SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Amendment No. )
X Filed by the Registrant Filed by a Party other than the Registrant
Check the appropriate box:
__ Preliminary Proxy Statement
__ Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
X 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):
X No fee required.
__ 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:
2) Aggregate number of securities to which transaction applies:
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):
4) Proposed maximum aggregate value of transaction: $___________
5) Total fee paid: $_______
__ 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 the Record Holders of Common Stock
of Internet Communications Corporation:
NOTICE IS HEREBY GIVEN pursuant to the Colorado Business Corporation Act (the
"CBCA") that on February 23, 1999 a special meeting (the "Meeting") of all
shareholders of Internet Communications Corporation, a Colorado corporation (the
"Company"), of record on January 22, 1999 (the "Record Date"), will be held at
the offices of the Company at 7100 East Belleview Avenue, Suite 201, Greenwood
Village, Colorado 80111, at 10:00 a.m., Denver, Colorado time, to consider (i) a
proposal to ratify and approve the issuance of 50,000 shares of Series A
Convertible Preferred Stock ("Preferred Stock") of the Company and all shares of
Common Stock issuable upon conversion thereof, pursuant to a Securities Purchase
Agreement entered into between the Company and Interwest Group, Inc., the
Company's largest shareholder; and (ii) such other matters as may properly be
brought before the Meeting.
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 Stock 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.
By order of the Board of Directors
John M. Couzens, President
January 27, 1999
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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
January 22, 1999 (the "Record Date"), in connection with a proposal (the
"Proposal") that the Company's shareholders ratify the issuance of 50,000 shares
of Series A Convertible Preferred Stock of the Company (the "Preferred Stock"),
and all shares of Common Stock issuable upon conversion thereof, pursuant to a
Securities Purchase Agreement entered into between the Company and Interwest
Group, Inc. ("Interwest"), the Company's largest shareholder. The Board has
approved the issuance of the Preferred Stock by a unanimous vote with Messrs.
Slater and Liebhaber, affiliates of Interwest, abstaining.
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, Greenwood Village, Colorado 80111, at 10:00 a.m.,
Denver, Colorado time, on February 23, 1999, to consider approval of the
Proposal.
The date of this Proxy Statement is January 27, 1999. This Proxy Statement and
the accompanying form of proxy are being furnished by the Company and were first
mailed on or about January 27, 1999 to shareholders of the Company as of the
close of business on the Record Date.
As of the Record Date there were 5,617,637 shares of Common Stock of the Company
("Common Stock") issued and outstanding and 50,000 shares of Preferred Stock
issued and outstanding (convertible as of the Record Date into 2,222,222 shares
of Common Stock). Stockholders may vote in person or by proxy. Each holder of
shares of Common Stock available for voting is entitled to one vote for each
share of stock held on the proposal presented in this Proxy Statement. The
holders of Preferred Stock shall vote with the holders of Common Stock as a
single class, with each share of Preferred Stock entitled to the number of votes
that the holder would have if such shares were converted into Common Stock as of
the Record Date. Because 25,000 shares of the Preferred Stock are held in escrow
pending shareholder approval (the "Escrowed Shares"), those shares will not be
voted with respect to the Proposal. The Common Stock is traded on the Nasdaq
SmallCap Stock Market.
The presence, in person or by proxy, at the Meeting of the holders of one-third
of the Common Stock outstanding and entitled to vote at the Meeting is necessary
to constitute a quorum at the meeting.
Approval of the Proposal will require the affirmative vote of a greater number
of votes cast for the proposal than are cast against the proposal.
Abstentions may be specified on all proposals and will be counted as present for
purposes of determining the existence of a quorum regarding the item on which
the abstention is noted. Abstentions will have no effect on the vote. Under
applicable Colorado law, both an abstention and a broker non-vote will have no
effect on the outcome of the matters to be voted on at the Meeting.
The Company's largest shareholder, Interwest Group, Inc. ("Group"), beneficially
owning 3,984,679 shares (58.7%) of the Company's common stock (assuming
conversion of the Preferred Stock held by Group other than the Escrowed Shares),
intends to vote all of its shares in favor of the proposal.
At the date of this Proxy Statement, the Board of Directors of the Company does
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
Stock executes and returns a proxy and does not specify otherwise, the
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shares represented by such proxy will be voted "for" approval and adoption of
the Proposal in accordance with the recommendation of the Board of Directors of
the Company. A holder of Common Stock 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.
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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
Stock, and all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name and Adress Title Amount of Percent
Beneficial Ownership of Class
<S> <C> <C> <C>
JOHN M. COUZENS (1)
7100 E. Belleview Ave., Suite 201 President, CEO 36,797 *
Greenwood Village, CO 80111 and Director
THOMAS C. GALLEY (2)
7100 E. Belleview Ave., Suite 201 Director 580,978 10.3%
Greenwood Village, CO 80111
PETER A. GUGLIELMI (3)
4951 Indiana Avenue Director 13,194 *
Lisle, IL 60532
WILLIAM J. MAXWELL (4)
500 18th Avenue, NE, Suite 2600 Director 8,772 *
Bellevue, WA 98004
CRAIG D. SLATER (5)
555 17th St., Suite 2400 Director 3,986,630 58.7%
Denver, CO 80202
ROBERT L. SMITH
7100 E. Belleview , Suite 201 Director 25,900 *
Greenwood Village, CO 80111
RICHARD LIEBHABER (6)
555 17th St., Suite 2400 Director 3,984,679 58.7%
Denver, CO 80202
T. TIMOTHY KERSHISNIK (7)
7100 E. Belleview Ave., Suite 201 Vice President,
Greenwood Village, CO 80111 CFO, Treasurer -- *
and Corporate Secretary
MARY BETH LOESCH (8)
7100 E. Belleview Ave., Suite 201 Vice President,
Greenwood Village, CO 80111 Sales and President,
Advanced Network 51,000 *
Solutions Group
Charles Eazor (9) Vice President/ -- *
7100 E. Belleview Ave., Suite 201 General Manager
Greenwood Village, CO 80111
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INTERWEST GROUP, INC. (10) 3,984,679 58.7%
555 17th St., Suite 2400
Denver, CO 80202
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (11) 4,703,271 68.6%
- -------------------------
*Less than one percent.
</TABLE>
(1) Share ownership represents 36,797 shares of common stock. Mr. Couzens also
has an option to purchase 70,000 shares of which none are presently exercisable.
(2) Share ownership includes 255,220 shares of Company Common Stock owned
beneficially and of record, 43,500 shares owned beneficially by virtue of his
wife's ownership of said shares and 282,258 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 which is presently exercisable.
(4) Share ownership includes 2,105 shares and an option to purchase 10,000
shares of which 6,667 are 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. 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.
(7) Mr. Kershisnik has an option to purchase 30,000 shares of which none are
presently exercisable.
(8) 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
50,000 are presently exercisable.
(9) Mr. Eazor has an option to purchase 30,000 shares of which none are
presently exercisable.
(10) Share ownership includes 2,810,410 shares of Company Common Stock owned
beneficially and of record, warrants to purchase 63,158 shares and 25,000 shares
of Preferred Stock which are convertible into 1,111,111 shares of Common Stock.
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 conversion of the Escrowed Shares.
(11) Represents 11 persons as of December 31, 1998. Share ownership includes
3,986,630 shares reported in the table with respect to Messrs. Slater and
Liebhaber, who disclaim beneficial ownership of all such shares shares, except
that Mr. Slater acknowledges beneficial ownership of 1,951 of such shares.
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PROPOSAL TO RATIFY AND APPROVE THE ISSUANCE OF 50,000 SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
AND ALL THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION THEREOF
The Company and Group executed a Securities Purchase Agreement on December 30,
1998 (the "Securities Purchase Agreement"), pursuant to which 50,000 shares of
Preferred Stock were issued to Group at a price of $100 per share. A copy of the
Securities Purchase Agreement is attached as Appendix A to this Proxy Statement.
Of the 50,000 shares issued, the 25,000 Escrowed Shares were placed in escrow
pending shareholder approval of the issuance. Of the $5,000,000 consideration,
$2,200,000 was delivered to the Company at closing and an additional $300,000
was applied to the Company's $1,600,000 convertible promissory note in favor of
Anschutz Company, Group's sole shareholder (the "Anschutz Note"). The balance of
the proceeds were paid by delivery of $1,200,000 in cash and the Anschutz Note
into escrow pending shareholder approval of the issuance. The Company has
applied $650,000 of the cash received at closing to pay down its credit facility
and intends to use the balance of the cash for working capital. The Company
intends to apply $850,000 of the escrowed cash to further pay down its credit
facility and intends to use the balance of the cash for working capital.
The Preferred Stock bears dividends at an annual rate equal to $7.125 per share.
The dividends accrue and are cumulative and do not compound. Dividends are
payable quarterly in arrears commencing March 31, 1999, in (i) cash or (ii)
shares of Common Stock (based on the Closing Price (as defined in the Articles
of Amendment) of the Common Stock on the dividend payment date), as the Company
shall elect. Currently, the Board of Directors of the Company does not
anticipate declaring any dividends with respect to the Common Stock.
In the event of any liquidation, dissolution, or winding up of the Company or
the sale of all or substantially all of the assets of the Company, or the
acquisition of the Company by another entity by means of corporate
reorganizations or merger, or other transaction or series of related
transactions in which more than 50% of the outstanding voting power of the
Company is disposed of (a "Liquidation Event"), the holders of shares of
Preferred Stock will be entitled to be paid out of the assets of the Company
available for distribution to all stockholders $100.00 per share, plus an amount
equal to all declared and unpaid dividends, prior to any amounts being paid to
the holders of Common Stock.
Holders of the Preferred Stock are entitled to the number of votes equal to the
number of shares of Common Stock into which their shares of Preferred Stock
could be converted at the record date for determination of the shareholders
entitled to vote.
Shares of Preferred Stock may be converted into shares of Common Stock. The
number of shares to be received on conversion will be the original purchase
price of $100 and all accrued and unpaid dividends, divided by $2.25. If at any
time the closing price of the Common Stock for 45 consecutive trading days is
equal to or greater than $10.00, the Company shall have the right to
automatically convert the Preferred Stock. The Common Stock received on
conversion will be deemed to be "Registrable Shares" subject to the terms of the
Registration Rights Agreement between the Company and Group dated as of May 29,
1996, as amended. The conversion price of $2.25 per Common Stock share was
determined by negotiation between the Company and Interwest and is equal to the
average of the high and low trading prices on the Nasdaq SmallCap Stock Market
on October 23, 1998, when the Company and Interwest first agreed in principle to
the sale of $2,000,000 of Preferred Stock. Subsequently, on December 18, 1998,
the Company and Interwest agreed to increase the amount of the investment to
$5,000,000, on the same terms. On that date, the closing price of the Common
Stock was $2.563 per share. On January 22, 1999, the closing price of the Common
Stock was $3.375 per share.
The Company may not, without first obtaining the consent of the holders of a
majority of the outstanding shares of Preferred Stock: (A) amend or repeal any
provision of, or add any provision to, the Company's Articles of Incorporation
or Bylaws if such action would alter or change the, rights of the holders of
Preferred Stock; (B) issue shares of any class or series of stock having any
preference or priority as to dividends or redemption rights,
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liquidation preferences, conversion rights, or voting rights, superior to or on
a parity with any preference or priority of the Preferred Stock; (C) issue any
bonds, debentures, notes or other obligations convertible into or exchangeable
for, or having option rights to purchase, any shares of stock of the Company
having any preference or priority as to dividends or redemption rights,
liquidation preferences, conversion rights, or voting rights, superior to or on
a parity with any preference or priority of the Preferred Stock; (D) reclassify
any shares of capital stock into shares having any preference or priority as to
dividends or redemption rights, liquidation preferences, conversion rights, or
voting rights, superior to or on a parity with any preference or priority of any
series of the Preferred Stock; (E) apply any of its assets to the redemption,
retirement, purchase or acquisition, directly or indirectly, of any shares of
any class or series of Common Stock; (F) cause a Liquidation Event; (G) declare
or pay dividends on or make any distributions with respect to the Company's
Common Stock; (H) increase or decrease the authorized number of shares of
Preferred Stock; or (I) sell, lease, assign, transfer, convey or otherwise
dispose of the securities of any subsidiary. A copy of the Articles of Amendment
is attached as Appendix B to this Proxy Statement.
Shareholder ratification and approval of the issuance of the Preferred Stock and
related actions contemplated pursuant to the Securities Purchase Agreement is
not required under the Colorado Business Corporation Act, the Company's Articles
of Incorporation, or the Company's Bylaws. However, as discussed below,
shareholder approval of the issuance of the Escrowed Shares is required in order
to maintain the Company's inclusion in The Nasdaq Stock Market SmallCap System.
Nasdaq Shareholder Approval Requirement. The Company's Common Stock is traded on
the over-the-counter market and is quoted on The Nasdaq Stock Market SmallCap
System. In order to qualify for inclusion in The Nasdaq Stock Market SmallCap
System, it is necessary that the Company satisfy certain financial and other
criteria set forth in The Nasdaq Marketplace Rules (the "Rules"). In addition,
in order to maintain such inclusion under the Rules, the Company must, among
other things, follow certain corporate governance procedures, including
obtaining shareholder approval in connection with certain corporate
transactions.
The Rules require shareholder approval of the issuance of 20% or more of the
common stock (or securities convertible into or exercisable for common stock)
outstanding before the issuance for less than the greater of book or market
value of the stock.
If the shares of Common Stock are converted into Common Stock, they will be
issued at the rate of $2.25 per share, which would be less than the greater of
book or market value of such shares on the date hereof. If all of the 50,000
Preferred Stock shares currently outstanding were converted on the date hereof,
the Company would have issued 39.6% of the number of shares of Common Stock
outstanding as of the date hereof. Accordingly, in order to comply with the
Rules, it will be necessary for the Company to obtain shareholder ratification
and approval of the issuance of the Preferred Stock (and the shares of Common
Stock issuable upon conversion thereof) pursuant to the Securities Purchase
Agreement.
Requirements for Continued Nasdaq Listing. Although the Common Stock is
currently quoted on The Nasdaq Stock Market SmallCap System, the Company has in
the past failed to meet the requirements of Nasdaq Marketplace Rule 4310(c)(2)
which requires that an issuer maintain (i) net tangible assets of $2,000,000;
(ii) market capitalization of $35,000,000; or (iii) net income of $500,000 in
the most recently completed fiscal year or in two of the last three most
recently completed fiscal years. The Company believes this deficiency will be
remedied upon shareholder approval of the Preferred Stock financing. There can
be no assurance, however, that the Company will continue to meet such
requirements in any future period.
If the Company is otherwise unable to meet The Nasdaq Stock Market SmallCap
System's continuing listing requirements described above, Nasdaq may take
appropriate action against the Company, including placing restrictions on or
additional requirements for listing of its Common Stock or the denial of listing
of its Common Stock. If the Company's Common Stock is delisted from The Nasdaq
Stock Market SmallCap System, the Company will become subject to the Securities
and Exchange Commission's "penny stock" rules, and as a result, an investor
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will find it more difficult to dispose of, or to obtain accurate quotations as
to the price of, the Company's Common Stock.
The "penny stock" rules under the Securities and Exchange Act of 1934 impose
additional sales practice and market-making requirements on broker-dealers who
sell and/or make a market in such securities. For transactions covered by the
penny stock rules, a broker-dealer must make special suitability determinations
for purchasers and must have received the purchaser's written consent to the
transaction prior to sale. In addition, for any transaction involving a penny
stock, unless exempt, the rules require delivery prior to any transaction in a
penny stock of a disclosure schedule relating to the penny stock market.
Disclosure is also required to be made about commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market and penny stocks. As a result, the Company's delisting
from The Nasdaq Stock Market SmallCap System and its becoming subject to the
rules on penny stock would negatively affect the ability or willingness of
broker-dealers to sell or make a market in the Company's securities and,
therefore, would severely and adversely affect the market liquidity for the
Company's Common Stock.
Although the issuance of the shares of Series A Preferred Stock pursuant to the
Securities Purchase Agreement will have a dilutive effect on the Company's
current stockholders, the Board of Directors believes that shareholder approval
of the Proposal is in the best interest of the Company, in order to help the
Company meet Nasdaq listing requirements, to pay down debt and to provide
additional working capital.
Impact of a Vote Against Issuance. If the Company's shareholders do not approve
the Proposal, the Escrowed Shares will be returned to the Company and the
purchase of the Escrowed Shares for $2,500,000 by Group will not be completed.
In such a case the Company may no longer qualify for inclusion on The Nasdaq
Stock Market SmallCap System.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR RATIFICATION AND APPROVAL OF THE
ISSUANCE OF 50,000 SHARES OF PREFERRED STOCK (AND ALL SHARES OF COMMON STOCK
ISSUABLE UPON CONVERSION THEREOF) PURSUANT TO THE TERMS OF THE SECURITIES
PURCHASE AGREEMENT.
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
Any proposals of holders of Common Stock intended to be presented at the Annual
Meeting of Shareholders of the Company to be held in 1999 would have had to have
been received by the Company, addressed to the Secretary at 7100 East Belleview
Avenue, Suite 201, Greenwood Village, 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.
INCORPORATION BY REFERENCE
The Company incorporates by reference its Annual Report on Form 10-K for the
year ended December 31, 1997 and its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998, attached as Appendices C and D, respectively.
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APPENDIX A
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT ("this Agreement"), dated as of
December 30, 1998, is entered into by and between Internet Communications
Corporation, a Colorado corporation (the "Company"), and Interwest Group, Inc.,
a Colorado corporation ("Buyer").
RECITALS
WHEREAS, the Company and Buyer are executing and delivering this
Agreement in accordance with and in reliance upon the exemption from securities
registration afforded, inter alia, by Rule 506 under Regulation D ("Regulation
D") as promulgated by the United States Securities and Exchange Commission (the
"SEC") under the Securities Act of 1933, as amended (the "1933 Act"), and/or
Section 4(2) of the 1933 Act; and
WHEREAS, the Company wishes to sell to Buyer and Buyer wishes to
purchase from the Company, upon the terms and subject to the conditions of this
Agreement, shares of Series A Convertible Preferred Stock (the "Convertible
Preferred Stock") of the Company, which which will be convertible into shares of
Common Stock of the Company (the "Common Stock") upon the terms and subject to
the conditions of such Convertible Preferred Stock;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO PURCHASE; PURCHASE PRICE.
a. Purchase; Certain Definitions.
(i) The Company agrees to sell to Buyer and Buyer agrees to purchase
from the Company 50,000 shares of Convertible Preferred Stock having the terms
and conditions set forth in the Articles of Amendment to the Articles of
Incorporation of the Company attached hereto as Annex I (the "Articles of
Amendment") at a purchase price of $100 per share.
(ii) Capitalized terms used and not defined herein shall have the
meanings given to them in the Articles of Amendment.
(iii) As used herein, the term "Securities" means the Preferred Stock
and the Common Stock issuable upon conversion of the Preferred Stock.
(iii) As used herein, the term "Purchase Price" means the purchase
price for the Preferred Stock.
b. Form of Payment; Delivery of Preferred Stock.
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(i) Upon execution and delivery of this Agreement, Buyer is paying the
Purchase Price for the Preferred Stock by delivering the following:
(A) $2,200,000 in immediately available funds to the Company;
(B) $300,000 in immediately available funds to Anschutz Company as a
prepayment of that certain Convertible Promissory Note dated March 20, 1998 from
the Company to Anschutz Company (the "Note);
(C) $1,200,000 in immediately available funds (the "Escrowed Cash") to
the escrow agent (the "Escrow Agent") identified in the Escrow Agreement
attached hereto as Annex II which is hereby adopted and incorporated by
reference herein; and
(D) the Note to the Escrow Agent, representing the $1,300,000 balance
of the Purchase Price.
(ii) Upon execution and delivery of this Agreement, the Company is
delivering one certificate representing 25,000 shares of Preferred Stock, duly
executed by or on behalf of the Company, to Buyer, and one certificate
representing 25,000 shares of Preferred Stock, duly executed by or on behalf of
the Company (the "Escrowed Certificate"), to the Escrow Agent.
(iii) By signing this Agreement, each of Buyer and the Company, subject
to acceptance by the Escrow Agent, agrees to all of the terms and conditions of,
and becomes a party to, the Joint Escrow Instructions, all of the provisions of
which are incorporated herein by this reference as if set forth in full.
c. Escrow Property. The Escrowed Cash shall be invested at the
direction of Buyer.
d. Release of Escrow. Upon receipt of a letter from the Company prior
to April 1, 1999 stating that the Company's shareholders have approved the
issuance of the Preferred Stock to Buyer and the future conversion thereof to
common stock of the Company and stating that the Company's common stock
continues to be listed on Nasdaq, the Escrow Agent shall deliver to the Company
the Note and the Escrowed Cash with all interest earned thereon; and shall
deliver the Escrowed Certificate to Buyer. If such letter has not been delivered
prior to April 1, 1999, the Escrow Agent shall deliver to Buyer the Note and the
Escrowed Cash with all interest earned thereon; and shall deliver the Escrowed
Certificate to the Company.
2. BUYER REPRESENTATIONS AND WARRANTIES.
Buyer represents and warrants to, and covenants and agrees with, the
Company as follows:
a. Buyer is purchasing the Preferred Stock and will be acquiring the
shares of Common Stock issuable upon conversion of the Preferred Stock (the
"Converted Shares") for its own account
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for investment only and not with a view towards the public sale or distribution
thereof and not with a view to or for sale in connection with any distribution
thereof.
b. All subsequent offers and sales of the Preferred Stock and the
shares of Common Stock representing the Converted Shares (such Common Stock
sometimes referred to as the "Shares") by Buyer shall be made pursuant to
registration of the Shares under the 1933 Act or pursuant to an exemption from
registration.
c. This Agreement has been duly and validly authorized, executed and
delivered on behalf of Buyer and is a valid and binding agreement of Buyer
enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally.
3. COMPANY REPRESENTATIONS AND WARRANTIES.
The Company represents and warrants to Buyer that:
a. Concerning the Preferred Stock and the Shares. The Preferred Stock
has been duly authorized, and when issued, will be duly and validly issued,
fully paid and non-assessable and will not subject the holder thereof to
personal liability by reason of being such holder. There are no preemptive
rights of any stockholder of the Company, as such, to acquire the Preferred
Stock or the Shares.
b. Reporting Company Status. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Colorado and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in each jurisdiction
where the nature of the business conducted or property owned by it makes such
qualification necessary, other than those jurisdictions in which the failure to
so qualify would not have a material adverse effect on the business, operations
or condition (financial or otherwise) of the Company. The Company has registered
its Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock is
listed and traded on The NASDAQ/SmallCap Market.
c. Authorized Shares. The Company has sufficient authorized and
unissued Shares as may be reasonably necessary to effect the conversion of the
Preferred Stock. The Converted Shares have been duly authorized and, when issued
upon conversion of, or as dividends on, the Preferred Stock in accordance with
the terms of the Articles of Amendment will be duly and validly issued, fully
paid and non-assessable and will not subject the holder thereof to personal
liability by reason of being such holder.
d. Securities Purchase Agreement and Stock. This Agreement and the
transactions contemplated thereby have been duly and validly authorized by the
Company, this Agreement has been duly executed and delivered by the Company and
this Agreement is the valid and binding agreement of the Company enforceable in
accordance with its terms, subject as to enforceability to general principles of
equity and to bankruptcy, insolvency, moratorium, and other similar laws
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affecting the enforcement of creditors' rights generally; and the Preferred
Stock will be duly and validly authorized and, when executed and delivered on
behalf of the Company in accordance with this Agreement, is a valid and binding
obligation of the Company in accordance with its terms, subject to general
principles of equity and to bankruptcy, insolvency, moratorium, or other similar
laws affecting the enforcement of creditors' rights generally.
e. Non-contravention. Assuming shareholder approval of the issuance of
the Escrowed Certificate and any subsequent conversion into Common Stock, the
execution and delivery of this Agreement and the issuance of the Securities, and
the consummation by the Company of the other transactions contemplated by this
Agreement and the Preferred Stock do not and will not conflict with or result in
a breach by the Company of any of the terms or provisions of, or constitute a
default under (i) the articles of incorporation or by-laws of the Company, each
as currently in effect, (ii) any indenture, mortgage, deed of trust, or other
material agreement or instrument to which the Company is a party or by which it
or any of its properties or assets are bound, including any listing agreement
for the Common Stock, (iii) any existing applicable law, rule, or regulation or
any applicable decree, judgment, or order of any court, United States federal or
state regulatory body, administrative agency, or other governmental body having
jurisdiction over the Company or any of its properties or assets, or (iv) the
Company's listing agreement for its Common Stock.
f. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the shareholders of the Company (other than shareholder
approval as required by Nasdaq) is required to be obtained by the Company for
the issuance and sale of the Securities to Buyer as contemplated by this
Agreement, except such authorizations, approvals and consents that have been
obtained.
g. SEC Filings. None of the Company's filings with the Securities and
Exchange Commission ("SEC") contained, at the time they were filed, any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements made therein in light of
the circumstances under which they were made, not misleading. The Company has
made and will timely make in the future all required filings with the SEC.
h. Absence of Certain Changes. Since January 1, 1998, there has been no
material adverse change and no material adverse development in the business,
properties, operations, condition (financial or otherwise), or results of
operations of the Company, except as disclosed in the Company's SEC filings.
Since January 1, 1998, except as disclosed in the Company's SEC filings, the
Company has not (i) incurred or become subject to any material liabilities
(absolute or contingent) except liabilities incurred in the ordinary course of
business consistent with past practices; (ii) discharged or satisfied any
material lien or encumbrance or paid any material obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary
course of business consistent with past practices; (iii) declared or made any
payment or distribution of cash or other property to stockholders with respect
to its capital stock, or purchased or redeemed, or made any agreements to
purchase or redeem, any shares of its capital stock; (iv) sold, assigned or
transferred any other tangible assets, or canceled any debts or claims, except
in the ordinary course of business consistent with past practices; (v) suffered
any substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount
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of existing business; (vi) made any changes in employee compensation, except in
the ordinary course of business consistent with past practices; or (vii)
experienced any material problems with labor or management in connection with
the terms and conditions of their employment.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. Buyer acknowledges that (1) the Securities
have not been and are not being registered under the provisions of the 1933 Act
and, except as provided in the Registration Rights Agreement, the Securities
have not been and are not being registered under the 1933 Act, and may not be
transferred unless (A) subsequently registered thereunder or (B) Buyer shall
have delivered to the Company an opinion of counsel, reasonably satisfactory in
form, scope and substance to the Company, to the effect that the Securities to
be sold or transferred may be sold or transferred pursuant to an exemption from
such registration; (2) any sale of the Securities made in reliance on Rule 144
promulgated under the 1933 Act may be made only in accordance with the terms of
said Rule and further, if said Rule is not applicable, any resale of such
Securities under circumstances in which the seller, or the person through whom
the sale is made, may be deemed to be an underwriter, as that term is used in
the 1933 Act, may require compliance with some other exemption under the 1933
Act or the rules and regulations of the SEC thereunder; and (3) neither the
Company nor any other person is under any obligation to register the Securities
(other than pursuant to the Registration Rights Agreement) under the 1933 Act or
to comply with the terms and conditions of any exemption thereunder.
b. Restrictive Legend. Buyer acknowledges and agrees that the
Securities shall bear a restrictive legend in substantially the following form
(and a stop-transfer order may be placed against transfer of any such
Securities):
THESE SECURITIES (THE "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
c. Filings and Shareholder Consent.
(i) The Company undertakes and agrees to make all necessary filings in
connection with the sale of the Preferred Stock to Buyer under any United States
laws and regulations applicable to the Company, or by any domestic securities
exchange or trading market, and to provide a copy thereof to Buyer promptly
after such filing.
(ii) The Company undertakes and agrees to take all steps necessary to have
a vote of the shareholders of the Company regarding authorization of the
Company's issuance to the holders of the Preferred Stock of shares of Common
Stock in excess of 20% of the outstanding shares of Common Stock in accordance
with NASDAQ Rule 4301(c)(25)(H)(i)(d)(2). The Company will use its best efforts
to obtain such approval and will recommend to the shareholders that such
authorization be granted and will seek proxies from shareholders not attending
the meeting naming a
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director or officer of the Company as such shareholder's proxy and directing the
proxy to vote, or giving the proxy the authority to vote, in favor of such
authorization. Upon receipt ofsuch authorization and if the Company's common
stock continues to be listed on Nasdaq, the Company will deliver to the Escrow
Agent the letter described in Section 1d. The Company will use its best efforts
to continue the listing of its Common Stock on The NASDAQ/SmallCap Market.
c. Available Shares. The Company shall have at all times authorized and
reserved for issuance, free from preemptive rights, shares of Common Stock
sufficient to satisfy the conversion rights of Buyer pursuant to the terms and
conditions of the Preferred Stock.
5. GOVERNING LAW: MISCELLANEOUS.
a. This Agreement shall be governed by and interpreted in accordance with
the laws of the State of Colorado for contracts to be wholly performed in such
state and without giving effect to the principles thereof regarding the conflict
of laws. Each of the parties consents to the jurisdiction of the federal courts
whose districts encompass any part of the City of Denver or the state courts of
the State of Colorado sitting in the City of Denver in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions.
b. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
c. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
d. This Agreement shall inure to the benefit of and be binding upon the
successors and assigns of each of the parties hereto.
e. All pronouns and any variations thereof refer to the masculine, feminine
or neuter, singular or plural, as the context may require.
f. A facsimile transmission of this signed Agreement shall be legal and
binding on all parties hereto.
g. This Agreement may be signed in one or more counterparts, each of which
shall be deemed an original.
h. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.
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i. If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement or the validity or
enforceability of this Agreement in any other jurisdiction.
j. This Agreement may be amended only by an instrument in writing signed by
the party to be charged with enforcement thereof.
k. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
6. NOTICES.
Any notice required or permitted hereunder shall be given in writing
(unless otherwise specified herein) and shall be deemed effectively given on the
earliest of
(a) the date delivered, if delivered by personal delivery as against
written receipt therefor or by confirmed facsimile transmission,
(b) the seventh business day after deposit, postage prepaid, in the United
States Postal Service by registered or certified mail, or
(c) the third business day after mailing by international express courier,
with delivery costs and fees prepaid, in each case, addressed to each of the
other parties thereunto entitled at the following addresses (or at such other
addresses as such party may designate by ten (10) days' advance written notice
similarly given to each of the other parties hereto):
COMPANY: Internet Communications Corporation
7100 East Belleview Avenue, Suite 201
Greenwood Village, Colorado 80111
BUYER: Lynn Wood
Interwest Group, Inc.
2400 Anaconda Tower
555 - 17th Street Denver, CO 80202
ESCROW AGENT: Norwest Bank Colorado, National Association
Corporate Trust and Escrow Services
1740 Broadway
Denver, CO 80274-8693
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12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The Company's and Buyer's representations and warranties herein shall
survive the execution and delivery of this Agreement and the delivery of the
Preferred Stock and payment of the Purchase Price, and shall inure to the
benefit of Buyer and the Company and their respective successors and assigns.
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IN WITNESS WHEREOF, the parties have caused this Securities Purchase
Agreement to be duly executed this 30th day of December, 1998.
Interwest Group, Inc.
By /s/ Craig D. Slater
Internet Communications Corporation
By /s/ John M. Couzens
The undersigned Escrow Agreement is executing this Agreement for purposes of
establishing the Escrow.
Norwest Bank Colorado, National Association,
Corporate Trust and Escrow Services
By /s/ Leigh M. Lutz
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AAPPENDIX B
Articles of Amendment
Mail to: Secretary of State
Corporations Section
Please include a typed 1560 Broadway, Suite 200
self-addressed envelope Denver, CO 80202
(303) 894-2251
Fax (303) 894-2242
MUST BE TYPED
FILING FEE: $25.00
MUST SUBMIT TWO COPIES
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF INTERNET COMMUNICATIONS CORPORATION
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is INTERNET COMMUNICATIONS CORPORATION
SECOND: The following amendment to the Articles of Incorporation was adopted on
December 30, 1998, as prescribed by the Colorado Business Corporation Act, in
the manner marked with an X below:
__ No shares have been issued or Directors Elected - Action by
Incorporators
__ No shares have been issued but Directors Elected - Action
by Directors
X Such amendment was adopted by the board of directors
where shares have been issued.
__ Such amendment was adopted by a vote of the
shareholders.The number of shares voted for the amendment
was sufficient for approval.
THIRD: The following section shall be added to the end of Section 2 of Article
IV:
(a) Series A Preferred Stock. The Board of Directors by resolution has
designated 50,000 of the shares of Preferred Stock "Series A Preferred Stock"
(the "Series A Preferred"). The relative rights, preferences, privileges, and
restrictions granted to or imposed upon the Series A Preferred or the holders
thereof are as follows:
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(i) Dividend Preference.
(A) When, as and if declared by the Board of Directors, the holders of
Series A Preferred shall be entitled to receive, out of funds legally available
therefor, dividends at an annual rate equal to $7.125 (as adjusted for
combinations, consolidations, subdivisions, or stock splits with respect to such
shares) for each outstanding share of Series A Preferred held by them, in
preference and priority to the payment of dividends on any shares of Common
Stock (other than those payable solely in Common Stock). The dividends payable
to the holders of the Series A Preferred shall accrue and be cumulative and
shall not compound. Dividends shall be payable quarterly in arrears commencing
March 31, 1999, in (i) cash or (ii) shares of Common Stock, as the Corporation
shall elect. If all or any portion of a dividend payment is to be paid in Common
Stock, the number of shares to be issued will be equal to the amount of the
dividend (or portion thereof) divided by the Closing Price of the Common Stock
on the dividend payment date. The "Closing Price" shall be the average last
reported sales prices, regular way, per share of Common Stock on the preceding
10 trading days, or if no such sale takes place on any such day, the average of
the closing bid and asked prices, regular way, for that day, in each case, as
reported in the principal consolidated transaction reporting system with respect
to securities listed or admitted to trading on a national securities exchange,
or, if shares of such stock are not listed or admitted to trading on a national
securities exchange, on the Nasdaq National Market or the Nasdaq Small Cap
Market, as the case may be, or, if such last sales price or closing bid and
asked prices are not so reported, the average of the closing bid and asked
prices on the preceding 10 trading days as furnished by any New York Stock
Exchange member firm selected from time to time by the Board of Directors for
such purpose, or if no such prices are available, the fair market value of the
Common Stock as determined in good faith by the Board of Directors.
(ii) Liquidation Preference.
(A) Each holder of Series A Preferred outstanding after the closing of
a Liquidation Event (as defined below) shall be entitled to receive, prior and
in preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of Common Stock and the Series A Preferred Stock, by
reason of their ownership of such stock, the amount of $100.00 (the "Original
Series A Issue Price") per share (as adjusted for combinations, consolidations,
subdivisions, or stock splits with respect to such shares) for each share of
Series A Preferred then held by such holder, plus an amount equal to all accrued
and unpaid dividends on such shares of Series A Preferred (collectively, the
"Series A Preference"). If, upon the occurrence of a Liquidation Event, the
assets and funds available to be distributed among the holders of Series A
Preferred shall be insufficient to permit the payment to such holders of the
full Series A Preference, then the entire assets and funds of the Corporation
legally available for distribution to the holders of Series A Preferred shall be
distributed ratably based on the total Series A Preference due each such holder
under this Section IV.2(a)(ii)(A).
(B) In the event of any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or not, or the sale, lease, assignment, transfer,
conveyance
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or disposal of all or substantially all of the assets of the Corporation, or the
acquisition of this Corporation by another entity by means of consolidation,
corporate reorganizations or merger, or other transaction or series of related
transactions in which more than 50% of the outstanding voting power of this
Corporation is disposed of for cash or other assets other than securities (each
a "Liquidation Event"), distributions to the shareholders of the Corporation
shall be made in the following manner:
(1) After payment has been made to the holders of Series A Preferred of
the full amounts to which they are entitled pursuant to paragraph (ii)(A) above,
the remaining assets of the Corporation available for distribution to
shareholders shall be distributed ratably among the holders of Common Stock.
(2) The value of securities and property paid or distributed pursuant
to this Section IV.2(a)(ii)(B) shall be computed at fair market value at the
time made available to shareholders, all as determined by the Board of Directors
in the good faith exercise of its reasonable business judgment, provided that
(i) if such securities are listed on any established stock exchange or a
national market system, their fair market value shall be the closing sales price
for such securities as quoted on such system or exchange (or the largest such
exchange) for the date the value is to be determined (or if there are no sales
for such date, then for the last preceding business day on which there were
sales), as reported in the Wall Street Journal or similar publication, and (ii)
if such securities are regularly quoted by a recognized securities dealer but
selling prices are not reported, their fair market value shall be the mean
between the high bid and low asked prices for such securities on the date the
value is to be determined (or if there are no quoted prices for such date, then
for the last preceding business day on which there were quoted prices).
(3) Nothing hereinabove set forth shall affect in any way the right of
each holder of Series A Preferred to convert such shares at any time and from
time to time into Common Stock in accordance with Section IV.2(a)(iv) hereof.
(iii) Voting Rights.
(A) Except as otherwise required by law or hereunder, the holder of
each share of Common Stock issued and outstanding shall have one vote and the
holder of each share of Series A Preferred shall be entitled to the number of
votes equal to the number of shares of Common Stock into which such share of
Series A Preferred could be converted at the record date for determination of
the shareholders entitled to vote on such matters, or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited, such votes to be counted together with all other
shares of stock of the Corporation having general voting power and not
separately as a class. Fractional votes by the holders of Series A Preferred
shall not, however, be permitted and any fractional voting rights shall (after
aggregating all shares into which shares of Series A Preferred held by each
holder could be converted) be rounded to the nearest whole number (with one-half
being rounded upward). Holders of Series A Preferred shall be entitled to notice
of any shareholders' meeting in accordance with the Bylaws of the Corporation.
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(iv) Conversion.
(A) OPTIONAL CONVERSION. Shares of Series A Preferred may be converted
into shares of Common Stock, as follows:
(1) Subject to and upon compliance with the provisions of this Section
IV.2(a)(iv), at the option of the holder of such shares, shares of Series A
Preferred or any portion thereof, may be converted into shares of Common Stock
("Conversion Shares"), as said shares shall be constituted on the date on which
such shares shall be surrendered for conversion and notice given in accordance
with the provisions of this Section (the "Conversion Date"). The number of
Conversion Shares to be received on conversions shall be the quotient of (A) the
sum of the Original Series A Issue Price and all accrued and unpaid dividends on
such share of Series A Preferred, accrued to the date of conversion, divided by
(B) $2.25 (the "Conversion Price").
(2) In order to exercise the conversion privilege, the holder shall
surrender such shares to the Corporation at its executive offices, together with
the conversion notice in the form attached hereto as Exhibit A (or similar
separate written notice) duly executed, and, if so required by the Corporation,
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder or by its duly authorized attorney in writing. As
promptly as practicable after the surrender of such shares for conversion as
aforesaid, but in no event later than 30 days after surrender, the Corporation
shall deliver at its executive office to such holder, or on its written order, a
certificate or certificates for the number of Conversion Shares deliverable upon
such conversion and a check or cash in amount equal to any unconverted
fractional share. Such conversion shall be deemed to have been effected on the
date on which such notice shall have been received at said executive offices and
such shares shall have been surrendered as aforesaid, and the person or persons
in whose name or names any certificate or certificates for Conversion Shares
shall be deliverable upon such conversion shall be deemed to have become on said
date the holder or holders of record of the shares represented thereby;
PROVIDED, HOWEVER, that any such surrender on any date when the stock transfer
books of the Corporation shall be closed shall constitute the person or persons
in whose name or names the certificates are to be delivered as the record holder
or holders thereof for all purposes on the next succeeding day on which such
stock transfer books are open, but such conversion shall be at the Conversion
Price in effect on the date of such surrender.
(3) Notwithstanding any other provision hereof, (A) if the conversion
is to be made in connection with a merger, acquisition, tender offer or other
business combination, the exercise of the conversion privilege may at the
election of the holder be conditioned upon the conclusion of such transaction,
in which case such exercise shall not be deemed to be effective until the
conclusion of such transaction and (B) if the issuance of any Conversion Shares
is not exempt from the applicable requirements under the Hart-Scott-Rodino Act,
the exercise of the conversion privilege shall be conditioned upon the
compliance by the Corporation, the holder and all other persons with such
requirements, in which case such exercise shall not be deemed to be effective
until all such requirements are satisfied. The holder may by written notice
withdraw any such exercise of such conversion privilege before the effectiveness
thereof. Any such exercise or
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withdrawal shall not impair or otherwise affect the other rights and remedies of
the holder permitted by law, equity or contract or as set forth herein.
(B) CORPORATION'S RIGHT TO AUTOMATICALLY CONVERT. If at any time the
Closing Price of the Corporation's Common Stock for 45 consecutive trading days
is equal to or greater than $10.00, the Corporation shall thereafter have the
right to automatically convert the Series A Preferred in accordance with the
provisions of this Section IV.2(a)(iv).
(C) FRACTIONAL INTERESTS. The Corporation shall not be required to
deliver fractions of shares of Common Stock upon conversions of shares of Series
A Preferred. If any fractional interest in a share of Common Stock would be
deliverable upon the conversion of shares of Series A Preferred, the Corporation
shall make an adjustment therefor in cash equal to the Closing Price per share
of the Common Stock on the Conversion Date.
(D) MECHANICAL ADJUSTMENTS. The number of Conversion Shares issuable
upon the conversion of shares of Series A Preferred and the Conversion Price
shall be subject to adjustment from time to time, as follows:
(1) If the Corporation shall at any time pay a dividend on its Common
Stock in shares of its Common Stock (including, if applicable, shares of Common
Stock held by the Corporation in treasury or by a Subsidiary (as defined below),
subdivide its outstanding shares of Common Stock into a larger number of shares
or combine its outstanding shares of Common Stock into a smaller number of
shares or otherwise effect a reclassification or recapitalization of the Common
Stock, then in each such case the number of Conversion Shares thereafter
issuable upon conversion of shares of Series A Preferred shall be adjusted so
that shares of Series A Preferred shall thereafter be convertible into the
number of Conversion Shares equal to the number of shares of Common Stock which
the holder would have held after the occurrence of any of the events described
above had such shares of Series A Preferred been converted in full immediately
prior to the occurrence of such event. An adjustment made pursuant to this
paragraph (i) shall become effective retroactively to the related record date in
the case of a dividend and shall become effective on the related effective date
in the case of a subdivision, combination, reclassification or recapitalization.
(2) Except with respect to Permitted Issuances (as defined below), if
the Corporation or a Subsidiary shall at any time issue or sell shares of Common
Stock at a purchase price per share of Common Stock (the value of any
consideration, if other than cash, to be determined in good faith by the Board
of Directors) less than the Closing Price on the date the Corporation or such
Subsidiary agrees to the issuance or sale (for the purpose of this paragraph
(2), the "Adjustment Date"), then in each such case, the number of Conversion
Shares thereafter issuable upon conversion of shares of Series A Preferred after
such Adjustment Date shall be determined by multiplying the number of Conversion
Shares issuable upon conversion of shares of Series A Preferred on the date
immediately preceding such Adjustment Date by a fraction, the numerator of which
shall be the sum of
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the number of shares of Common Stock outstanding immediately before issuance or
sale and the number of additional shares of Common Stock so issued or sold, and
the denominator of which shall be the sum of the number of shares of Common
Stock outstanding immediately before such issuance or sale and the number of
shares of Common Stock which the aggregate offering price of the total number of
shares so offered would purchase at the Closing Price. For the purposes of this
paragraph (2), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation or by a
Subsidiary.
(3) If the Corporation or a Subsidiary shall at any time issue or sell
Derivative Securities (as defined below) providing for the purchase of shares of
Common Stock upon the conversion, exchange or exercise thereof at a price per
share of Common Stock (taking into account any consideration received by the
Corporation upon the issuance or sale of such Derivative Securities and any
additional consideration to be received upon the conversion, exchange or
exercise thereof, the value of such consideration, if other than cash, to be
determined in good faith by the Board of Directors (the "Aggregate Derivative
Consideration")) less than the Closing Price on the date the Corporation or such
Subsidiary agrees to the issuance or sale (for the purpose of this paragraph
(3), the "Adjustment Date"), then in each such case, the number of Conversion
Shares thereafter issuable upon conversion of the Series A Preferred after such
Adjustment Date shall be determined by multiplying the number of Conversion
Shares issuable upon conversion of shares of Series A Preferred on the date
immediately preceding such Adjustment Date by a fraction, the numerator of which
shall be the sum of the number of shares of Common Stock outstanding on such
Adjustment Date and the number of additional shares of Common Stock so offered
for subscription or purchase upon the conversion, exchange or exercise of such
Derivative Securities, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding on such Adjustment Date and the
number of shares of Common Stock which the Aggregate Derivative Consideration
for the total number of shares so offered would purchase at the Closing Price.
Such adjustment shall be made whenever any such Derivative Securities are
issued, and shall become effective on the date of issuance retroactive to the
Adjustment Date. If all the shares of Common Stock so offered for subscription
or purchase are not delivered upon the final conversion, exchange or exercise of
such Derivative Securities, then, upon the final conversion, exchange or
exercise of such Derivative Securities, or the expiration, cancellation or other
termination thereof, the number of Conversion Shares issuable upon conversion of
shares of Series A Preferred shall thereafter be readjusted to the number of
Conversion Shares which would have been in effect had the numerator and the
denominator of the foregoing fraction and the resulting adjustment been made
based upon the number of shares of Common Stock actually delivered upon the
conversion, exchange or exercise of such Derivative Securities, or the
expiration, cancellation or other termination thereof rather than upon the
number of shares of Common Stock so offered for subscription or purchase. If the
purchase price provided for in any Derivative Securities, the additional
consideration, if any, payable upon the conversion, exchange or exercise of any
Derivative Securities or the rate at which any Derivative Securities are
convertible into or exchangeable or convertible into Common Stock shall change
at any time (including, without limitation, at the time of or after such
conversion, exchange or
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exercise), the number of Conversion Shares issuable upon conversion of shares of
Series A Preferred in effect at the time of such change shall be readjusted to
the number of Conversion Shares issuable upon conversion of shares of Series A
Preferred which would have been in effect at such time had such Derivative
Securities still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, on the
related Adjustment Date, and such readjustment shall become effective on the
date of such change retroactive to the Adjustment Date; PROVIDED, that no such
readjustment shall have the effect of decreasing the number of Conversion Shares
issuable upon the conversion of shares of Series A Preferred by an amount in
excess of the amount of the adjustment initially made with respect to the
issuance or sale of the Derivative Securities. For the purposes of this
paragraph (3), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Corporation or by a
Subsidiary.
(4) If the Corporation shall at any time declare or pay a dividend or
other distribution on its Common Stock other than (x) a stock dividend payable
solely in shares of Common Stock or (y) a cash dividend paid out of current
earnings (the value of any such dividend or other distribution, if other than
cash, to be determined in good faith by the Board of Directors), then in each
such case, the number of Conversion Shares thereafter issuable upon conversion
of shares of Series A Preferred after the declaration date therefor (for the
purpose of this paragraph (4), the "Adjustment Date") shall be determined by
multiplying the number of Conversion Shares issuable upon conversion of shares
of Series A Preferred on the date immediately preceding such Adjustment Date by
a fraction, the numerator of which shall be the sum of the number of shares of
Common Stock outstanding on such Adjustment Date and the number of additional
shares of Common Stock which the aggregate value of such dividend or
distribution would purchase at such price and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding on such Adjustment
Date. For the purposes of this paragraph (4), the number of shares of Common
Stock at any time outstanding shall not include shares held in the treasury of
the Corporation or by a Subsidiary.
(5) In case of any capital reorganization or any reclassification
(other than a change in par value) of the capital stock of the Corporation, or
of any exchange or conversion of the Common Stock for or into securities of
another corporation, or in case of the consolidation or merger of the
Corporation with or into any other person (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock or a Liquidation Event) or in case of any
sale or conveyance of all or substantially all of the assets of the Corporation
(other than a Liquidation Event), the person formed by such consolidation or
resulting from such capital reorganization, reclassification or merger or which
acquires such assets, as the case may be, shall make provision such that shares
of Series A Preferred shall thereafter be convertible into the kind and amount
of shares of stock, other securities, cash and other property receivable upon
such capital reorganization, reclassification of capital stock, consolidation,
merger, sale or conveyance, as the case may be, by a holder of the shares of
Common Stock equal to the number of Conversion Shares issuable upon conversion
of shares of Series A Preferred immediately prior to the effective date of such
capital
B-7
<PAGE>
reorganization, reclassification of capital stock, consolidation, merger, sale
or conveyance, assuming (1) such holder of Common Stock of the Corporation is
not a person with which the Corporation consolidated or into which the
Corporation merged or which merged into the Corporation or to which such sale or
transfer was made as the case may be ("Constituent Entity"), or an affiliate of
a Constituent Entity, and (2) such person failed to exercise his rights of
election, if any, as to the kind or amount of securities, cash and other
property receivable upon such capital reorganization, reclassification of
capital stock, consolidation, merger, sale or conveyance and, in any case
appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to rights and
interests thereafter of the holder, to the end that the provisions set forth
herein (including the specified changes in and other adjustments of the number
of Conversion Shares issuable upon conversion of shares of Series A Preferred)
shall thereafter be applicable, as near as reasonably may be, in relating to any
shares of stock or other securities or other property thereafter deliverable
upon conversion of shares of Series A Preferred.
(6) For the purposes of this Section IV.2(a)(iv)(D):
(X) "DERIVATIVE SECURITIES" means securities convertible into or
exchangeable or convertible into shares of Common Stock, rights or warrants
to subscribe for or purchase shares of Common Stock, options for the
purchase of, or calls, commitments or other claims of any character
relating to, shares of Common Stock or any securities convertible into or
exchangeable for any of the foregoing;
(Y)"PERMITTED ISSUANCES" means the issuance of shares of Common Stock after
the date hereof (x) pursuant to the exercise of options authorized on the
date hereof, in each case in accordance with the terms thereof as of the
date hereof and (y) pursuant to the conversion of shares of Series A
Preferred; and
(Z) "SUBSIDIARIES" means any corporation or other entity in which the
Corporation is entitled by virtue of its ownership of securities (or
equivalent interests) to elect a majority of the directors (or persons
performing equivalent functions).
(7) If any shares of Common Stock or Derivative Securities are issued
or sold or deemed to have been issued or sold for cash, the consideration
received therefor shall be deemed to be the net amount received by the
Corporation therefor. In case any shares of Common Stock or Derivative
Securities are issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
marketable securities, in which case the amount of consideration received by the
Corporation shall be the market price thereof as of the date of receipt. In case
any shares of Common Stock or Derivative Securities are issued to the owners of
the non-surviving
B-8
<PAGE>
entity in connection with any merger or other business combination in which the
Corporation is the surviving entity, the amount of consideration therefor shall
be deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such shares of Common Stock or
Derivative Securities, as the case may be. The fair value of any consideration
other than cash or marketable securities shall be determined jointly by the
Corporation and the holders of more than 50% of the outstanding shares of Series
A Preferred. If such parties are unable to reach agreement within a reasonable
period of time, such fair value shall be determined by an appraiser jointly
selected by the Corporation and such holders, whose determination shall be final
and binding on the Corporation and the holders. The fees and expenses of such
appraiser shall be paid by the Corporation.
(8) If the Corporation takes a record of the holders of Common Stock
for the purpose of entitling them (A) to receive a dividend or other
distribution on its Common Stock or (B) to subscribe for or purchase shares of
Common Stock or Derivative Securities, then such record date shall be deemed to
be the date of the payment or distribution of such dividend or other
distribution or the date of issuance and sale of any shares of Common Stock
deemed to have been issued or sold in connection thereto.
(9) All calculations under this Section IV.2(a)(iv)(D) shall be made to
the nearest share of Common Stock (with one-half being rounded upward)
(10) Whenever the number of Conversion Shares issuable upon the
conversion of shares of Series A Preferred is adjusted or readjusted pursuant to
paragraphs (1) through (9), inclusive, above, the Conversion Price shall be
adjusted or readjusted by multiplying the Conversion Price immediately prior to
the related Adjustment Date by a fraction, the numerator of which shall be the
number of Conversion Shares receivable upon the conversion of shares of Series A
Preferred immediately preceding such Adjustment Date, and the denominator of
which shall be the number of Conversion Shares so purchasable immediately
thereafter; PROVIDED that no such readjustment pursuant to paragraph (3) above
with respect to the conversion, exchange or exercise, or expiration,
cancellation or other termination, of any Derivative Securities shall have the
effect of increasing the Conversion Price by an amount in excess of the amount
of the adjustment initially made in respect of the issuance or sale of such
Derivative Securities.
(11) If any event occurs of the type contemplated by the provisions of
this Section IV.2(a)(iv)(D) but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
number of Conversion Shares issuable upon conversion of shares of Series A
Preferred and the Conversion Price so as to protect the rights of the holders of
shares of Series A Preferred.
(12) For the purpose of this Section IV.2(a)(iv)(D), the term "Shares
of Common Stock" means (W) the class of stock designated as the Common Stock of
the Corporation at the date hereof or (X) any other class of stock resulting
from successive
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<PAGE>
changes or reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made pursuant to
paragraphs (1) through (4), inclusive, above, the holders of shares of Series A
Preferred shall become entitled to receive any shares of the Corporation other
than shares of Common Stock, thereafter the number of such other shares so
receivable upon conversion of shares of Series A Preferred and the Conversion
Price shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Conversion Shares contained in paragraphs (1) through (4), inclusive, above, and
the provisions of Sections IV.2(a)(iv)(D), (E), and (F), inclusive, with respect
to the Conversion Shares, shall apply on like terms to any such other shares.
(13) Notwithstanding anything herein to the contrary, there shall be no
adjustment in the number of Conversion Shares or in the Conversion Price in
respect of Permitted Issuances.
(14) In case of any consolidation or merger of the Corporation with or
into another entity (whether or not the Corporation is the surviving entity) or
in case of any sale, transfer or lease of all or substantially all of the assets
of the Corporation, the Corporation or such successor or purchasing entity, as
the case may be, shall execute with the holders of shares of Series A Preferred
an agreement that such holders shall have the right thereafter to receive upon
conversion of shares of Series A Preferred the kind and amount of shares and
other securities, cash and property that such holders would have owned or would
have been entitled to receive after the happening of such consolidation, merger,
sale, transfer, lease or conveyance had their shares of Series A Preferred been
converted in full immediately prior to such action, and if the successor or
purchasing entity is not a corporation, such person shall provide appropriate
tax indemnification with respect to such shares or other securities and property
so that upon conversion of shares of Series A Preferred, the holders thereof
would have the same benefits they otherwise would have had if such successor or
purchasing person were a corporation. Such agreement shall provide for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in paragraphs (1) through (13), inclusive, above. The
provisions of this paragraph (14) shall similarly apply to successive
consolidations, mergers, sales or conveyances.
(E) TIME OF ADJUSTMENTS; MINIMUM ADJUSTMENTS. Each adjustment required
by Section IV.2(a)(iv)(D) shall be effective as and when the event requiring
such adjustment occurs. Notwithstanding the provisions of this Section
IV.2(a)(iv)(E), no adjustment of less than one percent of the number of
Conversion Shares shall be made until the earlier of (x) such time as the total
of all previous adjustments that were less than one percent of the number of
Conversion Shares shall equal three percent of the number of Conversion Shares
and (y) conversion of the Series A Preferred in accordance with the provisions
hereof.
(F) NOTICE OF ADJUSTMENT. Whenever the number of Conversion Shares
issuable upon the conversion of shares of Series A Preferred or the Conversion
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<PAGE>
Price is adjusted as herein provided, the Corporation shall promptly mail by
first class mail, postage prepaid, to each holder of shares of Series A
Preferred a certificate provided by, at the discretion of such holder, an
officer of the Corporation or a firm of independent public accountants selected
by the Board of Directors of the Corporation (who may be the regular accountants
employed by the Corporation) setting forth the number of Conversion Shares
purchasable upon the conversion of shares of Series A Preferred and the
Conversion Price after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth the computation by which such
adjustment was made.
(G) NO ADJUSTMENT FOR DIVIDENDS. Except as provided in Section
IV.2(a)(iv)(D), no adjustment in respect of any dividends declared or paid on
the Common Stock shall be made prior to or upon the conversion of shares of
Series A Preferred.
(H) TAXES. The issuance of stock certificates on conversions of shares
of Series A Preferred shall be made without charge to the holders thereof for
any tax in respect of the issue thereof. The Corporation shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares in any name other than that of the holders,
and the Corporation shall not be required to issue or deliver any such stock
certificate unless and until the person or persons requesting the issue thereof
shall have paid to the Corporation the amount of such tax or shall have
established to the satisfaction of the Corporation that such tax has been paid.
(I) RESERVATION OF SHARES. The Corporation shall at all times reserve
and keep available out of the aggregate of its authorized but unissued shares or
its issued shares held in its treasury, or both, for the purpose of effecting
the conversion of shares of Series A Preferred, such number of its duly
authorized shares of Common Stock as shall from time to time be sufficient to
effect the conversion, exchange or exercise of outstanding securities of the
Corporation convertible into or exchangeable or exercisable for any shares of
the Common Stock, all rights to subscribe for or to purchase, all options for
the purchase of, and all calls, commitments or claims of any character relating
to, any shares of Common Stock and any securities convertible into or
exchangeable or exercisable for any of the foregoing.
(J) REGISTRATION OR APPROVAL. If any shares of Common Stock reserved or
to be reserved for the purpose of conversion of shares of Series A Preferred
require registration with or approval of any governmental authority under any
federal or state law before such shares may be validly delivered upon
conversion, including, without limitation, the Hart-Scott-Rodino Act, then the
Corporation covenants that it will in good faith and as expeditiously as
possible endeavor to secure such registration or approval, as the case may be,
at the Corporation's expense.
(K) VALIDLY ISSUED, ETC. The Corporation covenants that all shares of
Common Stock which may be delivered upon conversion of shares of Series A
Preferred shall upon delivery be validly issued, fully paid and non-assessable
and free from all taxes, liens and charges with respect to the issue or delivery
thereof.
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<PAGE>
(L) NOTICE. In the event:
(1) that the Corporation shall pay any dividend or make any
distribution to the holders of shares of Common Stock
otherwise than in cash charged against capital surplus,
consolidated net earnings or retained earnings of the
Corporation and its Subsidiaries; or
(2) that the Corporation shall offer for subscription or
purchase, pro rata, to all of the holders of shares of Common
Stock any additional shares of stock of any class or any
securities convertible into or exchangeable for stock of any
class; or
(3) of any reclassification or change of outstanding shares of
the class of Common Stock issuable upon the conversion of
shares of Series A Preferred (other than a change in par
value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination),
or of any merger or consolidation of the Corporation with, or
merger of the Corporation into, another corporation (other
than a merger or consolidation in which the Corporation is the
continuing corporation and which does not result in any
reclassification or change of outstanding shares of Common
Stock issuable upon conversion of shares of Series A
Preferred), or of any sale or conveyance to another
corporation of the property of the Corporation as an entirety
or substantially as an entirety or of any other similar
business combination transaction;
then, and in any one or more of such events, the Corporation will give
to the holders of shares of Series A Preferred written notice thereof at least
15 days prior to (A) the record date fixed with respect to any of the events
specified in (1) and (2) above, and (B) the effective date of any of the events
specified in (3) above. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of such dividend, distribution,
reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up.
(M) SPECIFIC PERFORMANCE. The Corporation acknowledges that the failure
of the Corporation to perform its obligations under this Section IV.2(a)(iv)
will not be compensable by the payment of monetary damages and hereby waives any
defense to a claim by the holders of shares of Series A Preferred that the
provisions of this Section Section IV.2(a)(iv) be specifically enforced.
(N) REGISTRATION RIGHTS. The Conversion Shares shall be deemed to be
"Registrable Shares" subject to the terms of the Registration Rights Agreement
between the Corporation and Interwest Group, Inc. dated as of May 29, 1998, as
amended.
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<PAGE>
(v) Covenants.
In addition to any other rights provided by law, the Corporation shall
not, without first obtaining the affirmative vote or written consent of the
holders of a majority of the outstanding shares of Series A Preferred, voting as
a single class:
(A) amend or repeal any provision of, or add any provision to, the
Corporation's Articles of Incorporation or Bylaws if such action would alter or
change the preferences, rights, privileges or powers of, or the restrictions
provided for the benefit of, the Series A Preferred;
(B) authorize or issue shares of any class or series of stock having any
preference or priority as to dividends or redemption rights, liquidation
preferences, conversion rights, or voting rights, superior to or on a parity
with any preference or priority of the Series A Preferred;
(C) authorize or issue any bonds, debentures, notes or other obligations
convertible into or exchangeable for, or having option rights to purchase, any
shares of stock of this Corporation having any preference or priority as to
dividends or redemption rights, liquidation preferences, conversion rights, or
voting rights, superior to or on a parity with any preference or priority of the
Series A Preferred;
(D) reclassify any shares of capital stock of this Corporation into shares
having any preference or priority as to dividends or redemption rights,
liquidation preferences, conversion rights, or voting rights, superior to or on
a parity with any preference or priority of any series of the Series A
Preferred;
(E) apply any of its assets to the redemption, retirement, purchase or
acquisition, directly or indirectly, through Subsidiaries (as defined in Section
425 of the Internal Revenue Code of 1986) or otherwise, of any shares of any
class or series of Common Stock;
(F) engage in any transaction or series of related transactions
constituting a Liquidation Event;
(G) declare or pay dividends on or make any distributions with respect to
the Corporation's Common Stock;
(H) increase or decrease the authorized number of shares of Preferred
Stock; or
(I) sell, lease, assign, transfer, convey or otherwise dispose of the
securities of any Subsidiary.
FOURTH: In connection with the Articles of Amendment to the Corporation's
Articles of Incorporation set forth herein, no change in the outstanding capital
stock is being effected.
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FIFTH: The manner in which such amendment effects a change in the amount of
stated capital, and the amount of stated capital as changed by such amendment,
is as follows:
NONE
SIXTH: The foregoing amendment was adopted by the Board of Directors without
shareholder action and shareholder action was not required.
Executed at Denver, Colorado this 30th day of December, 1998
INTERNET COMMUNICATIONS CORPORATION
By: /s/ John M. Couzens
John M. Couzens, President
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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 Identification
incorporation or organization) Number)
7100 E. BELLEVIEW AVE., STE 201, GREENWOOD VILLAGE, COLORADO 80111
- ------------------------------------------------------------------
(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.
Page 1 of pages. Exhibits are indexed on page 34.
----
(Complete Copy)
1
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.
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Also in March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note, due March 1999. The note bears
interest at 10% and interest payments are due quarterly. The note includes a
conversion clause which allows conversion if the note is not paid when due and
carries a conversion price of $4.25 per common share. Proceeds from the note
will be used for working capital.
PRODUCTS AND SERVICES
- ---------------------
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).
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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.
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:
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* adding more proprietary, value-added services to integrated system and network
designs
* adding more products and services that can be offered under the Company brand
* adding more sources of recurring revenue
INDUSTRY OVERVIEW AND MARKET NICHE
- ----------------------------------
The total U.S. market for data communications systems and networks, according to
Data Communications Magazine, is estimated in 1997 at $51 billion, including
over $3.5 billion in internet services. The overall growth of this market is
projected at approximately 20%, and the internet services segment is growing at
a rate of 60% per year.
Helping to fuel this growth is the trend toward an increasingly networked world.
Distributed networks and the valuable information flowing over those networks
have become mission critical. Communications networks have also continued to
grow in complexity as technologies continue to proliferate and evolve.
Information Technologies (I.T.) managers must deliver communications networks
and systems within limited budgets and with limited resources. To help with this
dilemma, I.T. personnel are increasingly looking for integrated solutions from
their vendors. INCC is well positioned to provide such solutions.
COMPETITION
- -----------
Competitors for the network integration market are numerous and varied. The
field is comprised of companies which approach the market from different bases
of expertise. The types of companies with whom INCC has traditionally been
competing include:
* manufacturers (such as Cisco) selling data communications terminating
equipment and business communications systems (such as Lucent Technologies)
* distributors of that equipment * carriers selling direct (such as WilTel) *
re-sellers of carrier services
* national systems integrators (such as EDS, IBM Global Networks, and large
accounting firms)
Throughout 1998, the Company will seek to improve its position as a complete
communications services provider. In contrast to manufacturers, who focus on
selling their own products, or to sales agents, who act as a sales channel on
behalf of manufacturers and carriers, or to distributors, who buy and resell
products "as-is" from a limited number of sources, the Company will seek to add
value by tailoring integrated solutions as described above.
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The Company's competitive position is enhanced by its mix of technical breadth
and flexibility. Few companies the size of INCC can boast as complete an array
of communications services and capabilities. Large companies, who can match
INCC's capabilities, often cannot match the Company's responsiveness to customer
requirements and attractive price structure.
GOVERNMENT REGULATION
- ---------------------
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.
C-6
<PAGE>
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.
C-7
<PAGE>
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.
C-8
<PAGE>
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.
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
C-9
<PAGE>
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.
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
C-10
<PAGE>
to extend the current loan facility beyond September 1998 or will immediately
begin discussions with other lenders to replace the credit facility. There is no
assurance that the Company will be successful.
The Company's cash position has decreased from $571,000 in the prior year to $0
in the current year. The Company's current ratio decreased from 2.19 as of
January 31, 1997, to .87 as of December 31, 1997. The most significant reason
for the decrease in current ratio is the reclassification of the Company's bank
note payable from a long-term liability at January 31, 1997 to a current
liability in December 31, 1997. The reclassification is required because the
note expires in September 1998.
The Company has an outstanding receivable of $620,000 at December 31, 1997,
related to a project for which the Company is a subcontractor. This receivable
relates to the cost of delays and inefficiencies, as a result of environmental
hazards at the worksite. The Company anticipates recovering substantially all of
these costs from the contractor during 1998, however there is no assurance that
it will be collected. The Company is indemnified under a previous business
combination for any losses resulting from this contract although there can be no
assurance that the Company will collect under the indemnity agreement.
During fiscal 1997, Internet increased its investment in equipment in support of
its technical operations by $995,000.
The balance of goodwill as of December 31, 1997 is $2,198,000. Goodwill
represents the balance paid for an acquired entity in excess of the net assets
of the acquired company prior to the acquisition. The goodwill included in the
balance sheet relates principally to the acquisition of Interwest by Internet.
The goodwill is being amortized over a period of 5 to 20 years.
RESULTS FROM OPERATIONS
- -----------------------
As noted above, the Company changed its fiscal year end to December 31, and as a
result, the current year activity includes 11 months of operating results as
compared to 12 months in the previous year. Additionally, on September 1, 1996,
the Company acquired Interwest and its subsidiaries and the prior year operating
results includes only 5 months of Interwest activity.
In March 1998, the Company adopted a formal plan to sell its non-core business
segments, consisting of Sound and Cable, as a part of the Company's strategic
focus on providing integrated and high-end network systems. The segments have
been presented as discontinued operations for the eleven months ended December
31, 1997 and the year ended January 31, 1997.
During fiscal 1997, the Company recorded a net loss of $4,575,000, including a
$1,225,000 loss from discontinued operations, goodwill impairment of $328,000,
and a loss from the sale of a subsidiary in
C-11
<PAGE>
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
C-12
<PAGE>
of the sales price in cash and the other half in a note, secured by the shares
sold, payable over five years. WTS contributed $28,000 towards the Company's
loss in the current year and was considered to be non-core in its future
operations.
For most of 1997, the Company did not realize the benefits of combining the two
companies which was expected to occur after the acquisition of Interwest. There
are ongoing efforts to reduce the overhead expenses of the Company and reduce
G&A as a percentage of sales. As discussed in subsequent events, the Company
reduced its staffing levels in March 1998. It is expected that this will have a
positive effect in reducing its G&A expenses in future periods.
SUBSEQUENT EVENTS
- -----------------
In March 1998, the Company announced that it has taken steps to brings its
corporate structure in line with its corporate strategy by divesting non-core
businesses and sales channels. Two subsidiaries, Sound and Cable, will be sold.
In addition, the Company has re-sized its operations concentrating on areas
which generate revenues and profits. As a result, 50 positions, or 21% of the
Company's workforce (not including Sound and Cable) have been eliminated. In
connection with this restructuring, the Company's president, Thomas C. Galley,
resigned from his position as president and CEO. John M. Couzens replaces Mr.
Galley as interim president and CEO. A non-recurring restructuring charge, which
is expected to be not less than $500,000, will be reported in the first quarter
of 1998.
Also in March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note, due March 1999. The note bears
interest at 10% and interest payments are due quarterly. The note includes a
conversion clause which allows conversion if the note is not paid when due and
carries a conversion price of $4.25 per common share. Proceeds from the note
will be used for working capital.
YEAR 2000
- ---------
In January 1997, the Company developed a plan to deal with potential Year 2000
issues and began converting its computer systems to be Year 2000 compliant. The
plan provides for the conversion efforts to be completed by the end of 1999.
Year 2000 issues are the result of computer programs being written using two
digits rather than four to define the applicable year. The total cost of the
project is estimated to be no more than $20,000 and will be funded through
operating cash flows. The Company is expensing all costs associated with these
system changes as the costs are incurred.
ITEM 7. FINANCIAL STATEMENTS
--------------------
The following Financial Statements are filed as part of this Report:
C-13
<PAGE>
Page
-----
Independent Auditors' Reports 15-16
Consolidated Balance Sheet, December 31, 1997 17
Consolidated Statements of Operations, For the
Periods Ended December 31, 1997 and January 31, 1997 18
Consolidated Statement of Stockholders' Equity,
For the Period from February 1, 1995 through
December 31, 1997 19
Consolidated Statements of Cash Flows, For the
Periods Ended December 31, 1997 and January 31, 1997 20
Notes to Consolidated Financial Statements 21-32
C-14
<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-15
<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-16
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
- ------
Current assets:
Trade receivables, net of
$318 allowance for doubtful
accounts and sales returns $ 4,907
Inventory 3,255
Prepaid expenses and other 328
Costs and estimated earnings
in excess of billings 1,825
-------
Total current assets 10,315
Equipment, net 2,015
Goodwill, net 2,198
Spares inventory 507
Net assets of discontinued operations 2,078
Other assets, net 1,000
-------
Total assets $18,113
=======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 4,435
Accounts payable and accrued
expenses 4,706
Billings in excess of costs
and estimated earnings 1,537
Unearned income and deposits 1,125
-------
Total current
liabilities 11,803
Notes payable 209
Deferred revenue 117
------
Total liabilities 12,129
Stockholders' equity:
Preferred stock $0.0001 par
value, 100,000,000 shares
authorized -
Common stock, no par value,
20,000,000 shares
authorized, 5,397,887
shares issued and
outstanding 13,965
Stockholders' notes (31)
Accumulated deficit (7,950)
-------
Total stockholders'
equity 5,984
Commitments and contingencies (note 6)
Total liabilities and
stockholders' equity $18,113
=======
See accompanying notes to consolidated financial statements.
C-17
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
December 31, January 31,
1997 1997
---- ----
Net sales:
Equipment $ 16,767 13,214
Installation 3,977 1,550
Network services 12,369 11,741
------ ------
Total sales 33,113 26,505
Cost of sales 23,693 18,815
------ ------
Gross Margin 9,420 7,690
------ ------
Operating expenses:
Selling 5,722 3,995
General and administrative 6,648 4,251
Interest expense, net 400 378
------ ------
Total expenses 12,770 8,624
------ ------
Loss from continuing operations (3,350) (934)
Discontinued operations -
loss from operations (1,225) (191)
------ ------
Net loss $(4,575) (1,125)
====== ======
Loss per share - basic and diluted:
Weighted average common shares
outstanding 5,216 3,371
Loss from continuing operations $ (0.64) (0.28)
Loss from discontinued opertions $ (0.24) (0.05)
Net loss $ (0.88) (0.33)
See accompanying notes to consolidated financial statements.
C-18
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 31, 1996 TO DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
------------------- Stockholders' Accumulated
Shares Amount notes deficit Total
--------- -------- -------------- -------- -------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 31, 1996 2,400,686 $ 5,198 (31) (2,250) 2,917
Stock options exercised 6,500 20 - - 20
Stock issued in connection with purchase of
Interwest 2,306,541 5,480 - - 5,480
Stock issued in connection with purchase of
Paragon 25,000 113 - - 113
Net loss - - - (1,125) (1,125)
--------- -------- -------------- -------- -------
BALANCES, JANUARY 31, 1997 4,738,727 10,811 (31) (3,375) 7,405
Stock options exercised 8,333 41 - - 41
Stock issued in connection with purchase of 12,570 100 - - 100
Pueblo
Stock issued in connection with private 631,579 2,973 - - 2,973
placement, net
Stock issued to directors and advisors 6,678 40 - - 40
Net loss - (4,575) (4,575)
--------- -------- -------------- -------- -------
BALANCES, DECEMBER 31, 1997 5,397,887 $13,965 (31) (7,950) 5,984
========= ======== ============== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
C-19
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE ELEVEN MONTHS ENDED DECEMBER 31, 1997 AND
TWELVE MONTHS ENDED JANUARY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, January 31,
1997 1997
------------ -----------
Cash flows from operating activities:
<S> <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-20
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The consolidated financial statements include the accounts of Internet
Communications Corporation (the Company). The Company acquired the
outstanding common stock of Interwest Communications Corporation, C.S.
(Interwest) effective September 1, 1996, as more fully described in note 2.
After the acquisition of Interwest, the Company became 46% controlled by
Interwest Group. The Company is a wide and local area integrator of data
and tele-communications equipment installation, services and carrier
circuits.
In April 1997, the Company issued 631,579 shares of common stock for
$3,000,000 and 63,158 warrants to purchase common stock at $5.70 per share
exercisable for a period of 5 years to Interwest Group. After the purchase,
Interwest Group owns 52% of the Company.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiary Interwest; its 97% subsidiary, Interwest Cable
Network Systems, Inc. (Cable); its 80% subsidiary, Omega Business
Communications Services, Inc. (Sound). The minority interests of the above
subsidiaries are owned by the respective managers of each company and one
of the managers has the option to acquire a stated number of additional
shares at a specified price, but the manager would still own less than 50%
of their respective entity. No minority interests in the losses of these
subsidiaries has been recognized because the related minority interest
liabilities have been reduced to zero. All material intercompany
transactions and amounts have been eliminated in consolidation.
CHANGE IN FISCAL YEAR END
The Company has elected to change its fiscal year end to December 31 from
January 31, effective February 1, 1997. References to fiscal year 1996
relate to the year ended January 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company may deposit funds in a financial institution in excess of
amounts insured by the Federal Deposit Insurance Corporation.
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
C-21
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Substantially all of the Company's accounts receivable result from data and
telecommunications hardware sales and related services. Historically,
credit losses incurred by the Company have not been significant. The
Company's activities are primarily located in the State of Colorado,
however, activities are conducted throughout the United States.
INVENTORY
Inventory, which consists of finished goods (communications equipment), is
stated at average cost. Spares inventory consists of finished parts used in
servicing customer maintenance contracts and is depreciated over a
five-year period. These amounts are stated at the lower of cost or market
and a provision is provided for expected obsolescence.
EQUIPMENT
Equipment is stated at cost, and depreciation is calculated on a
straight-line basis over the estimated useful lives of these assets
generally five to seven years. Leasehold improvements are amortized over
the lesser of the useful lives of the assets or the lease term.
Expenditures for maintenance and repairs are expensed as incurred. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts and any
gain or loss on the disposition is reflected in operations.
Equipment consisting of the following at December 31, 1997 (in thousands):
Telecommunications equipment $ 2,338
Office furniture and equipment 2,159
Transportation equipment 60
Leasehold improvements 482
-------
5,039
Less accumulated depreciation and
amortization (3,024)
-------
Total furniture $ 2,015
and equipment =======
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-22
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Operating costs are charged to expense as incurred. Provisions for
estimated losses on incomplete contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
Revenue on maintenance contracts is recognized over the term of the
agreement. Unearned income represents the current month's advance billings
and revenue received in advance for services under contract. These amounts
will be recognized as revenue when earned. Commissions paid in advance are
expensed over the term of the related noncancelable service agreements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
OTHER ASSETS
The excess of the purchase price over the net amount acquired recorded in
the acquisition of Interwest is recorded as goodwill. Goodwill is being
amortized on a straight-line basis over a period of 20 years. Accumulated
amortization at December 31, 1997 is approximately $360,000.
Other assets is comprised primarily of noncompete agreements and purchased
customer lists which are being amortized on a straight-line basis over five
years. At December 31, 1997, the related accumulated amortization is
approximately $292,000.
The amortization expense for the eleven months ended December 31, 1997 and
the year ended January 31, 1997 for the above intangibles was approximately
$406,000 and $98,000, respectively.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
significant estimates, including the percentage of completion on projects
in progress at year-end which is the basis for the calculation of revenue
earned for these projects. The Company's estimates to complete are
determined by management for all projects in process at year-end and could
C-23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
change as future information becomes available. Management believes it is
reasonably possible that there will be changes to total revenues and
expenses on projects in process at year-end through change orders that will
affect these projects ultimate profitability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments under SFAS No. 107,
Disclosures About Fair Value of Financial Instruments, are determined at
discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with precision. At
December 31, 1997, the Company believes the carrying values of its
receivables, notes payables and accounts payable approximate their
estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such assets
may not be recoverable, in accordance with Statement of Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of (SFAS 121). This review consists of
a comparison of the carrying value of the asset with the asset's expected
future undiscounted cash flows without interest costs. Estimates of
expected future cash flows are to represent management's best estimate
based on reasonable and supportable assumptions and projections. If the
expected future cash flow exceeds the carrying value of the asset, no
impairment is recognized. If the carrying value of the asset exceeds the
expected future cash flows, an impairment exists and is measured by the
excess of the carrying value over the fair value of the asset. Any
impairment provisions recognized are permanent and may not be restored in
the future.
STOCK-BASED COMPENSATION
In fiscal 1996, the Company adopted SFAS No. 123, Accounting for Stock-
Based Compensation, (SFAS 123). SFAS 123 encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options and other equity instruments to employees based on fair value.
Companies that do not adopt the fair value accounting rules must disclose
the impact of adopting a new method in the notes to the financial
statements. Transactions in equity instruments with non-employees for goods
or services must be accounted for on the fair value method. The Company has
elected not to adopt the fair value accounting method prescribed by SFAS
123 for employee stock compensation, and is subject only to the disclosure
requirements prescribed by SFAS 123. Adoption of SFAS 123 has no effect on
the Company's consolidated financial statements.
C-24
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
LOSS PER SHARE
During 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128), which is
effective for financial statements issued for periods ending after December
15, 1997. Under SFAS 128, basic loss per share is computed on the basis of
weighted-average common shares outstanding. Diluted loss per share
considers potential common stock in the calculation, and is the same as
basic loss per share for the 11 months ended at December 31, 1997 and the
year ended January 31, 1997, as all of the Company's potentially dilutive
securities were anti-dilutive during these periods.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentations. Such reclassifications has no effect
on net income.
(2) ACQUISITIONS
In September 1996, the Company acquired the outstanding common stock of
Interwest through the issuance of 2,306,541 shares of its common stock,
which was valued at approximately $5,480,000. This acquisition was
accounted for under the purchase method of accounting. The excess of the
purchase price over the net liabilities acquired of approximately
$2,162,000 is being amortized over a period not to exceed 20 years.
Additionally, in October 1996, the Company purchased the assets of another
entity for 25,000 shares of the Company's common stock and accounted for
the acquisition under the purchase method of accounting.
During 1997, the Company acquired its remaining interest in Interwest
Communications Pueblo Corporation for 12,500 shares of common stock, valued
at $100,000. Any pro-forma results of operations are immaterial to the
consolidated financial statements.
C-25
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(3) CONTRACTS IN PROGRESS
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
Costs incurred on uncompleted contracts $5,879
Estimated earnings 1,790
------
7,669
Less: Billings to date 7,381
------
$ 288
======
Included in the accompanying balance
sheet accounts under the following
captions:
Costs and estimated earnings in excess
of billings $1,825
Billings in excess of costs and
estimated earnings 1,537
------
$ 288
======
The Company has entered into various contracts for the installation of
wide-area and local-area voice and data networks. Progress billings are
made to customers upon contract acceptance and completion of certain
milestones. The Company expects to bill and collect all costs and estimated
earnings in excess of billings as of December 31, 1997 in 1998.
(4) GOODWILL
In the fourth quarter of 1997, the Company recognized a goodwill impairment
of $746,000 which is directly associated with discontinued operations (note
9). The goodwill is related to two of the Company's non-core business
segments which the Company's Board of Directors have adopted a plan to sell
during 1998.
In addition, during the fourth quarter of 1997, the Company recognized a
goodwill impairment of $259,000, which is recorded in general and
administrative expenses. The goodwill relates to a 1996 purchase business
combination and was determined to have been impaired because the purchased
business was generating recurring operating losses and key employees were
transferred to other operating units of the Company.
(5) NOTES PAYABLE
In April 1997, the Company renegotiated its credit facility. The new
facility consists of a line-of-credit for $5,000,000 with interest at prime
plus 1/2% (totaling 9% at December 31, 1997) and a $450,000 facility to
support a performance bond which will expire upon the release of the bond.
As of December 31, 1997, there was $4,390,000 outstanding under the
line-of-credit and there was no balance committed under the performance
bond. The line-of-credit is collateralized by accounts receivable and
inventory and expires in September 1998, but may be extended for an
additional year at sole discretion of the financial institution. As of
December 31, 1997, the Company was not in compliance with certain covenants
to its credit facility, however, such covenants have been waived as of
December 31, 1997 through the expiration of the credit facility. Pursuant
to
C-26
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
the waiver granted by the Company's lender, the Company and its lender must
agree to the terms of an amendment to the credit facility to incorporate
monthly cash flow covenants for the periods from May 1998 through August
1998, by April 15, 1998.
The Company also has various notes payable agreements with various
individuals totaling approximately $254,000 at December 31, 1997. In
general, these notes are unsecured, however, a few are collateralized by
certain equipment and vehicle of the Company. Interest accrues on these
notes at between approximately 7% and 14% per annum.
Future debt maturities as of December 31, 1997 are as follows (in
thousands):
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
======
The Company also leases telecommunications circuits under noncancelable
leases. The Company subleases these circuits to its customers as part of
its normal operations. Minimum commitments under these agreements total
approximately $1,275,000 for fiscal 1998, $1,500,000 for fiscal 1999 and
2000, $1,100,000 for fiscal 2001, and only minimal commitments thereafter.
The Company has an outstanding receivable of $620,000 at December 31, 1997,
related to a project for which the Company is a subcontractor. This
receivable relates to the cost of delays and inefficiencies, as a result of
environmental hazards at the worksite. The Company anticipates recovering
substantially all of these costs from the contractor during 1998. The
Company is indemnified by Interwest Group under a previous business
combination for any losses resulting from this contract.
C-27
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY
The Company has authorized 100,000,000 shares of preferred stock, which may
be issued in series and with such preferences as determined by the
Company's Board of Directors. As of December 31, 1997, no preferred stock
has been issued.
During the fiscal year 1996, the Company adopted, and the stockholders
approved, an Incentive Stock Plan (Plan), that authorizes the issuance of
up to 875,000 shares of common stock. Pursuant to the Plan, the Company may
grant "incentive stock options" (intended to qualify under Section 422 of
the Internal Revenue Code of 1986, as amended), non-qualified stock options
and stock purchase rights or a combination thereof.
Incentive stock options may not be granted at an exercise price of less
than the fair market value of the common stock on the date of grant (except
for holders of more that 10% common stock, whereby the exercise price must
be at least 110% of the fair market value at the date of grant for
incentive stock options). The term of the options may not exceed ten years.
During the fiscal year 1996, the Company also adopted the Non Employee
Directors' Stock Option Plan (Outside Directors' Plan), which provides for
the grant of stock options to non-employee directors of the Company and any
subsidiary. An aggregate of 40,000 shares of common stock are reserved for
issuance under the Outside Directors' Plan. The exercise price of the
options will be the fair market value of the stock on the date of grant.
Outside directors are automatically granted options to purchase 10,000
shares initially and an additional 2,000 shares for each subsequent year
that they serve. All options granted vest over a 3-year period from the
date of the grant.
The following is a summary of activity under these stock option plans for
the eleven months ended December 31, 1997 and the year ended January 31,
1997:
<TABLE>
<CAPTION>
Eleven months ended
December 31, 1997 Year ended January 31, 1997
-------------------------- ---------------------------
Weighted Weighted
Number of average Number of average
shares exercise price shares exercise price
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 659,844 $4.18 296,800 $3.44
Granted 221,800 5.52 686,344 4.10
Exchanged - - (217,900) 3.20
Exercised (8,333) 4.95 (6,500) 3.00
Forfeitures (40,867) 4.53 (98,900) 4.20
------- --------
Outstanding, end of period 832,444 4.62 659,844 4.18
======= ========
</TABLE>
C-28
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following tables summarize certain information about the Company's
stock options at December 31, 1997.
Options outstanding
-------------------------------------------------------------
Weighted Weighted
Range of Number of average average
exercise outstanding remaining exercise
prices options contractual life price
------------ ----------- ---------------- --------
$3.75-4.13 444,844 8.2 years $3.88
4.81-6.25 364,100 9.0 5.27
7.88-8.88 23,500 9.7 8.36
-----------
3.75-8.88 832,444 8.6 4.62
===========
Options exercisable
-------------------------------------------------------------
Weighted
Range of Number of average
exercise options exercise
prices exercisable price
------------ ----------- --------
$3.75-4.13 222,422 $3.88
4.81-6.25 140,776 5.33
7.88-8.88 5,875 8.36
-----------
3.75-8.88 369,073 4.51
===========
PRO FORMA STOCK BASED COMPENSATION DISCLOSURES
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options and warrants which are granted to
employees. Accordingly, no compensation cost was recognized for grants of
options during the eleven months ended December 31, 1997 and year ended
January 31, 1997 to employees since the exercise prices were not less than
the fair value of the Company's common stock on the grant dates. Had
compensation cost been determined based on the fair value method described
in SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
C-29
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Eleven months
ended Year ended
December 31, January 31,
1997 1997
------------ ----------
Net loss applicable to common shareholders:
As reported $(4,575) (1,125)
Pro forma (5,612) (1,803)
Net loss per common share - basic and diluted:
As reported (0.88) (0.33)
Pro forma (1.08) (0.53)
The weighted average fair value of options granted in the eleven months
ended December 31, 1997 and the year ended January 31, 1997 on the date of
grant was estimated to be $4.05 and $2.98, respectively, using the Black-
Scholes option-pricing model with the following weighted average
assumptions:
Eleven months
ended Year ended
December 31, January 31,
1997 1997
------------ ----------
Expected volatility 57% 83%
Risk-free interest rate 6% 7%
Expected dividends - -
Expected terms (in years) 10 5
(8) INCOME TAXES
Deferred income taxes are provided for differences between the tax and book
basis of assets and liabilities as a result of temporary differences in the
recognition of revenues or expenses for tax and financial reporting
purposes.
At December 31, 1997, these differences consist of the following (in
thousands):
Income tax loss carryforward $ 2,401
Allowance on assets 263
Deferred revenue 53
Depreciation expense 258
Other 40
-------
3,015
Less valuation allowance (3,015)
-------
Net $ -
=======
C-30
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The Company did not recognize tax benefits in 1997 and 1996 due to
increases in the valuation allowance for deferred tax assets in those
periods. The valuation allowance for deferred tax assets increased from
$952,000 at January 31, 1997 to $3,267,000 at December 31, 1997, due
primarily to an increase in the Company's net operating loss carryforwards.
As of December 31, 1997, the Company has income tax loss carryforwards of
approximately $6,436,000 which expire in the years 2006 through 2012. The
utilization of the majority of these net operating loss carryforwards have
been restricted because of ownership changes. These restrictions limit the
amount of utilizable net operating loss carryforwards each year.
(9) EMPLOYEE SAVING PLANS
The Company provides two separate savings plans to its' employees: (1) the
Internet Communications Employee Retirement Savings Plan and Trust, and (2)
the Interwest Communications Employee Thrift Retirement Plan.
The Internet Communications Employee Retirement Savings Plan and Trust
permits employees to make contributions by salary reductions pursuant to
section 401(k) of the Internal Revenue Code. This plan covers substantially
all of the pre-merger Internet Communications Corporation employees who
have been employed with the Company for six months and are at least 21
years of age. The Company may also make additional cash contributions at
the discretion of the Board of Directors. Employees are fully vested in
employer contributions after they complete six years of service. There were
no Company contributions for the 11 month period ended December 31, 1997 or
for the year ended January 31, 1997.
The Interwest Communications Employee Thrift Retirement Plan permits
employees to make contributions by salary reductions pursuant to section
401(k) of the Internal Revenue Code. This plan covers substantially all of
the pre-merger Interwest Communications Corporation employees who have been
employed with the Company for one year and are at least 21 years of age.
Each employees contribution up to a maximum of 10% is matched 50% by the
Company. The Company may also make additional cash contributions at the
discretion of the Board of Directors. Employees are fully vested in
employer contributions after they complete six years of service. Company
contributions charged against income for the 11 month period ended December
31, 1997 and for the year ended January 31, 1997 were $97,689 and $44,675,
respectively.
Effective January 1, 1998, the Company adopted a new 401(k) plan. The new
plan will merge the two existing plans together.
(10) DISCONTINUED OPERATIONS
In March 1998, the Company's Board of Directors adopted a formal plan to
sell its non-core business segments, consisting of Sound and Cable, as a
part of the Company's strategic focus on providing integrated and high-end
network systems. The Segments have been accounted for as discontinued
operations in accordance with APB 30 for the 11
C-31
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
months ended December 31, 1997 and year ended January 31, 1997, which among
other provisions, requires the plan of disposal to be carried out within
one year (the Divestiture Period). Remaining assets and liabilities of
Sound and Cable, primarily consist of accounts receivable and accounts
payable. Summarized results of Sound and Cable for the last two years are
as follows (dollars in thousands):
Sound Cable
-------------- --------------
1997 1996 1997 1996
----- ----- ----- -----
Loss from operations $ 476 69 749 122
The January 31, 1997 consolidated financial statements have been restated
to conform with December 31, 1997 presentation.
(11) RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions in the normal course of
business with related parties. As of December 31, 1997, the Company had
outstanding related party receivables of $448,000, which are included in
trade receivables, and related party payables of $129,000 which are
included in accounts payable and accrued expenses.
(12) SUBSEQUENT EVENT
Subsequent to year end, the Company received $1.6 million from a related
party, in exchange for a convertible promissory note, due March 1999. The
note bears interest at 10% and interest payments are due quarterly. If the
Company defaults on the promissory note, the remaining principal
outstanding may be converted into common stock of the Company at $4.25 per
share.
C-32
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Hein + Associates LLP served as independent accountant for the Company for the
years ended January 31, 1996 and 1997. On September 15, 1997, the Company's
Board of Directors on the recommendation of its Audit Committee selected KPMG
Peat Marwick LLP to serve as its independent accountant with respect to
subsequent periods. The Board of Director's failure to select Hein + Associates
LLP as the Company's independent accountants constitutes their being "dismissed"
as such term is used in Item 304 of Regulation S-K, under the Securities Act of
1933, as amended.
Hein + Associates LLP's reports on the Company's financial statements for the
years ended January 31, 1996 and 1997 did not contain an adverse opinion or
disclaimer of opinion and were not qualified as to audit scope or accounting
principles. During the years ended January 31 1996 and 1997 or for any
subsequent interim period, the Company has not had any disagreement with Hein +
Associates LLP on any matter of accounting principles, financial statement
disclosure, or auditing scope or procedures which disagreement if not resolved
to the satisfaction of Hein + Associates LLP, would have caused Hein +
Associates LLP to make reference to the subject matter of the disagreement in
connection with its report.
C-33
<PAGE>
PART III
The information required by Part III, Items 9, 10, 11 and 12 of Form 10-KSB is
incorporated herein by reference to Registrant's definitive Proxy Statement to
be filed in connection with the Annual Meeting of Shareholders to be held in May
1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
Exhibit
No. Exhibit Location
3.1 Corporate Bylaws Incorporated by reference to
Exhibit No. 3.1 to the
Registrant's Form S-18
Registration Statement No.
33-24299-D
3.2 Restated Articles of Filed Herewith
Incorporation filed with
the Colorado Secretary of
State on January 23, 1998
10.1 Non-Compete Agreement Incorporated by reference to
between Thomas C. Galley Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.2 Non-Compete Agreement Incorporated by reference to
between Arnell J. Galley Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.3 Non-Compete Agreement Incorporated by reference to
between Paul W. Greiving Registrant's Form 10-K dated
and Internet January 31, 1992, File No. 0-19578
Communications Corporation
dated December 23, 1991
10.4 Executive Employment Incorporated by reference to
Agreement between Thomas Registrant's Form 10-KSB
C-34
<PAGE>
C. Galley and Internet dated January 31, 1995, File
Communications Corporation No. 0-19578
dated May 1, 1994
10.5 Buy-Sell Agreement between Incorporated by reference to
Thomas C. Galley and Registrant's Form 10-KSB dated
Internet Communications January 31, 1995, File No. 0-19578
Corporation dated May 1
1994
10.6 Share Exchange Agreement, Incorporated by reference to
Stock Registration Registrant's Form 8-K dated May
Agreement, and Loan 29, 1996, File No. 0-19578
Agreement dated May 29,
1996, between Internet
Communications Corporation
and Interwest Group
10.7 1995 Non-employee Director Incorporated by reference to
Stock Option Plan, dated Registrant's definitive proxy,
September 12, 1996 dated August 12, 1996, File No.
0-19578
10.8 1996 Incentive Stock Plan, Incorporated by reference to
dated September 12, 1996 Registrant's definitive proxy,
dated August 12, 1996, File No.
0-19578
10.9 1996 Incentive Stock Plan, Incorporated by reference to
dated September 12, 1996 Registrant's definitive proxy
(as amended September 1996) dated May 30, 1997
10.10 1995 Non-employee Director Incorporated by reference to
Stock Option Plan, dated Registrant's Form S-8 dated
September 12, 1996 (as September 8, 1997
amended)
10.11 Convertible Promissory Filed herewith
Note dated March 20, 1998
in the amount of $1,600,000
22.1 Subsidiaries of the Incorporated by reference to
Registrant Exhibit 22.1 to Registrant's Report
on Form 10-K for the year ended
January 31, 1997, File No.
33-24299
23.1 Consent of KPMG Peat
Marwick LLP Filed herewith
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarterly period ending
December 31, 1997.
C-35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET COMMUNICATIONS CORPORATION
-----------------------------------
(Registrant)
Date: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, President and
Principal Executive Officer
In accordance the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Date: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, President and
Principal Executive Officer
Date: March 30, 1998 By: /s/ Paul W. Greiving
------------------------------
Paul W. Greiving, Chief
Financial Officer and Chief
Accounting Officer
Date: March 30, 1998 By: /s/ John M. Couzens
------------------------------
John M. Couzens, Director
Date: March 30, 1998 By: /s/ Thomas C. Galley
------------------------------
Thomas C. Galley, Director
Date: March 30, 1998 By: /s/ Craig D. Slater
------------------------------
Craig D. Slater, Director
Date: March 30, 1998 By: /s/ Peter A. Guglielmi
------------------------------
Peter A. Guglielmi, Director
Date: March 30, 1998 By: /s/ William J. Maxwell
------------------------------
William J. Maxwell, Director
C-36
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 SEPTEMBER 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 NOVEMBER 6, 1998, 5,617,637 SHARES OF COMMON STOCK, NO PAR VALUE, WERE
OUTSTANDING.
Page 1 of 16 pages.
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
INDEX
PAGE
----
Form 10-Q Cover Page 1
Index Page 2
Part I FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets at 3
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations For the 4
Three and Nine months ended September 30, 1998 and October 31, 1997
Condensed Consolidated Statements of Cash Flows 5
For the Nine months ended September 30, 1998 and October 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 15
Item 2 - Changes in Securities and use of Proceeds 15
Item 3 - Defaults upon Senior Securities 15
Item 4 - Submission of Matters to a Vote of 15
Security Holders
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 16
D-2
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash $ 69 --
Trade receivables, net of allowance
for doubtful accounts and sales returns 7,665 4,907
Inventory 3,522 3,255
Prepaid expenses and other 525 328
Costs and estimated earnings in
excess of billings 1,551 1,825
------------- ------------
Total current assets 13,332 10,315
Equipment, net 1,436 2,015
Goodwill, net 2,090 2,198
Spares inventory 240 507
Net assets of discontinued operations -- 2,078
Other, net 737 1,000
------------- ------------
Total assets $ 17,835 18,113
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 6,634 4,435
Accounts payable and accrued expenses 5,585 4,706
Billings in excess of costs and
estimated earnings 1,977 1,537
Unearned income 966 1,125
Net liabilities of discontinued
operations 629 --
------------- ------------
Total current liabilities 15,791 11,803
Notes payable and other long term
obligations 302 209
Deferred revenue 166 117
------------- ------------
Total liabilities 16,259 12,129
Stockholders' equity:
Common stock, no par value 14,881 13,965
Stockholders' notes (22) (31)
Accumulated deficit (13,283) (7,950)
------------- ------------
Total stockholders' equity 1,576 5,984
------------- ------------
Total liabilities and
stockholders' equity $ 17,835 18,113
============= ============
D-3
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
---------------------------------- -------------------------------------------
September 30, October 31, September 30, October 31,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales:
<S> <C> <C> <C> <C>
Network Services 3,518 3,356 11,097 9,836
Network Integration 4,856 5,887 14,032 18,884
------------- ------------- ------------- ------------
Total sales 8,374 9,243 25,129 28,720
Cost of Sales (6,102) (6,599) (18,409) (19,997)
------------- ------------- ------------- ------------
Gross margin 2,272 2,644 6,720 8,723
------------- ------------- ------------- ------------
Operating expenses:
Selling 1,166 1,533 4,065 4,684
General and
administrative 1,790 1,710 5,168 4,806
Restructuring -- -- 1,199 --
Interest expense, net 157 85 448 334
Loss from sale of
Subsidiary -- 152 -- 152
------------- ------------- ------------- ------------
Total expenses 3,113 3,480 10,880 9,976
------------- ------------- ------------- ------------
Income (Loss) from
continuing operations (841) (836) (4,160) (1,253)
Discontinued operations --
Income (Loss) from
operations -- (218) (206) (261)
Estimated loss on
disposal (730) -- (967) --
------------- ------------- ------------- ------------
Net Income (Loss) (1,571) (1,054) (5,333) (1,514)
------------- ------------- ------------- ------------
Income (Loss) per share basic and diluted:
Weighted average
common shares
outstanding 5,460 5,378 5,429 5,175
Income (Loss) from
continuing
operations (0.15) (0.16) (0.76) (0.24)
Income (Loss) from
discontinued
operations (0.14) (0.04) (0.22) (0.05)
Net Income
(Loss) (0.29) (0.20) (0.98) (0.29)
</TABLE>
- ---------------------------------------------------------------------------
See accompanying notes to these condensed consolidated financial statements
D-4
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For Nine Months Ended
--------------------- ---------------
September 30, October 31,
1998 1997
---- ----
(Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net loss from continuing operations (4,160) (1,253)
Adjustments to reconcile net loss from continued operations
Depreciation and amortization 1,033 1,043
Allowance for doubtful accounts and sale returns 229 (99)
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables (2,987) 202
Inventory (136) (844)
Prepaid expenses and other (83) 28
Costs in excess of billings and estimated earnings 274 1,940
Increase (decrease) in:
Accounts payable and accrued expenses 879 (443)
Unearned income and deferred revenue (110) (157)
Other Liabilities 161 328
Billings in excess of costs and estimated earnings 440 --
--------- ---------
Net cash provided by (used in) operating activities (4,460) 745
Net cash provided by (used in) discontinued operations 1,534 (1,412)
Cash flows from investing activities:
Capital expenditures (174) (703)
Proceeds from sales of assets 113 --
--------- ---------
Net cash used in investing activities (61) (703)
Cash flows from financing activities:
Proceeds from sale of common stock -- 3,041
Expenses from sale of common stock -- (29)
Repayment of debt (5,734) (11,258)
Proceeds from debt 7,865 9,146
Repayment of stockholders' note 9 --
Proceeds from exercise of stock options 916 --
--------- ---------
Net cash provided by financing activities 3,056 900
--------- ---------
Increase (decrease) in cash: 69 (470)
Cash, beginning of period -- 571
--------- ---------
Cash, end of period $ 69 101
--------- ---------
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
D-5
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 third quarter of 1997 relate
to the three-month period ended October 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"), Omega and ICNS. On April 30, 1998,
the Company executed two separate divestiture agreements for the 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-KSB
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. 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. During August 1998, the Company
entered into negotiations to relinquish its role under the last major contract
to be completed under the Company's plan to divest of ICNS. The Company has
entered into an agreement to terminate the contract and expects final settlement
during December 1998. Based on the settlement terms and the results of the
contracts covered under the April 30, 1998 divestiture agreement for ICNS,
management has determined that an additional loss on disposal should be
recognized. Management has revised its estimates in the financial statements for
the quarter ended September 30, 1998. The October 31, 1997 consolidated
financial statements have been restated to conform to the September 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 was to become a wholly-owned subsidiary of RMI and the
shareholders of the Company were to receive $6.764 per share of common stock of
the Company, for a total consideration to the Company's shareholders of
approximately $39.4 million. Additionally, in connection with the merger, RMI
was to repay certain of the Company's indebtedness. The acquisition was approved
by the Company's shareholders at a Special
D-6
<PAGE>
Meeting of Shareholders on September 18, 1998. On October 13, 1998, RMI notified
the Company that it would not close the merger, asserting that INCC was unable
to accurately certify to compliance with conditions precedent to RMI's
obligation to close. The Company believes this claim to be entirely without
merit and an attempt by RMI to avoid its obligations under the merger agreement.
The Company filed suit against RMI on October 14, 1998 for damages of at least
$30 million.
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.
The Company has a borrowing agreement with a lending institution which provides
for a $5.0 million credit facility. At September 30, 1998, the Company had
borrowed $5.0 million against the facility. The borrowing agreement expired on
October 15, 1998. The amount of funds available under the credit facility is
limited to the lesser of $5.0 million or a borrowing base calculation. As of
October 31, 1998, the amount borrowed of $5.0 million exceeded the borrowing
base calculation by $1,350,000. The Company is currently in discussions with the
lender to extend and/or modify the existing credit facility, however, there is
no assurance that the Company will be successful.
NOTE 4 - STOCKHOLDERS' EQUITY
--------------------
On November 20, 1998, the Company entered into an agreement with Interwest
Group, Inc., a wholly-owned subsidiary of Anschutz Company. Under the terms of
the agreement, the Company will issue 7 1/8% convertible preferred stock,
convertible at $2.25 per share, in exchange for $2.0 million.
During the quarter ended September 30, 1998, 25,500 options to purchase shares
of common stock were exercised for total proceeds to the Company of $123,000.
For the nine months ended September 30, 1998, 219,750 options to purchase shares
of common stock were exercised for total proceeds to the Company of $916,000.
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
and nine months ended September 30, 1998 and the three and nine months ended
October 31, 1997, as all of the Company's potentially dilutive securities were
anti-dilutive during these periods.
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
D-7
<PAGE>
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.
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 software, and the software is covered by
certain maintenance programs provided by the Company.
(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
On November 20, 1998, the Company entered into an agreement with Interwest
Group, Inc., a wholly-owned subsidiary of Anschutz Company. Under the terms of
the agreement, the Company will issue 7 1/8% convertible preferred stock,
convertible at $2.25 per share, in exchange for $2.0 million.
The Company has a borrowing agreement with a lending institution which provides
for a $5.0 million credit facility. At September 30, 1998, the Company had
borrowed $5.0 million against the facility. The borrowing agreement expired on
October 15, 1998. The amount of funds available under the credit facility is
limited to the lesser of $5.0 million or a borrowing base calculation. As of
October 31, 1998, the amount borrowed of $5.0 million exceeded the borrowing
base calculation by $1,350,000. The Company is current on interest payments and
the lender has not demanded repayment of the principal. The Company is currently
in discussions with the lender to extend and/or modify the existing credit
facility, however, there is no assurance that the Company will be successful.
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.
D-9
<PAGE>
LIQUIDITY
At September 30, 1998, The Company had a working capital deficit of $2,459,000,
which included $6,634,000 relating to the current portion of long term debt and
amount outstanding under the Company's credit facility. The Company had a
working capital deficit of $1,448,000 at December 31, 1997. The amounts relating
to the current portion of long term debt and the amounts outstanding under the
Company's credit facility were $4,435,000 at December 31, 1997.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns was $7,665,000 at September 30, 1998, as compared to $4,907,000 at
December 31, 1997. As discussed in the March 31, 1998 Form 10-Q, the Company
converted its primary management information systems in January. Certain of the
Company's customers considered the descriptive detail provided on the invoices
generated by this system to be inadequate, and have delayed payment pending
additional support being provided by the Company. The Company has committed
additional resources in the collection area to address customer concerns. In
addition, the Company increased the allowance for doubtful accounts by $229,000
during the three months ended September 30, 1998. Continued delays in collection
or uncollectibility of accounts receivable could have an adverse effect on the
Company's liquidity and working capital position.
Accounts payable and accrued expenses at September 30, 1998 were $5,585,000 as
compared to $6,441,000 at June 30, 1998 and $4,706,000 at December 31, 1997. The
increase in the accounts receivable has resulted in the Company extending the
time in which it paid its vendors. The Company has made advances in the timing
of payments to vendors, assisted by proceeds from the exercise of stock options.
The Company incurred capital expenditures of $100,000 during the quarter ended
September 30, 1998, and $174,000 for the nine months ended September 30, 1998.
Some of the capital expenditures incurred during the quarter ended September 30,
1998 were to buy out leases on executive vehicles. The Company subsequently sold
these vehicles. 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 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, employees were separated
from the Company, the number of manufacturers' product lines were reduced and
the wholesale engineering services business launched during the fourth quarter
of the fiscal year ended December 31, 1997 was closed.
These restructuring actions resulted in the Company recognizing expenses for the
three months ended March 31, 1998 totaling $1,608,000. The expenses have been
classified for financial statement purposes as follows:
D-10
<PAGE>
Operating expenses:
Restructuring:
Employee Severance $ 653,000
Closure of Wholesale
Engineering Company 274,000
Facilities Consolidation 229,000
Other 43,000
----------
1,199,000
----------
Cost of Sales:
Product Line Reduction 409,000
----------
Total $1,608,000
----------
Employee Severance: The Company severed 50 positions and accepted the
resignations of Thomas C. Galley, the Company's former President, CEO and a
Director, and Arnell Galley, the Company's former Secretary, Vice President
Administration and a Director. The severed employees each signed a Severance
Agreement and Legal Release, which provided them 30 days severance pay and
continued health insurance coverage for the month of April 1998. As disclosed in
the Company's Definitive Proxy Statement filed April 23, 1998, Mr. Galley
entered into a Severance Agreement and Mutual Legal Release whereby the Company
agreed to pay a total of two years severance at a rate of $160,000 per year.
Also, as described in the Definitive Proxy Statement, Mrs. Galley entered into a
Severance Agreement and Mutual Legal Release whereby the Company agreed to pay a
total of twelve months severance pay at a rate of $100,000 per year.
Closure of Wholesale Engineering Company: The Company launched an entirely
separate wholesale engineering services business during the fourth quarter of
the fiscal year ended December 31, 1997, which was closed as part of the
restructuring. The restructuring expenses include an accrual of a liability
triggered by the closure of the business related to a contractual agreement
entered into by the Company.
Facilities Consolidation: The facilities consolidation expense includes the cost
of leased space which would no longer be required by the Company, for the period
from the date of the restructuring to the estimated date of securing a sublease
and the related real estate brokers commissions for subletting the space. In
addition, the expense includes the net furniture costs in excess of expected
trade in or sales value.
Other: Other represents legal fees related to the severance plan and agreements
and disposition of vehicles related to the restructuring.
Product Line Reduction: The Company's restructuring plan included a clearly
defined approach to hardware and material offerings. The Company undertook a
review of the then offered products which included the product and technical
support requirements and the manufacturer's warranty, quality standards and
support standards. As a result of this review, the Company reduced the number of
approved vendors from 51 to 22. This reduction in product offerings allows the
Company to reduce future training costs and allow its technicians to be more
proficient on the products offered. The product line reduction expense
represents inventory that would no longer be offered as part of the Company's
standard product offerings.
The balance of these restructuring expenses remaining to be funded as of
September 30, 1998 was approximately $702,000.
D-11
<PAGE>
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 September 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 September 30, 1998, all but one of the contracts were substantially
completed. The status of the remaining contract is discussed below.
As of the issuance date of the Company's Annual Report on Form 10-KSB 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. During August 1998,
the Company entered into negotiations to relinquish its role under the last
major contract to be completed under the Company's plan to divest of ICNS. The
Company has entered into an agreement to terminate the contract and expects
final settlement during December 1998. Based on the settlement terms and the
results of the contracts covered under the April 30, 1998 divestiture agreement
for ICNS, management has determined that an additional loss on disposal should
be recognized. Management has revised its estimates in the financial statements
for the quarter ended September 30, 1998.
CONTINUING OPERATIONS
Revenues were $8,374,000, and $25,129,000 for the three and nine month periods
ended September 30, 1998, as compared to $9,243,000 and $28,720,000 for the
three and nine month periods ended October 31, 1997. This represents decreases
of $869,000, or 9.4% and $3,591,000, or 12.5% when compared to the three and
nine month periods ended October 31, 1997. Work Telcom, a division of Internet
was sold in October 1997 and accounted for $150,000 and $545,000 of the revenues
for the three and nine month periods ended October 31, 1997. The Telesales
division, which was phased out in 1997, accounted for $204,000 and $1,379,000 of
the revenues for the three and nine month periods ended October 31, 1997. During
the nine month period ended October 31, 1997 the company recognized Network
Integration revenues of $2,085,000 on two large contracts. During that same
period, the Company also recognized Network Integration revenues of $512,000 on
a significant fiber infrastructure construction contract which was outside of
the Company's normal scope of business. The Company did not have any comparable
contracts during the first nine months of 1998. These decreases were offset by
service sales which increased by $162,000, or 4.83% and $1,261,000, or 12.8% for
the three and nine month periods ended September 30, 1998, reflecting the
Company's continued emphasis to increasing sales of recurring service contracts.
D-12
<PAGE>
GROSS MARGIN
Gross margin for the three and nine month periods ended September 30, 1998 was
27.1% and 26.7% of sales as compared to 28.6% and 30.4% for the three and nine
month periods ended October 31, 1997. As discussed above, included in Cost of
Sales for the first quarter of 1998 is $409,000 of product line reduction
expense related to the Company's restructuring. Excluding the effects of the
product line reduction expense, the gross margin for the nine months ended
September 30, 1998 would have been 28.4%. Margins declined in 1998 due to
tightening margins on Network Integration sales, and lower returns in Carrier
Services, a component of Network Services.
SELLING EXPENSES
Selling expenses decreased by $367,000, or 23.9%, and $619,000, or 13.2% for the
three and nine month periods ended September 30, 1998 as compared to the three
and nine month periods ended October 31, 1997. Selling expenses as a percentage
of revenue were 13.9% and 16.2% of revenues for the three and nine month periods
ended September 30, 1998 versus 16.6% and 16.3% for comparable periods in 1997.
Selling expenses for the nine months ended September 30, 1998 included
$1,710,000, or 20.8% of revenues for the quarter ended March 31, 1998. Controls
and cost savings continue to be recognized as a result of the restructuring in
March.
GENERAL & ADMINISTRATIVE
General and administrative expenses increased $80,000, or 4.7% for the three
months ended September 30, 1998 as compared to the three months ended October
31, 1997. Included in the third quarter of 1998 balance is $117,000 of costs
associated with the failed merger. The Company also increased its allowance for
doubtful accounts by $229,000 due to the growth in accounts receivable balances.
General and administrative costs for the nine months ended September 30, 1998
increased $362,000, or 7.5% due to the previously mentioned items, as well as
the increases in the first quarter of 1998 in personnel costs, settlement costs,
and increases in allowances for bad debt and obsolete inventory.
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 software, and the software is covered by certain
maintenance programs provided by the Company.
(b) Network Control Center, where the Company monitors and manages the
integrity and quality of customer networks.
D-13
<PAGE>
(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-14
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
-----------------
On October 14, 1998, the Company filed a complaint against Rocky Mountain
Internet Inc. ("RMI") in the District Court, City and County of Denver, State
of Colorado. The complaint relates to RMI's failure to close the merger
between the Company and RMI which agreement was entered into on June 5, 1998.
The complaint alleges that RMI breached the merger agreement and made certain
misrepresentations to the Company with respect to the merger transaction. The
Company has claimed damages of at least $30 million and intends to vigorously
pursue the complaint.
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 September 30, 1998, 25,500 options to purchase
shares of common stock were exercised for total proceeds to the Company of
$123,000. For the nine months ended September 30, 1998, 219,750 options to
purchase shares of common stock were exercised for total proceeds to the
Company of $ 916,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
The Company has a borrowing agreement with a lending institution which
provides for a $5.0 million credit facility. At September 30, 1998, the
Company had borrowed $5.0 million against the facility. The borrowing
agreement expired on October 15, 1998. The Company is current on interest
payments and the lender has not demanded repayment of the principal. The
Company is currently in discussions with the lender to extend and/or modify
the existing credit facility, however, there is no assurance that the Company
will be successful.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On September 18, 1998, a Special Meeting of the Company's shareholders was
held to vote on a proposal contained in the proxy statement mailed to
shareholders on September 8, 1998. The Company's shareholders approved the
Merger of Internet Acquisition Corp. and a wholly-owned subsidiary of Rocky
Mountain Internet. The number of shares voted and withheld were as follows:
FOR WITHHELD ABSTAIN
--------- -------- -------
AMENDMENT 3,501,416 100 1,000
ITEM 5. OTHER INFORMATION
-----------------
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
NONE
D-15
<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: November 23, 1998 By: /s/ John M. Couzens
---------------------------------------
John M. Couzens, President
Date: November 23, 1998 By: /s/ T. Timothy Kershisnik
---------------------------------------
T. Timothy Kershisnik,
Chief Financial Officer
D-16
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
Special Meeting of Shareholders - February 23, 1999
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, Greenwood Village, Colorado
80111 on February 23, 1999 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 issue 50,000 shares of Preferred Stock of the Company, and
all shares of Common Stock issuable upon conversion thereof:
[ ] 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
PROPOSAL NUMBER 1.
A copy of the Notice of Special Meeting of Shareholders and Proxy Statement,
dated January 27, 1999, 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: , 1999
Signature
Signature if jointly held
PLEASE MARK, SIGN, DATE AND RETURN IN THE ENCLOSED POSTAGE-PAID ENVELOPE TODAY
