 6.2 Shareholders' Meeting and Proxy Statement. Except as provided
in Section 8.1 of this Agreement, the Company shall take all action necessary in
accordance with applicable law and its Articles of Incorporation and By-Laws to
convene a meeting of the holders of the shares of Common Stock of the Company as
promptly as practicable after the date hereof to consider and vote upon the
adoption of this Agreement. In connection with any shareholders' meeting, if
required, the Company shall prepare and file the Proxy Statement with the SEC
and Purchaser shall furnish all information concerning Purchaser and Acquisition
as the Company may reasonably request in connection with the preparation of the
Proxy Statement. The Company shall in the Proxy Statement, through its Board of
Directors, recommend that the Company's shareholders adopt this Agreement, if
such vote is required, except to the extent that the Board of Directors shall
have withdrawn or modified its approval or recommendation of this Agreement as
contemplated by Section 8.1(c). The Company acknowledges that any breach of this
Section 6.2 would cause the Purchaser irreparable harm and entitle the Purchaser
to specific performance of the covenants contained in this Section 6.2.
Section 6.3 Certain Filings and Consents. Purchaser, Acquisition and the
Company shall (a) cooperate with each other in determining whether any filings
are required to be made or consents, approvals, permits or authorizations are
required to be obtained under any federal or state law or regulation or whether
any consents, approvals or waivers are required to be obtained from other
parties to loan agreements or other contracts material to the business of the
Company and its subsidiaries taken as a whole in connection with the
consummation of the Merger and (b) actively assist each other in making any such
filings and obtaining any consents, permits, authorizations, approvals or
waivers that are required.
Section 6.4 Access. Upon reasonable notice, the Company shall afford
Purchaser and Acquisition, and their respective representatives, full access
during normal business hours until the Effective Date to all of its properties,
books, contracts, commitments and records (including, but not limited to, tax
returns) and, during that period, the Company and each of its subsidiaries shall
furnish promptly to Purchaser and Acquisition, and their respective
representatives, all information concerning its business, properties, assets,
liabilities, operations, financial condition and personnel as Purchaser or
Acquisition may reasonably request; except that in the case of all written
materials for which the Company asserts an attorney client privilege, the
Company shall provide Purchaser with a list of such materials and a summary of
their contents, and the Company shall cooperate with Purchaser to provide
Purchaser with access to such materials if such access can be provided without
violation of the attorney client privilege. Purchaser and Acquisition shall, and
shall use their reasonable best efforts to cause their consultants and advisors
to, hold in confidence all such information until such time as such information
is otherwise publicly available (unless otherwise required to disclose such
information by law), and if this Agreement is terminated, Purchaser and
Acquisition shall deliver to the Company all documents, work papers and other
material obtained by them from the Company pursuant to the terms of this
Agreement.
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Section 6.5 Expenses.
(a) Except as provided in Article VIII hereof, all Expenses (as defined in
Section 6.5(b) hereof) incurred by the parties hereto shall be borne solely and
entirely by the party which has incurred such Expenses.
(b) "Expenses" as used in this Agreement shall include all out-of-pocket
expenses (including, without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to a party hereto and
its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation, negotiation, execution and
performance of this Agreement, the Proxy Statement and all other matters related
to the consummation of the transactions contemplated hereby; provided, however,
that "Expenses" shall not include any fees of legal counsel or advisors of any
shareholder of any party.
Section 6.6 Outstanding Options. On or before the Effective Date of the
Merger, the Company shall use its best efforts to cause all Outstanding Options
to be converted by the Merger into the right to receive for each Share covered
thereby a cash amount equal to the excess of the Merger Consideration over the
option exercise price. Such amount shall be paid by the Paying Agent on the
Effective Date.
Section 6.7 Directors' and Officers' Indemnification and Insurance. The
Surviving Corporation shall cause to be maintained in effect (i) in its articles
of incorporation and by-laws for a period of six years after the Effective Date,
the current provisions regarding elimination of liability of directors and
indemnification of officers, directors and employees contained in the articles
of incorporation and by-laws of the Company and (ii) for a period of six years,
the current policies of directors' and officers' liability insurance and
fiduciary liability insurance maintained by the Company (provided that the
Surviving Corporation may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are, in the
aggregate, no less advantageous to the insured) with respect to claims arising
from facts or events that occurred on or before the Effective Date.
Section 6.8 Maintenance of Commitment. Purchaser and Acquisition shall
cause the Commitment to remain in full force and effect.
Section 6.9 Resignation of Directors. The Company will obtain the
resignations of all of the Directors of the Company on the Effective Date.
Section 6.10 Control of Other Party's Business. Nothing contained in this
Agreement shall give the Purchaser, directly or indirectly, the right to control
or direct the Company's operations prior to the Effective Date. Nothing
contained in this Agreement shall give the Company, directly or indirectly, the
right to control or direct the Purchaser's operations prior to the Effective
Date. Prior to the Effective Date, each of the Purchaser and the Company shall
exercise, consistent with the terms and conditions of this Agreement, complete
control and supervision over its respective operations.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:
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(a) The holders of the Common Stock of the Company entitled to vote shall
have duly approved the Merger if required by applicable law.
(b) No preliminary or permanent injunction or other order by a court of
competent jurisdiction which prevents the consummation of the Merger shall have
been issued and remain in effect (each party agreeing to use its reasonable best
efforts to have any such injunction lifted).
(c) No action shall have been taken nor shall any statute, rule or
regulation have been enacted by the government of the United States or any state
thereof that makes the consummation of the Merger illegal in any material
respect.
(d) The applicable waiting period under the Hart-Scott-Rodino Act with
respect to the transactions contemplated by this Agreement shall have expired or
been terminated.
Section 7.2 Conditions to Obligations of Purchaser and Acquisition to
Effect the Merger. The obligations of Purchaser and Acquisition to effect the
Merger shall be subject to the fulfillment at or prior to the Effective Date of
the following additional conditions:
(a) The representations and warranties of the Company set forth in Article
V shall be true and correct in all material respects on the Effective Date (or
on such other date specified in Article V) with the same force and effect as
though made on and as of such date, except for any such untrue or incorrect
representations and warranties that would not have a Company Material Adverse
Effect, and Purchaser and Acquisition shall have received a certificate to that
effect from the Chief Executive Officer and the Treasurer of the Company.
(b) All of the covenants and agreements of the Company to be performed or
complied with pursuant to this Agreement prior to the Effective Date shall have
been duly performed and complied with in all material respects, except for any
such failure of performance or compliance that would not have a Company Material
Adverse Effect, and Purchaser and Acquisition shall have received a certificate
to that effect from the Chief Executive Officer and the Treasurer of the
Company.
(c) Holders of no more than 10% of the outstanding Shares, in the
aggregate, shall have filed with the Company a written objection to the Merger
and made a written demand for payment of the fair value of his shares in the
manner permitted by the CBCA.
(d) All of the Directors of the Company on the Effective Date shall have
resigned.
(e) Since the date of this Agreement, there shall have been no Company
Material Adverse Effect.
(f) The Company shall have received an opinion from a reputable investment
banking firm satisfactory to the Company as to the fairness, from a financial
point of view, of the Merger Consideration to be paid to the Company's
shareholders.
(g) The Purchaser shall have received from Interwest Group, Inc. an
irrevocable proxy in the form attached hereto as Exhibit 7.2(g).
Section 7.3 Conditions to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Effective Date of the following additional
conditions.
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(a) The representations and warranties of Purchaser and Acquisition set
forth in Article IV shall be true and correct in all material respects on the
Effective Date (or on such other date specified in Article IV) with the same
force and effect as though made on and as of such date, except for any such
untrue or incorrect representations and warranties that would not have a
Purchaser Material Adverse Effect, and the Company shall have received
certificates to that effect from the Chief Executive Officer and the Treasurer
of Purchaser and the President of Acquisition.
(b) All of the covenants and agreements of Purchaser and Acquisition to be
performed or complied with pursuant to this Agreement prior to the Effective
Date shall have been duly performed and complied with in all material respects,
except for any such failure of performance or compliance that would not have a
Purchaser Material Adverse Effect, and the Company shall have received
certificates to that effect from the Chief Executive Officer and the Treasurer
of Purchaser and the President of Acquisition.
(c) Either (i) the Commitment shall remain in full force and effect and
shall be funded and Douglas H. Hanson shall have provided $7,800,000 in debt or
equity financing to the Purchaser, or (ii) the Purchaser and shall have executed
a Purchase Agreement for the sale of more than $50 million of debt or equity
securities in form and substance acceptable to the Company and with a purchaser
acceptable to the Company and all the conditions to closing the transactions
contemplated by such Purchase Agreement (other than conditions that, by their
terms, cannot be satisfied until such closing) set forth in such Purchase
Agreement shall have been satisfied or waived.
(d) If the Purchaser and its affiliates shall have obtained debt financing
at or before the Closing in the aggregate principal amount greater than
$50,000,000 in one transaction or a series of related transactions, then the
Anschutz Note shall have been paid in full.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination. This Agreement shall be subject to termination at
any time prior to the Effective Date, whether before or after approval by the
shareholders of the Company, if required, as follows:
(a) by mutual consent of Purchaser and the Board of Directors of the Company;
(b) by Purchaser or the Company if the Merger shall not have been
consummated on or before September 15, 1998, which date may be extended by
mutual agreement of the Boards of Directors of the Company and Purchaser;
(c) by the Company if, prior to the Effective Date, the Company, its Board
of Directors or its shareholders shall receive a bona fide written proposal or
offer from a third party (each an "Acquisition Proposal") relating to:
(i) the acquisition or purchase of all or substantially all of the
assets of, or more than a 50% equity interest (including any Shares
theretofore acquired) in the Company;
(ii) a merger, consolidation or similar business combination with the
Company;
(iii) a tender or exchange offer for the Company conditioned on
ownership of more than 50% of the outstanding Shares following such tender
or exchange offer;
and the Board of Directors of the Company determines, after consultation with
the
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Company's legal advisors and after receiving advice of the Company's financial
advisors that the alternative transaction is more favorable than the Merger from
a financial point of view, that it has a duty in the proper discharge of its
fiduciary responsibilities under applicable law to consider such other proposal
or offer, and then such Board of Directors either (A) accepts such proposal or
offer, (B) recommends to the shareholders acceptance of such proposal or offer,
or (C) in the case of a tender or exchange offer, takes no position with respect
thereto and all conditions (other than terminating this Agreement) of such
tender or exchange offer have been satisfied, in which event this Agreement
shall be terminated without any liability to the Company or the Company's Board
of Directors as a result of such termination other than as set forth herein.
(d) by Purchaser upon a breach of any material representation, warranty,
covenant or agreement on the part of the Company set forth in this Agreement or
if any representation or warranty of the Company shall have become untrue and
such breach or untruth shall have caused a Company Material Adverse Effect.
(e) by the Company upon a breach of any material representation, warranty,
covenant or agreement on the part of the Purchaser set forth in this Agreement
or if any representation or warranty of the Purchaser shall have become untrue
and such breach or untruth shall have caused a Purchaser Material Adverse
Effect.
Section 8.2 Break-Up Fee; Effect of Termination.
(a) If the Company shall have terminated this Agreement by reason of the
failure of any condition set forth in Sections 7.3(a), (b), (c), (d) or (e),
except for a failure of the condition set forth in Sections 7.3(c) by reason of
a failure of any condition set forth in Sections 8.1(c) or 7.2(a), (b) or (d),
the Purchaser shall pay to the Company $1,050,000 in cash or, at the Purchaser's
election, that number of shares of the Purchaser's common stock equal to
$1,050,000 divided by the "Fair Market Value" (as defined below) of such stock.
(b) If the Purchaser shall have terminated this Agreement by reason of the
failure of any condition set forth in Sections 8.1(c) or 7.2(a), (b) or (d), the
Company shall pay to the Purchaser $1,050,000 in cash.
(c) The "Fair Market Value" of the Purchaser's or the Company's common
stock shall be the average closing price of the stock reported by NASDAQ for the
15 trading days after announcement of termination pursuant to this Section
8.2(a). If either party elects to deliver shares of stock pursuant to Section
8.2(a) or (b), such party shall file at its expense a registration statement
with respect to any such shares under the Securities Act of 1933 within 15 days
after termination by the Company of this Agreement, shall use its best efforts
to have such registration statement be declared effective and to keep it
effective for not less than two years and shall indemnify the other party and
its affiliates pursuant to an indemnity agreement typical of a registration
rights agreement.
(d) Any payment required to be made pursuant to this Section 8.2 shall be
made as promptly as practicable but not later than three business days after
termination of this Agreement.
(e) In the event of termination of this Agreement by Purchaser, Acquisition
or the Company (other than pursuant to Section 8.1(c)), there shall be no
liability under this Agreement on the part of either the Company, Purchaser or
Acquisition or their respective officers or directors, except for any breach of
the provisions of Section 6.2 and the confidentiality provisions of Section 6.4
and except as provided in Sections 8.2(a) and (b).
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Section 8.3 Amendment. This Agreement may be amended by the parties hereto,
by action taken by the respective Boards of Directors of Purchaser, Acquisition
and the Company, at any time before or after approval hereof by the shareholders
of the Company, but, after any such approval, if required, no amendment shall be
made which changes the Merger Consideration without the further approval of such
shareholders. This Agreement may not be amended except by an instrument in
writing signed on behalf of each of the parties hereto.
Section 8.4 Waiver. At any time prior to the Effective Date, the parties
hereto, by action taken by the respective Boards of Directors of Purchaser,
Acquisition or the Company, may (a) extend, for a reasonable time, the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of the party hereto to any such extension or waiver shall
be valid if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Notice of Breach. Each party shall promptly give written notice
to the other parties upon becoming aware of the occurrence, or impending or
threatened occurrence, of any event which would cause or constitute a breach of
any of its representations, warranties of covenants contained or referred to in
this Agreement and shall use its reasonable best efforts to prevent or promptly
remedy the same.
Section 9.2 Cooperation. Subject to the terms and conditions herein
provided, each of the parties hereto agrees to use its reasonable best efforts
to take, or cause to be taken, all action and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions contemplated
by this Agreement. In case at any time after the Effective Date any further
action is necessary or desirable to carry out the purpose of this Agreement, the
proper officers and/or directors of Purchaser, Acquisition or the Company shall
take, or cause to be taken, all such necessary action. Purchaser shall cause
Acquisition to comply with all of Acquisition's obligations hereunder.
Section 9.3 Non-Survival of Representations and Warranties. None of the
representations and warranties in this Agreement shall survive the Effective
Date of the Merger.
Section 9.4 Brokers. The Company represents and warrants that no broker,
finder or investment banker is entitled to any brokerage, finder's or other fee
or commission in connection with the Merger, except that the Company has agreed
to pay to Daniels & Associates all amounts due to it for its efforts in
connection with the Merger (the "Daniels Fee").
Section 9.5 Entire Agreement. Other than the Voting Agreement of even date
herewith between the Purchaser and Interwest Group, Inc., this Agreement
contains the entire agreement among Purchaser, Acquisition and the Company with
respect to the Merger and the other transactions contemplated hereby, and
supersedes all prior agreements, understandings, representations, and warranties
with respect to the subject matter.
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Section 9.6 Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado (without giving
effect to its choice of laws principles).
Section 9.7 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 9.8 Separability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction, shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
Section 9.9 Publicity. Except as required by law or the rules of any
exchange on which the shares of Purchaser or Company are traded, as long as this
Agreement is in effect, neither the Company nor Purchaser shall issue or cause
the publication of any press release or other announcement with respect to the
Merger or this Agreement without the prior consent of the other, which consent
shall not be unreasonably withheld.
Section 9.10 Notices. All notices or other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered
personally or sent by first-class mail, postage prepaid, with return receipt
requested, addressed as follows:
If to Purchaser or Acquisition, to:
ROCKY MOUNTAIN INTERNET, INC.
Douglas H. Hanson, President
1099 18th Street, 30th Floor
Denver, Colorado 80202
Fax # 303-672-0711
with copies to:
Matthew Perkins
JACOBS CHASE FRICK KLEINKOPF & KELLEY LLC 1050 17th Street, Suite 1500
Denver, Colorado 80265 Fax #303-685-4869
If to the Company, to:
INTERNET COMMUNICATIONS CORPORATION
John Couzens, President
7100 East Belleview Avenue, Suite 201
Englewood, Colorado 80111
Fax #303-770-0588
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with copies to:
Nick Nimmo HOLME ROBERTS & OWEN LLP 1700 Lincoln, Suite 4100 Denver,
Colorado 80203 Fax #(303) 866-0200
and
Drake S. Tempest O'MELVENY & MYERS LLP 153 East 53rd Street New York,
New York 10022-4611 Fax #(212) 326-2061
Section 9.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one agreement.
Section 9.12 No Third Party Beneficiaries. No provision of this Agreement
is intended to benefit any person other than the parties hereto.
Section 9.13 Schedules. Inclusion of, or reference to, matters in a
schedule to this Agreement does not constitute an admission of what is material
or the materiality of such matter.
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IN WITNESS WHEREOF, Purchaser, Acquisition and the Company have caused this
Agreement to be signed by their respective officers thereunto duly authorized
all as of the date first written above.
INTERNET
COMMUNICATIONS
CORPORATION
By: /s/ John M. Couzens
John M. Couzens
Title: President
INTERNET ACQUISITION
CORPORATION
By: /s/ Douglas H. Hanson
Douglas H. Hanson
Title: President
ROCKY MOUNTAIN
INTERNET, INC.
By: /s/ Douglas H. Hanson
Douglas H. Hanson
Title: President
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APPENDIX B
CONFIDENTIAL
July 14, 1998
Internet Communications Corporation
7100 East Belleview Avenue, Suite 201
Englewood, Colorado 80111
ATTENTION: Board of Directors
Gentlemen:
A Restated Agreement and Plan of Merger, dated as of June 5, 1998 (the
"Merger Agreement") was entered into among Rocky Mountain Internet, Inc.
("RMI"), Internet Acquisition Corporation, which is a wholly-owned subsidiary of
RMI ("Acquisition"), and Internet Communications Corporation ("INCC"). Pursuant
to the terms and subject to the conditions set forth in the Merger Agreement,
INCC will merge into Acquisition and thereby become a wholly-owned subsidiary of
RMI (the "Merger"). The consideration payable payable to each INCC shareholder
upon closing is equal to $6.764 per share for each of the INCC shares which are
outstanding or committed to be issued as of the closing of the Merger. On June
5, 1998, there were 5,464,437 INCC shares which were outstanding or committed to
be issued. Holders of certain options and warrants to acquire INCC common stock
will also be paid $6.764 per share less the exercise price, as if such options
and warrants had been issued.
The Merger is expected to be considered at a special meeting of the
shareholders of INCC to be held on August 10, 1998, and to be consummated
shortly thereafter if the Merger is approved by INCC's shareholders at such
meeting.
You have asked us to render an opinion that the aggregate consideration
received and to be received in the proposed Merger is fair to the INCC
shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things,
done the following:
(1) Reviewed the following agreements relating to the proposed Merger: (a)
the Merger Agreement, and related schedules thereto, (b) the Voting Agreement
between Interwest Group, Inc. and RMI, dated June 5, 1998, and (c) the
Commitment Letter from ING Barings, et al., to RMI, dated June 5, 1998, and the
attached Summary Term Sheet, and certain amendment letters to the Commitment
Letter, dated June 19, 1998 and June 24, 1998.
(2) Reviewed a draft of the Proxy Statement of INCC; dated July 14, 1998.
(3) Reviewed the following agreements and documents dated prior to the date
of the Merger Agreement: (a) Convertible Promissory Note granted to Anschutz
Company by INCC, dated March 20, 1998, (b) Employment Agreement between RMI and
John Couzens, dated June 3, 1998, (c) certain letters and attached exhibits from
various prospective purchasers, and (d) Research Report on INCC prepared by
Neidiger Tucker Bruner, Inc., dated May 27, 1998.
(4) Reviewed the annual report on Form 10-KSB for the fiscal year ended
December 31, 1997, the Form 10-Q report dated March 31, 1998, and the Form 8-K
report, dated June 10,
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1998, all as filed with the Securities and Exchange Commission, as well as
unaudited financial statements for the months of April and May of 1998 as
prepared by management of INCC.
(5) Reviewed INCC's budget for the nine months ended December 31, 1998.
(6) Conducted discussions with certain members of senior management of both
INCC and RMI regarding the business and prospects of the respective companies.
(7) Reviewed minutes of meetings of the Board of Directors of INCC which
took place on March 31, 1997, September 23, 1997, March 15, 1998 and March 25,
1998, as well as minutes of an Executive Committee meeting which took place on
November 21, 1997. As of the date of this letter, the minutes for the INCC Board
meeting which took place on May 31, 1998, at which the Merger Agreement was
approved were not yet finalized or reviewed by us.
(8) Compared the results of operations of INCC with those of certain
companies which we deemed to be reasonably similar to INCC.
(9) Compared the proposed financial terms of the Merger contemplated by the
Merger Agreement with the terms of certain other acquisitions which we deemed to
be relevant.
(10) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we deemed
necessary for purposes of our opinion.
In preparing our opinion, we have relied on the accuracy and completeness
of all financial and other information supplied or otherwise made available to
us by INCC (or RMI as the case may be), and we have not independently verified
such information and/or made or obtained any independent evaluation or appraisal
of the assets of INCC or RMI. This opinion does not constitute a recommendation
to any of the shareholders of INCC as to how such shareholders should vote on
the Merger. This opinion does not address the relative merits of the Merger as
compared with any other mergers or proposed mergers submitted to INCC or
discussed by the Board of Directors of INCC as alternatives to the Merger or the
decision of the Board of Directors of INCC to proceed with the Merger. This
opinion is based on market, economic, financial and other conditions as they
existed and could be evaluated as of the date of this letter.
Prior to our engagement to render a fairness opinion to INCC, we were separately
engaged by INCC to identify and solicit prospective purchasers interested in a
purchase or other transaction with INCC. Daniels will receive a fee if the
proposed Merger is consummated. However, Daniels does not believe that its right
to receive this fee in any way prevents it from rendering an impartial opinion
on the fairness of the Merger, from a financial point of view, to the
shareholders of INCC.
In rendering this opinion, Daniels has not been engaged to act as an agent or
fiduciary of the shareholders of INCC, and, to the extent permitted by law, the
Board of Directors has expressly waived any duties or liabilities Daniels may
otherwise be deemed to have had to the shareholders of INCC or any other third
party.
On the basis of and subject to the foregoing, we are of the opinion that, as of
the date of this letter, the consideration to be received in the proposed Merger
is fair, from a financial point of view, to the shareholders of INCC.
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Daniels hereby consents to the mention of its name in the Proxy Statement of
INCC.
Very truly yours,
/s/
DANIELS & ASSOCIATES, L.P.
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APPENDIX C
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
Commission file number 0-19578
INTERNET COMMUNICATIONS CORPORATION
(Name of small business issuer in its charter)
COLORADO 84-1095516
- ---------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7100 E. BELLEVIEW AVE., STE 201,
GREENWOOD VILLAGE, 80111
COLORADO
- ------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (303) 770-7600
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.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL 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 - SECURITIES LITIGATION REFORM ACT OF 1995
This 10-KSB contains "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements include statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts. The
forward-looking statements in this 10-KSB are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed in or
implied by the statements.
With regard to the Company, the most important factors include, but are not
limited to, the following:
- Changing technology.
- Competition.
- Possible future government regulation.
- Competition for talented employees.
- Company's ability to 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.
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.
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PRODUCTS AND SERVICES
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 -
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).
Internet Access Services
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
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.
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Sound and Security Systems
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
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 -
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
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:
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
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)
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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.
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
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
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
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
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 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
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 Internet is primarily a network integrator and network
services provider and as such is not involved in any significant research and
development efforts.
LOCATIONS
Internet's headquarters and principal offices are located at 7100 East
Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111. Its telephone
number is (303) 770-7600. The Company and its subsidiaries conduct business
throughout Colorado and in Minneapolis, Minnesota.
ITEM 2. DESCRIPTION OF PROPERTIES
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
Internet is not a party to, nor is any of Internet's property subject to
any material legal proceedings. Internet knows of no material legal proceedings
contemplated or threatened against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
two- month period ended December 31, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Principal Market or Markets. Internet's Common Stock is traded on the
NASDAQ Small- Cap Market under the symbol INCC.
The following table represents the range of high and low closing prices for
the Common Stock for the eight fiscal quarters ended December 31, 1997.
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Quarter Ended
Apr-30-96 Jul-31-96 Oct-31-96 Jan-31-97
High Low High Low High Low High Low
4.63 3.63 7.13 4.00 6.81 5.00 6.88 4.88
Quarter Ended
Apr-30-97 Jul-31-97 Oct-31-97 Dec-31-97
High Low High Low High Low High Low
5.56 4.13 8.88 4.63 9.50 7.31 8.00 4.56
(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 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 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 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
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.
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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 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 work site. 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
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
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a subsidiary in 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 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.
C-9
<PAGE>
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:
Page
Independent Auditors' Reports............................................. C-11
Consolidated Balance Sheet, December 31, 1997............................. C-13
Consolidated Statements of Operations, For the Periods
Ended December 31, 1997 and January 31, 1997.............................. C-14
Consolidated Statement of Stockholders' Equity, For the Period
from February 1, 1995 through December 31, 1997.......................... C-15
Consolidated Statements of Cash Flows, For the Periods Ended December 31,
1997 and January 31, 1997................................................. C-16
Notes to Consolidated Financial Statements................................ C-18
C-10
<PAGE>
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
C-11
<PAGE>
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
C-12
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
(In Thousands, Except Share And Per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Trade receivables, net of $318 allowance for doubtful accounts and sales $ 4,907
returns
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.
C-13
<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
Net sales:
<S> <C> <C>
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............................................................ 5,72 23,995
General and administrative......................................... 6,64 84,251
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 operations.................................. $ (0.24) (0.05)
Net loss....................................................... $ (0.88) (0.33)
</TABLE>
See accompanying notes to consolidated financial statements.
C-14
<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 Pueblo.................. 12,570 100 -- -- 100
Stock issued in connection with
private placement, net.............. 631,579 2,973 2,973
Stock issued to directors and 6,678 40 40
advisors
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.
C-15
<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
Cash flows from operating activities:
<S> <C> <C> <C>
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.
C-16
<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 telecommunications 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.
C-17
<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):
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 and equipment............................ $ 2,015
=======
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.
C-18
<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 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.
C-19
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Of Financial Instruments
he 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.
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.
C-20
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
(3) CONTRACTS IN PROGRESS
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
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 $1,825
billings................................................
Billings in excess of costs and estimated 1,537
------
earnings................................................
$ 288
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.
C-21
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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):
1998......................... $4,435
1999......................... 126
2000......................... 58
2001......................... 25
-------
$4,644
(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):
1998......................... $ 876
1999......................... 768
2000......................... 711
2001......................... 616
2002......................... 338
------
Thereafter...................
$3,309
C-22
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 work site. 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.
(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.
C-23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 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>
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:
C-24
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Eleven months
ended Year ended
December 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..................................................... $ --
=======
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.
C-25
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 11months 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.
C-26
<PAGE>
INTERNET COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING ANDFINANCIAL 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.
27
C-27
<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
<TABLE>
<CAPTION>
<S> <C> <C>
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 Incorporation Filed Herewith
filed with the Colorado Secretary of
State on January 23, 1998
10.1 Non-Compete Agreement between Incorporated by reference to Registrant's
Thomas C. Galley and Internet Form 10-K dated January 31, 1992,
Communications Corporation dated File No. 0-19578
December 23, 1991
10.2 Non-Compete Agreement between Incorporated by reference to Registrant's
Arnell J. Galley and Internet Form 10-K dated January 31, 1992, File
Communications Corporation dated No. 0-19578
December 23, 1991
10.3 Non-Compete Agreement between Incorporated by reference to Registrant's
Paul W. Greiving and Internet Form 10-K dated January 31, 1992, File
Communications Corporation dated No. 0-19578
December 23, 1991
10.4 Executive Employment Agreement Incorporated by reference to Registrant's
between Thomas C. Galley and Form 10-KSB dated January 31, 1995,
Internet Communications File No. 0-19578
Corporation dated
May 1, 1994
10.5 Buy-Sell Agreement between Incorporated by reference to Registrant's
Thomas C. Galley and Internet Form 10-KSB dated January 31, 1995,
Communications Corporation dated File No. 0-19578
May 1 1994
10.6 Share Exchange Agreement, Stock Incorporated by reference to Registrant's
Registration Agreement, and Loan Form 8-K dated May29, 1996, File
Agreement dated May 29, 1996, No. 0-19578
between Internet Communications
Corporation and Interwest Group
10.7 1995 Non-employee Director Stock Incorporated by reference to Registrant's
Option Plan, dated September 12, definitive proxy, dated August 12, 1996,
1996 File No. 0-19578
10.8 1996 Incentive Stock Plan, dated Incorporated by reference to Registrant's
September 12, 1996 definitive proxy, dated August 12, 1996,
File No. 0-19578
C-28
<PAGE>
10.9 1996 Incentive Stock Plan, dated Incorporated by reference to Registrant's
September 12, 1996 (as amended definitive proxy dated May 30, 1997
September 1996)
C-29
<PAGE>
Exhibit N o. Exhibit Location
----------- ------- --------
10.10 1995 Non-employee Director Stock Incorporated by reference to
Option Plan, dated September 12, Registrant's Form S-8 dated
1996 (as amended) September 8, 1997
10.11 Convertible Promissory Note dated Filed herewith
March 20, 1998 in the amount of
$1,600,000
22.1 Subsidiaries of the Registrant Incorporated by reference to 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 Filed herewith
LLP
27 Financial Data Schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarterly period ending
December 31, 1997.
C-30
<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
C-31
<PAGE>
APPENDIX D
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q.--QUARTERLY REPORT UNDER SECTION 13 OR (15)d
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _____________ to _____________
Commission file number 0-19578
INTERNET COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 84-1095516
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
7100 E. Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(303) 770-7600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
At August 10, 1998, 5,617,137 shares of Common Stock, no par value, were
outstanding.
D-1
<PAGE>
Internet Communications Corporation
INDEX
Page
Form 10-Q Cover Page D-1
Index Page D-2
Part I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets at D-3
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations For the 4
Three and Six months ended June 30, 1998 and July 31, 1997
Condensed Consolidated Statements of Cash Flows D-5
For the Six months ended June 30, 1998 and July 31, 1997
Notes to Condensed Consolidated Financial Statements D-6
Management's Discussion and Analysis of Financial D-9
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 - Legal Proceedings D-14
Item 2 - Changes in Securities and use of Proceeds D-14
Item 3 - Defaults upon Senior Securities D-14
Item 4 - Submission of Matters to a Vote of D-14
Security Holders
Item 5 - Other Information D-14
Item 6 - Exhibits and Reports on Form 8-K D-14
Signature Page D-15
D-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 422 ---
Trade receivables, net of allowance for doubtful
accounts and sales returns 7,238 4,907
Inventory 3,563 3,255
Prepaid expenses and other 543 328
Costs and estimated earnings in excess of billings 933 1,825
------------------ -----------------
Total current assets 12,699 10,315
Equipment, net 1,642 2,015
Goodwill, net 2,126 2,198
Spares inventory 410 507
Net assets of discontinued operations 496 2,078
Other, net 874 1,000
------------------ -----------------
Total assets $ 18,247 18,113
================== =================
Current Liabilities:
Notes payable $ 6,135 4,435
Accounts payable and accrued expenses 6,441 4,706
Billings in excess of costs and estimated earnings 1,047 1,537
Unearned income and deposits 1,069 1,125
------------------ -----------------
Total current liabilities 14,692 11,803
Notes payable and other long term obligations 364 209
Deferred revenue 167 117
------------------ -----------------
Total liabilities 15,223 12,129
Stockholders' equity:
Common stock, no par value 14,758 13,965
Stockholders' notes (22) (31)
Accumulated deficit (11,712) (7,950)
------------------ -----------------
Total stockholders' equity 3,024 5,984
------------------ -----------------
Total liabilities and stockholders' equity $ 18,247 18,113
================== =================
- -----------------------------------------------------------------------------
See accompanying notes to these condensed consolidated financial statements
</TABLE>
D-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
---------------------------------- -------------------------------------
June 30, July 31, June 30, July 31,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
Sales:
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Network Services 3,880 3,246 7,579 6,481
Network Integration 4,662 7,542 9,176 12,997
------------ ------------- ------------ ------------
Total sales 8,542 10,788 16,755 19,478
Cost of Sales (5,926) (7,385) (11,898) (13,399)
------------ ------------- ------------ ------------
Gross margin 2,616 3,403 4,857 6,079
------------ ------------- ------------ ------------
- --------------------------------------------------------------------------------------------------------------
Operating expenses:
- --------------------------------------------------------------------------------------------------------------
Selling 1,189 1,632 2,899 3,151
General and administrative 1,467 1,614 3,378 3,083
Restructuring -- -- 1,608 --
Interest expense, net 169 109 291 249
Other -- 13 -- 13
------------ ------------- ------------ ------------
Total expenses 2,825 3,368 8,176 6,496
------------ ------------- ------------ ------------
Income (Loss) from continuing
operations (209) 35 (3,319) (417)
Discontinued operations --
Income (Loss) from operations -- 148 (206) (43)
Estimated loss on disposal -- -- (237) --
============ ============= ============ ============
Net Income (Loss) $ (209) 183 (3,762) (460)
============ ============= ============ ============
- --------------------------------------------------------------------------------------------------------------
Income (Loss) per share - basic and diluted:
- --------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 5,460 5,618 5,429 5,071
Income (Loss) from continuing
operations (0.04) 0.01 (0.61) (0.08)
Income (Loss) from discontinued N/A 0.02 (0.08) (0.01)
operations
Net Income (Loss) $ (0.04) 0.03 (0.69) (0.09)
- ----------------------------------------
See accompanying notes to these condensed consolidated financial statements
</TABLE>
D-4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands, except per share amounts)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
For the six months ended
June 30 July 31,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss from continuing operations $ (3,319) (417)
Adjustments to reconcile net loss from continued operations
to net cash provided by (used in) operating activities:
Depreciation and amortization 697 687
Allowance for doubtful accounts and sale returns 16 (3)
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (2,347) 295
Inventory (303) (616)
Prepaid expenses and other (192) 20
Costs in excess of billings and estimated 892 --
earnings
Increase (decrease) in:
Accounts payable 1,790 265
Unearned income (6) 33
Accrued expenses 145 --
Billings in excess of costs and estimated (490) --
earnings
--------------- ----------------
Net cash provided by (used in) operating activities (3,117) 264
Net cash provided by (used in) operating activities of
discontinued operations 201 118
discontinued operations 1,139 118
Cash flows from investing activities:
Capital expenditures (90) (393)
Proceeds from sales of assets 34 --
--------------- ----------------
Net cash used in investing activities (56) (393)
Cash flows from financing activities:
Proceeds from sale of common stock -- 3,011
Expenses from sale of common stock -- (29)
Repayment of debt (2,941) (6,313)
Proceeds from debt 4,595 3,041
Repayment of stockholders' note 9 --
Proceeds from exercise of stock options 793 --
--------------- ----------------
Net cash provided by (used in) financing activities 2,456 (290)
--------------- ----------------
Increase (decrease) in cash: 422 (301)
Cash, beginning of period -- 571
--------------- ----------------
Cash, end of period $ 422 270
=============== ================
- -------------------------------------------------------------------
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
D-5
<PAGE>
Internet Communications Corporation
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The financial statements included herein have been prepared by Internet
Communications Corporation ("Internet" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and include all adjustments which are, in the opinion of management, necessary
for a fair presentation. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The Company believes that the disclosures are adequate to
make the information presented not misleading. However, it is suggested that
these financial statements be read in conjunction with the financial statements
and the notes thereto which are included in the Company's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1997. The financial data for the
interim periods may not necessarily be indicative of results to be expected for
the year.
Change in Fiscal Year End
The Company elected to change its fiscal year end to December 31 from January
31, effective February 1, 1997. References to the second quarter of 1997 relate
to the three-month period ended July 31, 1997.
Discontinued Operations
In March 1998, the Company's Board of Directors adopted a formal plan to sell
its non-core business segments ("Segments"). The Segments have been accounted
for as discontinued operations in accordance with APB 30. As of the issuance
date of the Company's Annual Report on Form 10-SKB for the year ended December
31, 1997, management was not anticipating net losses on the disposal of the
segments or the related interim period results of operations. Subsequent to this
date, based in part on the definitive agreements entered into on April 30, 1998,
management determined that a net loss on disposal would be incurred as well as
operating losses. Management revised its estimates in the financial statements
for the quarter ended March 31, 1998. The results of operations and disposition
of the discontinued operations for the quarter ended June 30, 1998 are
consistent with the Company's revised estimates. Remaining assets and
liabilities of the Segments referred to as Omega Business Communications
Services, Inc. ("Omega") and Interwest Cable Network Systems, Inc. ("ICNS"),
primarily consist of accounts receivable and accounts payable. The July 31, 1997
consolidated financial statements have been restated to conform to the June 30,
1998 presentation.
NOTE 2 - AGREEMENT AND PLAN OF MERGER
On June 5, 1998, the Company executed a definitive Agreement and Plan of Merger
(the "Merger Agreement") with Rocky Mountain Internet, Inc. ("RMI"). Upon
consummation, the Company will become a wholly-owned subsidiary of RMI and the
shareholders of the Company will receive $6.764 per share of common stock of the
Company, for a total consideration to its shareholders of approximately $39.4
million. Additionally, in connection with the merger, RMI will repay certain of
the Company's indebtedness. The acquisition is subject to the approval of the
Company's shareholders and other customary conditions. Interwest Group Inc.
("Interwest Group") holds in excess of 50% of the outstanding shares of common
stock of the Company and has agreed to vote in favor of the transaction pursuant
to a Voting Agreement dated June 5, 1998 between Interwest Group and RMI.
D-6
<PAGE>
NOTE 3 - NOTES PAYABLE
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. 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. Under certain
circumstances, this note will be paid off as part of the proposed acquisition by
RMI.
The Company has a borrowing agreement with a lending institution which provides
for a $5.0 million credit facility. At June 30, 1998, the Company had borrowed
$4.5 million against the facility. The credit facility will be paid off as part
of the proposed acquisition by RMI. The borrowing agreement expires on September
19, 1998. In the event that the acquisition by RMI is not consummated, the
Company's intention would be to renew the line of credit with the bank, however,
there is no assurance that the Company will be successful.
NOTE 4 - STOCKHOLDERS' EQUITY
During the quarter ended June 30, 1998, 194,250 options to purchase shares of
common stock were exercised for a total consideration of $793,000.
On May 19, 1998, the Company's shareholders approved an amendment to the
Company's 1996 Incentive Stock Plan which increases the number of options which
may be granted from 875,000 shares to 975,000 shares.
NOTE 5 - INCOME (LOSS) PER SHARE
Basic income (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 three
months and six months ended June 30, 1998 and the six months ended July 31,
1997, as all of the Company's potentially dilutive securities were anti-dilutive
during these periods. For the three months ended July 31, 1997, the potential
common stock in the calculation of diluted earnings per share includes the
assumed conversion of the then outstanding warrants and certain of the
outstanding stock options.
NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING PROUNOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 requires that all items which are components of comprehensive
earnings or losses be reported in a financial statement in the period in which
they are recognized. The Company has no items which are components of
comprehensive earnings or losses, other than net income (loss), accordingly the
adoption of this pronouncement had no effect on the accompanying financial
statements.
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities by requiring that all derivative
instruments be reported as assets or liabilities and measured at their fair
values. Although management of the Company has not completed its assessment of
the impact of SFAS 133 on its consolidated results of operations and financial
position, management estimates that the impact of SFAS 133 will not be material.
D-7
<PAGE>
NOTE 7 - YEAR 2000 RISKS
Currently, many computer systems, hardware and software products are coded to
accept only two digit entries in the date code field and, consequently, cannot
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company and third
parties with which the Company does business rely on numerous computer programs
in their day to day operations.
The Company has begun the process of identifying computer systems that could be
affected by the Year 2000 issue as it relates to the Company's internal hardware
and software, as well as third parties which provide the Company goods or
services. The Company groups its analysis of these software, hardware and
systems into the following four categories:
(a) Customer Network Installations, where the Company has installed
third party vendor equipment and may or may not provide ongoing
maintenance and support to the customer and their network.
(b) Network Control Center, where the Company monitors and manages the
integrity and quality of customer networks.
(c) Third party vendors and providers (other than the equipment
vendors referred to above), including those which provide the
Company with services such as its data transmission capacity.
(d) Corporate Administrative Functions, including financial systems and
other corporate functions.
For categories (a) and (b), the Company has substantially completed its
inventory of the software and devices involved. During this inventory phase, the
project team has been working with third party equipment and software vendors to
assess whether these devices and software programs are date dependent and
whether it is anticipated that they will be Year 2000 compliant.
The Company has not commenced a detailed inventory and assessment process for
categories (c) and (d) as these were deemed to be less critical to the Company's
operations and less likely to require remediation or replacement.
The inventory and assessment for each of the four categories should be completed
by the end of 1998. Testing, remediation and replacement will commence in the
fourth quarter of 1998 for selected areas and will commence by the first quarter
of 1999 for all categories. The Company has not developed a contingency plan
which would be utilized if current efforts by the Company and its vendors are
unsuccessful.
In the event that the Company acquires other assets of businesses, the software
and hardware acquired by the Company in connection with those business
combinations may also be Year 2000 non-compliant.
There can be no assurance that the Year 2000 issues will be resolved in 1998 or
1999. The Company does not currently have an estimate of the total costs
required for this effort and may incur significant costs in resolving its Year
2000 issues. If not resolved, this issue would have a material adverse impact on
the Company's business, operating results, financial condition and cash flow.
D-8
<PAGE>
Internet Communications Corporation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This 10-Q 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-Q 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.
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying condensed financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
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. 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. Under certain
circumstances, this note will be paid off as part of the proposed acquisition by
RMI.
The Company has a borrowing agreement with a lending institution which provides
for a $5.0 million credit facility. At June 30, 1998, the Company had borrowed
$4.5 million against the facility. The borrowing agreement expires on September
19, 1998. The credit facility will be paid off as part of the proposed
acquisition by RMI. In the event that the acquisition by RMI is not consummated,
the Company's intention would be to renew the line of credit with the bank,
however, there is no assurance that the Company will be successful.
During the quarter ended June 30, 1998, the Company received an inquiry from
NASDAQ regarding compliance with listing requirements. The Company responded to
the inquiry and NASDAQ has given the Company an extension until September 15,
1998 to complete the merger with RMI or demonstrate compliance with the listing
requirements or be delisted. The Company is currently in compliance. Delisting
of the Common Stock from NASDAQ could have an adverse effect on the stock price.
D-9
<PAGE>
Liquidity
At June 30, 1998, the Company had a working capital deficit of $1,993,000, which
included $6,135,000 relating to the current portion of long term debt and
amounts outstanding under the Company's credit facility. As of March 31, 1998
and December 31, 1997, the working capital deficits were $3,697,000 and
$1,488,000, respectively. The March 31, 1998 and December 31, 1997 working
capital deficits included $6,639,000 and $4,435,000, respectively, relating to
the current portion of long term debt and amounts outstanding under the
Company's credit facility.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns, at June 30, 1998, were $7,238,000 as compared to $6,320,000 at
March 31, 1998 and $4,907,000 at December 31, 1997. As discussed in the March
31, 1998 Form 10-Q, the Company converted its primary management information
system in January which resulted in an inability to invoice customers on a
timely basis. The Company is currently billing on a timely basis. In addition,
certain of the Company's customers considered the descriptive detail provided on
the invoices to be inadequate and have delayed payment pending additional
support being provided by the Company. This issue has contributed to the
increase in receivables during the second quarter. The Company is committing
additional resources in the collections area to address the customers concerns.
Continued delays in collection or uncollectibility of accounts receivable could
have an adverse effect on the Company's liquidity and working capital position.
Inventory levels increased due, in part, to the staging of materials on a
significant contract.
Accounts payable and accrued expenses at June 30, 1998 were $6,441,000 as
compared to $6,253,000 at March 31, 1998 and $4,706,000 at December 31, 1997.
The significant increase in accounts receivable in the first quarter resulted in
the Company extending the time in which it paid its vendors. The Company did
make improvements in the timing of payments to vendors during the second
quarter, assisted by the proceeds from the exercise of stock options and the
disposition of discontinued operations.
The Company incurred capital expenditures of $37,000 during the quarter ended
June 30, 1998 and $90,000 for the six months ended June 30, 1998. There are no
material commitments for capital expenditures and the Company is maintaining
tight controls over its capital purchases.
RESULTS OF OPERATIONS:
Restructuring
In March 1998, the Company announced a restructuring plan aimed principally at
tightening the strategic focus on the data communications network service
market. Management determined the Company had over-extended resources in the
Rocky Mountain region and had evolved into an overly complex organization.
Accordingly, the number of departments was reduced and 50 employees were
separated from the Company, representing 21% of the Company's workforce
(excluding discontinued operations). The personnel reductions were largely in
the sales department and the administration department. In addition, during the
fourth quarter of the fiscal year ended December 31, 1997, the Company had
launched an entirely separate wholesale engineering services business. The
closure of this entity was integral to the restructuring.
D-10
<PAGE>
These restructuring actions resulted in the Company recognizing an expense for
the three months ended March 31, 1998 in the amount of $1,608,000. The balance
of these restructuring expenses remaining to be funded as of June 30, 1998 was
approximately $829,000.
Discontinued Operations
Pursuant to a plan adopted in March 1998, the Company executed two separate
divestiture agreements on April 30, 1998 for its non-strategic subsidiaries,
Omega and ICNS. The Segments have been accounted for as discontinued operations
in accordance with APB 30. The remaining assets and liabilities of the Segments
at June 30, 1998 primarily consisted of accounts receivable and accounts
payable.
The Company executed a Stock Purchase Agreement on April 30, 1998 for the sale
of its 80% ownership of the common stock of Omega to Omega's vice president and
sole minority shareholder. The consideration for the sale of Company's common
stock ownership of Omega was $209,000.
The Company executed an Agreement on April 30, 1998 for the transition of the
business activities of its wholly owned subsidiary, ICNS, to a newly formed
corporation ("MetroWest") owned and operated by the principal managers of ICNS.
The Agreement specifies that MetroWest shall satisfactorily complete the ICNS
contracts existing at April 30, 1998. ICNS shall pay MetroWest incentive
compensation for the completion and final customer acceptance of ICNS contracts.
As of June 30, 1998, there were seven ICNS contracts pending completion. These
contracts are scheduled to be completed between July 1998 and January 1999.
As of the issuance date of the Company's Annual Report on Form 10-SKB for the
year ended December 31, 1997, management was not anticipating net losses on the
disposal of the segments or the related interim period results of operations.
Subsequent to this date, based in part on the definitive agreements entered into
on April 30, 1998, management determined that a net loss on disposal would be
incurred as well as operating losses. Management revised its estimates in the
financial statements for the quarter ended March 31, 1998. The results of
operations and disposition of the discontinued operations for the quarter ended
June 30, 1998 are consistent with the Company's revised estimates.
Continuing Operations
The following analysis of continuing operations incorporates the quarter ending
March 31, 1998 operating results, due to the effect of the restructuring
discussed above, on the Company's business.
Sales
Three Months Ended Six Months Ended
- ------------------------------------------------ -----------------------------
June 30 March 31 July 31 June 30 July 31
1998 1998 1997 1998 1997
$8,542,000 $8,234,000 $10,788,000 $16,755,000 $19,478,000
Revenues decreased by $2,246,000 or 20.8%, and $2,723,000 or 14.0% for the three
months and six months ended June 30, 1998, as compared to the 1997 periods. Work
Telcom, a division of Internet which was sold in 1997 accounted for $229,000 and
$395,000 of revenues for the three and six months ended July 31, 1997. The
Telesales division, which was phased out in 1997, accounted for $598,000 and
$1,175,000 of revenues for the three and six months ended July 31, 1997. The
decrease in sales, excluding Work Telcom and the Telesales division, for the
three months is due primarily to two large contracts which accounted for
$1,270,000 of sales. The Company did not have any comparable contracts during
the second quarter of 1998. For the six months, the decrease was also affected
by a significant fiber infrastructure construction contract which was outside
the normal scope of the Company's business, which was completed during the first
quarter of 1997. These decreases were offset by service sales which increased by
$634,000 or 19.5%, and $1,098,000 or 17.0% for the three and six months ended
June 30, 1998, reflecting the Company's continued emphasis to increase sales of
recurring services contracts.
D-11
<PAGE>
Sales increased by 3.7%, or $308,000 for the quarter ended June 30, 1998
compared to the quarter ended March 31, 1998. This increase was due to a 3.3%
increase in network integration revenue and a 4.2% increase in network services
revenue.
Gross Margin
Gross margin for the three and six months ended June 30, 1998 was 30.6% and
29.0% of sales versus 31.5% and 31.2% for the comparable periods in the prior
year. The gross margin for the three months ended March 31, 1998 was 27.2%.
Selling Expenses
Three Months Ended Six Months Ended
- ------------------------------------------------ -----------------------------
June 30 March 31 July 31 June 30 July 31
1998 1998 1997 1998 1997
$1,189,000 $1,710,000 $1,632,000 $2,899,000 $3,151,000
Selling expenses decreased by $443,000 or 27.1%, and $252,000 or 8.0% for the
three months and six months ended June 30, 1998, as compared to the 1997
periods. Selling expenses as a percentage of revenue were lower in the current
quarter (13.9%) as compared to the same period in the prior year (15.1%) and the
quarter ended March 31, 1998 (20.8%), reflecting costs savings realized as a
result of the restructuring in March, which included a reduction in the
company's sales force. Selling expenses as a percentage of revenue for the
six-month period ended June 30, 1998 were 17.3% as compared to 16.2% for same
period in the prior year.
General & Administrative
Three Months Ended Six Months Ended
- ----------------------------------------------- ------------------------------
June 30 March 31 July 31 June 30 July 31
1998 1998 1997 1998 1997
$1,467,000 $1,911,000 $1,614,000 $3,378,000 $3,083,000
For the three months ended June 30, 1998, general and administrative costs
decreased by $147,000 or 9.1% over the prior year quarter and $444,000, or 23.2%
over the quarter ended March 31, 1998. The decrease in expense is due to lower
personnel costs and decreases in rent and office expenses resulting from the
restructuring, General and administrative costs for the six month period ended
June 30, 1998 increased by $295,000 or 9.6% over the prior year, due to the
increase in personnel costs, settlement costs, and increases in allowances for
bad debt and obsolete inventory incurred in the first quarter of 1998.
Year 2000 Risks
Currently, many computer systems, hardware and software products are coded to
accept only two digit entries in the date code field and, consequently, cannot
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company and third
parties with which the Company does business rely on numerous computer programs
in their day to day operations.
D-12
<PAGE>
The Company has begun the process of identifying computer systems that could be
affected by the Year 2000 issue as it relates to the Company's internal hardware
and software, as well as third parties which provide the Company goods or
services. The Company groups its analysis of these software, hardware and
systems into the following four categories:
(a) Customer Network Installations, where the Company has installed third
party vendor equipment and may or may not provide ongoing maintenance
and support to the customer and their network.
(b) Network Control Center, where the Company monitors and manages the
integrity and quality of customer networks.
(c) Third party vendors and providers (other than the equipment vendors
referred to above), including those which provide the Company with
services such as its data transmission capacity.
(d) Corporate Administrative Functions, including financial systems and
other corporate functions.
For categories (a) and (b), the Company has substantially completed its
inventory of the software and devices involved. During this inventory phase, the
project team has been working with third party equipment and software vendors to
assess whether these devices and software programs are date dependent and
whether it is anticipated that they will be Year 2000 compliant.
The Company has not commenced a detailed inventory and assessment process for
categories (c) and (d) as these were deemed to be less critical to the Company's
operations and less likely to require remediation or replacement.
The inventory and assessment for each of the four categories should be completed
by the end of 1998. Testing, remediation and replacement will commence in the
fourth quarter of 1998 for selected areas and will commence by the first quarter
of 1999 for all categories. The Company has not developed a contingency plan
which would be utilized if current efforts by the Company and its vendors are
unsuccessful.
In the event that the Company acquires other assets of businesses, the software
and hardware acquired by the Company in connection with those business
combinations may also be Year 2000 non-compliant.
There can be no assurance that the Year 2000 issues will be resolved in 1998 or
1999. The Company does not currently have an estimate of the total costs
required for this effort and may incur significant costs in resolving its Year
2000 issues. If not resolved, this issue would have a material adverse impact on
the Company's business, operating results, financial condition and cash flow.
D-13
<PAGE>
Part II
ITEM 1. LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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. 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.
During the quarter ended June 30, 1998, 194,250 options to purchase shares
of common stock were exercised for a total consideration of $793,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1998, the annual meeting of the Company's shareholders was held
to vote on proposals contained in the proxy statement mailed to
shareholders on April 17, 1998. The Company's shareholders elected Peter
A. Guglielmi and Robert L. Smith, each to serve a three year term. The
Company's shareholders also approved an amendment to the Company's 1996
Incentive Stock Plan to increase the number of options which may be
granted from 875,000 shares to 975,000 shares. The number of shares voted
and withheld with respect to each director and the Amendment to the 1996
Incentive Stock Plan were as follows:
Election of Directors For Withheld
Peter A. Guglielmi 5,093,987 18,177
Robert L. Smith 5,095,687 16,477
For Withheld Abstain
Amendment 4,934,987 152,478 24,699
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K. During the quarter for which this report is filed,
the Registrant filed a current report on Form 8-K, dated June 10, 1998,
regarding the Registrant and Rocky Mountain Internet, Inc., a Delaware
corporation, entering into a definitive Agreement and Plan of Merger.
D-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERNET COMMUNICATIONS CORPORATION
(Registrant)
Date: August 19, 1998 By: /s/ John M. Couzens
--------------------------
John M. Couzens, President
Date: August 19, 1998 By: /s/ T. Timothy Kershisnik
-------------------------------
T. Timothy Kershisnik,
Chief Financial Officer
D-15
<PAGE>
APPENDIX E
TITLE 7. COLORADO BUSINESS CORPORATION ACT
ARTICLE 113. DISSENTERS' RIGHTS
PART 1. RIGHT OF DISSENT - PAYMENT FOR SHARES
C.R.S. 7-113-101 (1996)
7-113-101. Definitions
For purposes of this article: (1) "Beneficial shareholder" means the
beneficial owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under section 7-113-102 and who exercises that right at the time and in
the manner required by part 2 of this article.
(4) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effective date of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action except to the extent that exclusion would
be inequitable.
(5) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the corporation
on its principal bank loans or, if none, at the legal rate as specified in
section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares that are
registered in the name of a nominee to the extent such owner is recognized by
the corporation as the shareholder as provided in section 7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102. Right to dissent
(1) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a party if:
(I) Approval by the shareholders of that corporation is required for
the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation; or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all, of the property of the corporation for which a shareholder
vote is required under section 7-112-102 (1); and
E-1
<PAGE>
(d) Consummation of a sale, lease, exchange, or other disposition of all, or
substantially all, of the property of an entity controlled by the corporation if
the shareholders of the corporation were entitled to vote upon the consent of
the corporation to the disposition pursuant to section 7-112-102 (2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine shareholders
entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate action is
authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall not
apply if the shareholder will receive for the shareholder's shares, pursuant to
the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan of
merger or share exchange;
(b) Shares of any other corporation which at the effective date of the plan of
merger or share exchange either will be listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934", as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or will be held of record by more than two thousand
shareholders;
(c) Cash in lieu of fractional shares; or
(d) Any combination of the foregoing described shares or cash in lieu of
fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, 30, effective June 1, 1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to dissent
and obtain payment of the fair value of the shareholder's shares in the event of
a reverse split that reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so created is
to be acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair value
of the shareholder's shares in the event of any corporate action to the extent
provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the shareholder's
shares under this article may not challenge the corporate action creating such
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
7-113-103. Dissent by nominees and beneficial owners
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered
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<PAGE>
in the record shareholder's name only if the record shareholder dissents with
respect to all shares beneficially owned by any one person and causes the
corporation to receive written notice which states such dissent and the name,
address, and federal taxpayer identification number, if any, of each person on
whose behalf the record shareholder asserts dissenters' rights. The rights of a
record shareholder under this subsection (1) are determined as if the shares as
to which the record shareholder dissents and the other shares of the record
shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the shares
held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the record
shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder dissents with
respect to the shares held by any one or more beneficial shareholders, each such
beneficial shareholder must certify to the corporation that the beneficial
shareholder and the record shareholder or record shareholders of all shares
owned beneficially by the beneficial shareholder have asserted, or will timely
assert, dissenters' rights as to all such shares as to which there is no
limitation on the ability to exercise dissenters' rights. Any such requirement
shall be stated in the dissenters' notice given pursuant to section 7-113-203.
7-113-201. Notice of dissenters' rights
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting, the notice of the
meeting shall be given to all shareholders, whether or not entitled to vote. The
notice shall state that shareholders are or may be entitled to assert
dissenters' rights under this article and shall be accompanied by a copy of this
article and the materials, if any, that, under articles 101 to 117 of this
title, are required to be given to shareholders entitled to vote on the proposed
action at the meeting. Failure to give notice as provided by this subsection (1)
shall not affect any action taken at the shareholders' meeting for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (1).
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104, any written or oral solicitation of a shareholder to execute a
writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
shall not affect any action taken pursuant to section 7-107-104 for which the
notice was to have been given, but any shareholder who was entitled to dissent
but who was not given such notice shall not be precluded from demanding payment
for the shareholder's shares under this article by reason of the shareholder's
failure to comply with the provisions of section 7-113-202 (2).
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<PAGE>
7-113-202. Notice of intent to demand payment
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is submitted to a vote at a shareholders' meeting and if notice of
dissenters' rights has been given to such shareholder in connection with the
action pursuant to section 7-113-201 (1), a shareholder who wishes to assert
dissenters' rights shall:
(a) Cause the corporation to receive, before the vote is taken, written notice
of the shareholder's intention to demand payment for the shareholder's shares if
the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized without a meeting of shareholders pursuant to section
7-107-104 and if notice of dissenters' rights has been given to such shareholder
in connection with the action pursuant to section 7-113-201 (2), a shareholder
who wishes to assert dissenters' rights shall not execute a writing consenting
to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection (1) or
(2) of this section is not entitled to demand payment for the shareholder's
shares under this article.
7-113-203. Dissenters' notice
(1) If a proposed corporate action creating dissenters' rights under section
7-113-102 is authorized, the corporation shall give a written dissenters' notice
to all shareholders who are entitled to demand payment for their shares under
this article.
(2) The dissenters' notice required by subsection (1) of this section shall be
given no later than ten days after the effective date of the corporate action
creating dissenters' rights under section 7- 113-102 and shall:
(a) State that the corporate action was authorized and state the effective
date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment demands and
the address of a place where certificates for certificated shares must be
deposited;
(c) Inform holders of uncertificated shares to what extent transfer of the
shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a dissenter
to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment demand and
certificates for certificated shares, which date shall not be less than thirty
days after the date the notice required by subsection (1) of this section is
given;
(f) State the requirement contemplated in section 7-113-103 (3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
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<PAGE>
7-113-204. Procedure to demand payment
(1) A shareholder who is given a dissenters' notice pursuant to section
7-113-203 and who wishes to assert dissenters' rights shall, in accordance with
the terms of the dissenters' notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203 (2) (d), duly completed,
or may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1) of
this section retains all rights of a shareholder, except the right to transfer
the shares, until the effective date of the proposed corporate action giving
rise to the shareholder's exercise of dissenters' rights and has only the right
to receive payment for the shares after the effective date of such corporate
action.
(3) Except as provided in section 7-113-207 or 7-113-209 (1) (b), the demand
for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the shareholder's
share certificates as required by the date or dates set in the dissenters'
notice is not entitled to payment for the shares under this article.
7-113-205. Uncertificated shares
(1) Upon receipt of a demand for payment under section 7-113-204 from a
shareholder holding uncertificated shares, and in lieu of the deposit of
certificates representing the shares, the corporation may restrict the transfer
thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206. Payment
(1) Except as provided in section 7-113-208, upon the effective date of the
corporate action creating dissenters' rights under section 7-113-102 or upon
receipt of a payment demand pursuant to section 7-113-204, whichever is later,
the corporation shall pay each dissenter who complied with section 7-113-204, at
the address stated in the payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, the
amount the corporation estimates to be the fair value of the dissenter's shares,
plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall be
accompanied by:
(a) The corporation's balance sheet as of the end of its most recent fiscal
year or, if that is not available, the corporation's balance sheet as of the end
of a fiscal year ending not more than sixteen months before the date of payment,
an income statement for that year, and, if the corporation customarily provides
such statements to shareholders, a statement of changes in shareholders' equity
for that year and a statement of cash flow for that year, which balance sheet
and statements shall have been audited if the corporation customarily provides
audited financial statements to shareholders, as well as the latest available
financial statements, if any, for the interim or full-year period, which
financial statements need not be audited;
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(b) A statement of the corporation's estimate of the fair value of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under section
7-113-209; and
(e) A copy of this article.
7-113-207. Failure to take action
(1) If the effective date of the corporate action creating dissenters' rights
under section 7-113-102 does not occur within sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
(2) If the effective date of the corporate action creating dissenters' rights
under section 7-113-102 occurs more than sixty days after the date set by the
corporation by which the corporation must receive the payment demand as provided
in section 7-113-203, then the corporation shall send a new dissenters' notice,
as provided in section 7-113-203, and the provisions of sections 7-113-204 to
7-113-209 shall again be applicable.
7-113-208. Special provisions relating to shares acquired after
announcement of proposed corporate action
(1) The corporation may, in or with the dissenters' notice given pursuant to
section 7-113-203, state the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating dissenters'
rights under section 7-113-102 and state that the dissenter shall certify in
writing, in or with the dissenter's payment demand under section 7-113-204,
whether or not the dissenter (or the person on whose behalf dissenters' rights
are asserted) acquired beneficial ownership of the shares before that date. With
respect to any dissenter who does not so certify in writing, in or with the
payment demand, that the dissenter or the person on whose behalf the dissenter
asserts dissenters' rights acquired beneficial ownership of the shares before
such date, the corporation may, in lieu of making the payment provided in
section 7-113-206, offer to make such payment if the dissenter agrees to accept
it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206 (2).
7-113-209. Procedure if dissenter is dissatisfied with payment or offer
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206 or
offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206 within
sixty days after the
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date set by the corporation by which the corporation must receive the
payment demand; or
(c) The corporation does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares as required by section
7-113-207 (1).
(2) A dissenter waives the right to demand payment under this section unless
the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
7-113-301. Court action
(1) If a demand for payment under section 7-113-209 remains unresolved, the
corporation may, within sixty days after receiving the payment demand, commence
a proceeding and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay to each dissenter whose demand remains
unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in subsection (1)
of this section in the district court of the county in this state where the
corporation's principal office is located or, if the corporation has no
principal office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unresolved parties to the proceeding commenced
under subsection (2) of this section as in an action against their shares, and
all parties shall be served with a copy of the petition. Service on each
dissenter shall be by registered or certified mail, to the address stated in
such dissenter's payment demand, or if no such address is stated in the payment
demand, at the address shown on the corporation's current record of shareholders
for the record shareholder holding the dissenter's shares, or as provided by
law.
(4) The jurisdiction of the court in which the proceeding is commenced under
subsection (2) of this section is plenary and exclusive. The court may appoint
one or more persons as appraisers to receive evidence and recommend a decision
on the question of fair value. The appraisers have the powers described in the
order appointing them, or in any amendment to such order. The parties to the
proceeding are entitled to the same discovery rights as parties in other civil
proceedings.
(5) Each dissenter made a party to the proceeding commenced under subsection
(2) of this section is entitled to judgment for the amount, if any, by which the
court finds the fair value of the dissenter's shares, plus interest, exceeds the
amount paid by the corporation, or for the fair value, plus interest, of the
dissenter's shares for which the corporation elected to withhold payment under
section 7-113-208.
7-113-302. Court costs and counsel fees
(1) The court in an appraisal proceeding commenced under section 7-113-301
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation; except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 7-113-209.
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(2) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court finds
the corporation did not substantially comply with the requirements of part 2 of
this article; or
(b) Against either the corporation or one or more dissenters, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to said counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
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INTERNET COMMUNICATIONS CORPORATION
Special Meeting of Shareholders - September __, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints John M. Couzens and T. Timothy Kershisnik, and
each of them, the attorneys and proxies of the undersigned, each with full power
of substitution, to vote all the shares of Common Stock of Internet
Communications Corporation which the undersigned is entitled to vote at the
Special Meeting of Shareholders of the Company to be held at the offices of the
Company at 7100 East Belleview Avenue, Suite 201, Englewood, Colorado 80111 on
September __, 1998 at 10:00 a.m., Denver time, and at any adjournment or
adjournments thereof, and authorizes and instructs said proxies to vote in the
manner directed below:
1. On the Proposal to Approve and Adopt the Merger Agreement and the Merger
described in the accompanying Proxy Statement:
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting, or any adjournment thereof,
upon matters incident to the conduct of the meeting.
IF NO INSTRUCTION TO THE CONTRARY IS INDICATED, THIS PROXY WILL BE VOTED FOR THE
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
A copy of the Notice of Special Meeting of Shareholders and Proxy Statement,
dated August __, 1998, has been received by the undersigned.
Please sign exactly as name or names appear on this Proxy, including the title
"Executor", "Guardian," etc., if the same is indicated. When joint names appear
both should sign. If stock is held by a corporation this proxy should be
executed by a proper officer thereof, whose title should be given.
Dated: , 1998
Signature
Signature if jointly held
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TODAY
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