<PAGE>
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.
Page 1 of 15 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Form 10-Q Cover Page 1
Index Page 2
Part I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets at 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 5
For the Six months ended June 30, 1998 and July 31, 1997
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities and use of Proceeds 14
Item 3 - Defaults upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of 14
Security Holders
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signature Page 15
</TABLE>
2
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INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
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
============== ==============
</TABLE>
- -----------------------------------------
See accompanying notes to these condensed consolidated financial statements
3
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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)
<S> <C> <C> <C> <C>
Sales:
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 operations N/A 0.02 (0.08) (0.01)
Net Income (Loss) $ (0.04) 0.03 (0.69) (0.09)
</TABLE>
- -----------------------------------------
See accompanying notes to these condensed consolidated financial statements
4
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the six months ended
----------------------------
June 30 July 31,
1998 1997
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (3,319) (417)
Adjustments to reconcile net loss from continued operations
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 earnings 892 --
Increase (decrease) in:
Accounts payable 1,790 265
Unearned income (6) 33
Accrued expenses 145 --
Billings in excess of costs and estimated earnings (490) --
---------- ----------
Net cash provided by (used in) operating activities (3,117) 264
Net cash provided by (used in) operating activities of
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
========== ==========
</TABLE>
- -----------------------------------------
See accompanying notes to these condensed consolidated financial statements.
5
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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
6
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pursuant to a Voting Agreement dated June 5, 1998 between Interwest Group and
RMI.
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.
7
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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 21/st/ century dates from 20/th/ 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.
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
9
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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.
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.
These restructuring actions resulted in the Company recognizing an expense for
the three months ended
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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
11
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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.
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 21/st/ century dates from 20/th/ 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
12
<PAGE>
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.
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.
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
15
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 422,000
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0
<COMMON> 14,758,000
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<INTEREST-EXPENSE> 169,000
<INCOME-PRETAX> (209,000)
<INCOME-TAX> 0
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