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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 March 31, 1999
--------------
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-19578
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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
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(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 May 3, 1999, 5,617,637 shares of Common Stock, no par value, were
outstanding.
Page 1 of 16 pages.
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Internet Communications Corporation
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Form 10-Q Cover Page 1
Index Page 2
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at 3
March 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations for the 4
Three months ended March 31, 1999 and March 31, 1998
Condensed Consolidated Statements of Cash Flows 5
for the Three months ended March 31, 1999 and March 31, 1998
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 13
Part II OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities and use of Proceeds 14
Item 3 - Defaults upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of 15
Security Holders
Item 5 - Other Information 15
Item 6 - Exhibits and Reports on Form 8-K 15
Signature Page 16
</TABLE>
2
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INTERNET COMMUNICATIONS CORPORATION
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Assets 1999 1998
- ----- ------------ ----
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 208 14
Restricted cash -- 650
Trade receivables, net of allowance for doubtful accounts and sales returns of
$363 at March 31, 1999 and $472 at December 31, 1998 6,135 5,637
Subscription receivable from a related party -- 2,500
Inventory 2,933 3,296
Prepaid expenses and other 372 350
Costs and estimated earnings in excess of billings 891 772
-------- --------
Total current assets 10,539 13,219
Equipment, net 1,322 1,458
Goodwill, net 820 838
Spares inventory 231 252
Net assets of discontinued operations 144 460
Other assets, net 568 540
-------- --------
Total assets $ 13,624 16,767
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Notes payable $ 3,188 1,569
Notes payable to a related party -- 1,300
Accounts payable 3,954 2,933
Accrued expenses 870 808
Billings in excess of costs and estimated earnings 479 1,239
Unearned income and deposits 872 834
-------- --------
Total current liabilities 9,363 8,683
-------- --------
Notes payable 69 3,585
Deferred revenue 167 184
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Total liabilities 9,599 12,452
Stockholders' equity:
Preferred stock, 100,000,000 shares authorized
Series A Convertible Preferred Stock, issued and outstanding
50,000 shares, stated value of $100.00 5,000 5,000
Common stock, no par value, 20,000,000 shares authorized, 5,617,637
shares issued and outstanding 14,915 14,826
Stockholders' notes (22) (22)
Accumulated deficit (15,868) (15,489)
-------- -------
Total stockholders' equity 4,025 4,315
Commitments and contingencies
-------- ------
Total liabilities and stockholders' equity $ 13,624 16,767
======== =======
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
3
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INTERNET COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended
-----------------------------------------
March 31, March 31,
1999 1998
------------------ ----------------
(unaudited)
<S> <C> <C>
Sales
Network Services $ 3,294 3,722
Network Integration 3,976 4,512
------ ------
Total Sales 7,270 8,234
Cost of Sales (5,203) (6,402)
------ ------
Gross Margin 2,067 1,832
------ ------
Operating expenses
Selling 828 1,710
General and administrative 1,420 1,911
Restructuring -- 1,199
Interest expense, net 108 122
------ ------
Total expenses 2,356 4,942
------ ------
Income (Loss) from continuing operations (289) (3,110)
Discontinued operations --
Income (Loss) from operations -- (206)
Estimated loss on disposal -- (237)
------ ------
Net Income (Loss) $ (289) (3,553)
====== ======
Income (Loss) per share - basic and diluted:
Weighted average common shares outstanding 5,618 5,398
Income (Loss) from continuing operations ($0.07) ($0.58)
Income (Loss) from discontinued operations -- ($0.08)
Net Income (Loss) ($0.07) ($0.66)
</TABLE>
- -----------------------------
See accompanying notes to these condensed consolidated financial statements
4
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INTERNET COMMUNICATIONS CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For Three Months Ended
-----------------------------------------
March 31, March 31,
1999 1998
----------------- ----------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (289) (3,110)
Adjustments to reconcile net loss from continued operations
Depreciation and amortization 226 352
Allowance for doubtful accounts and sale returns (70) 80
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables 568 (1,493)
Inventory 362 (46)
Prepaid expenses and other (99) (23)
Costs in excess of billings and estimated earnings (119) 534
Increase (decrease) in:
Accounts payable and accrued expenses 1,021 1,343
Unearned income and deferred revenue 21 (66)
Other Liabilities 61 444
Billings in excess of costs and estimated earnings (760) (387)
--------- ---------
Net cash provided by (used in) operating activities (74) (2,372)
Net cash provided by (used in) discontinued operations 316 241
Cash flows from investing activities:
Capital expenditures (6) (53)
Proceeds from sales of assets 5 --
--------- ---------
Net cash used in investing activities (1) (53)
Cash flows from financing activities:
Proceeds from debt 1,740 4,425
Repayment of debt (3,637) (2,241)
Repayment of note from a related party (1,300) --
Subscription receivable from a related party 2,500 --
--------- ---------
Net cash provided by financing activities (697) 2,184
--------- ---------
Increase (decrease) in cash: (456) --
Cash, beginning of period 664 --
--------- ---------
Cash, end of period $ 208 --
========= =========
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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-K for the fiscal year ended December 31, 1998. The financial data for the
interim periods may not necessarily be indicative of results to be expected for
the year.
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, and an agreement entered into by the Company to terminate the last
major contract to be completed under the Company's plan to divest of ICNS,
management determined that a net loss on disposal would be incurred as well as
operating losses. Management revised these estimates in the financial statements
for the year ended December 31, 1998.
NOTE 2 - NOTES PAYABLE
-------------
On December 30, 1998, the Company entered into an agreement with the bank to
amend its credit facility. On February 1, 1999, the Fourth Amendment to Credit
Agreement and Note Modification Agreement was executed. The new facility
consists of a line-of-credit for $4,350,000 through March 31, 1999 and
$4,000,000 thereafter with interest at prime plus 1% (8.75% at March 31, 1999).
As of March 31, 1999, there was $3,133,000 outstanding under the line of credit.
As of December 31, 1998, there was $5,000,000 outstanding under the line-of-
credit. In accordance with the agreement with the Bank, the Company paid down
the amount outstanding by $650,000 on January 4, 1999 and by $850,000 on
February 24, 1999. The cash used to make the $650,000 payment was reflected as
restricted cash at December 31, 1998. The line-of-credit is subject to a
borrowing base calculation and collateralized by accounts receivable and
inventory. The line matures on March 1, 2000. The credit agreement requires
that the Company remain in compliance with certain affirmative and negative
covenants. The financial covenants include specific requirements for EBITDA,
accounts receivable and accounts payable. In addition, the Company has monthly
and quarterly reporting requirements.
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. As of December
31, 1998, the balance on the note was $1,300,000. This amount was paid off on
February 24, 1999.
6
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NOTE 3 - 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. On December 30, 1998, the Company executed a stock purchase
agreement with Interwest Group, Inc., a related party. Under the terms of the
agreement, the Company issued 50,000 shares of Series A, 7 1/8% convertible
preferred stock, convertible at $2.25 per share, in exchange for $5.0 million.
Of the proceeds, $2.5 million was placed in escrow subject to shareholder
approval as required by NASDAQ corporate governance rules. On February 23,
1999, the Company received shareholder approval and the escrow was released.
After the purchase, Interwest Group owns 50% of the outstanding common stock of
the Company and 64% on an if converted basis.
NOTE 4 - INCOME (LOSS) PER SHARE
-----------------------
Basic income (loss) per share is computed on the basis of weighted-average
common shares outstanding. Diluted loss per share considers potential common
stock in the calculation, and is the same as basic loss per share for the three
months ended March 31, 1999 and 1998 as all of the Company's potentially
dilutive securities were anti-dilutive during these periods.
NOTE 5 - IMPACT OF RECENTLY ISSUED ACCOUNTING PROUNOUNCEMENTS
----------------------------------------------------
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS 133"), which is effective for all fiscal years beginning
after June 15, 1999. SFAS 133 establishes accounting and reporting standards
for derivative instruments and hedging activities by requiring that all
derivative instruments be reported as assets or liabilities and measured at
their fair values. Although management of the Company has not completed its
assessment of the impact of SFAS 133 on its consolidated results of operations
and financial position, management estimates that the impact of SFAS 133 will
not be material.
NOTE 6 - YEAR 2000 RISKS
---------------
Currently, many computer systems, hardware and software products are coded to
accept only two digit entries in the date code field and, consequently, cannot
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company and third
parties with which the Company does business rely on numerous computer programs
in their day to day operations.
The Company has identified 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. As of the
first quarter of 1999, testing, remediation and replacement had commenced. By
the end of the third quarter, the Company intends to have developed a
contingency plan that would be utilized if current efforts by the Company and
its vendors are unsuccessful.
There can be no assurance that the Year 2000 issues will be resolved in 1999.
The Company has an estimate of approximately $50,000 for the costs required for
this effort, but may incur additional costs in resolving its Year 2000 issues.
If not resolved, this issue could have a material adverse impact on the
Company's business, operating results, financial condition and cash flow.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
-----------------------------
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, based on a merger agreement entered into on June 5,
7
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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. RMI has counterclaimed that the Company
breached the merger agreement by failing to file the merger proxy in a timely
manner, misrepresenting the Company's compatibility with RMI and failing to
maintain satisfactory business operations. The counterclaim seeks substantial
damages based on RMI's inability to complete a $175 million high yield debt
offering as a result of the Company's breach of contract. The Company believes
RMI's counterclaims are frivolous and without merit and intends to vigorously
defend its position and pursue its claim against RMI. In addition, both parties
have filed motions for partial summary judgement addressed to the applicability
of a provision of the merger agreement which would limit damages upon
termination to $1,050,000 for the non-breaching party. While the ultimate
outcome of these matters cannot be determined at this time, management does not
believe the resolution will have a material adverse affect on the Company's
financial position.
8
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ITEM 2. 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.
- Becoming Y2K compliant.
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 December 30, 1998, the Company executed a stock purchase agreement with
Interwest Group, Inc., a related party. Under the terms of the agreement, the
Company issued Series A 7-1/8% convertible preferred stock, convertible at $2.25
per share, in exchange for $5.0 million. On December 30, 1998, $2.5 million was
funded to the Company, of which $650,000 was restricted for payment on the
Company's credit facility. Of the balance of the proceeds, $300,000 was used to
pay down the note from the related party, and $1,550,000 was used for working
capital. The remaining $2.5 million was funded to escrow subject to shareholder
approval as required by NASDAQ corporate governance rules. On February 23,
1999, the Company received shareholder approval and the escrow was released.
The Company used $850,000 to pay down the Company's credit facility, $1,300,000
to pay the balance of the note from the related party, and $350,000 for working
capital purposes. As a result of this equity investment, the Company reduced
its debt by $3.1 million.
On December 30, 1998, the Company entered into an agreement with the bank to
amend its credit facility. On February 1, 1999, the Fourth Amendment to Credit
Agreement and Note Modification Agreement was executed. The new facility
consists of a line-of-credit of $4,350,000 through March 31, 1999 and $4,000,000
thereafter with interest at prime plus 1% (8.75% at March 31, 1999). As of
March 31, 1999, there was $3,133,000 outstanding under the line-of-credit. The
line-of-credit is subject to a borrowing base calculation and is collateralized
by accounts receivable and inventory. The line matures on March 1, 2000.
9
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In March 1998, the Company received $1.6 million from a related party in
exchange for a convertible promissory note ("Note"), due March 1999. The Note
bears interest at 10% and interest payments are due quarterly. The Note
includes a conversion clause which allows conversion if the Note is not paid
when due and carries a conversion price of $4.25 per common share. At December
31, 1998, $1,300,000 was outstanding on this note. This note was paid in full
upon release of the escrowed funds as mentioned above.
Liquidity
During the quarter ended March 31, 1999, the Company's cash position decreased
by $456,000. Of this decrease, $650,000 of cash classified as restricted on
December 31, 1998, was used to pay down the Company's credit facility on January
4, 1999. The Company's current ratio declined to 1.13 at March 31, 1999, from
1.52 at December 31, 1998. The decline in the current ratio is due primarily to
the reclassification of the Company's credit facility to short-term at March 31,
1999 from long-term at December 31, 1998.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns, was $6,135,000 at March 31, 1999, as compared to $5,637,000 at
December 31, 1998. The Company's sales increased by $403,000 during the quarter
ended March 31, 1999, as compared to the quarter ended December 31, 1998.
Accounts payable and accrued expenses at March 31, 1999 were $4,824,000, as
compared to $3,741,000 at December 31, 1998. Increases in the Company's sales
during the quarter ended March 31, 1999 contributed to this increase.
The Company made no significant investment in property, plant, or equipment
during the quarter ended March 31, 1999. There are not material commitments for
capital expenditures and the Company is maintaining tight controls over its
capital purchases.
RESULTS OF OPERATIONS:
- ----------------------
The Company recorded a loss from continuing operations of $289,000 for the
quarter ended March 31, 1999, as compared to a loss of $3,110,000 for the
quarter ended March 31, 1998. Included in the loss for the quarter ended March
31, 1998, were restructuring costs of $1,199,000, and product line reduction
costs associated with the restructuring of $409,000. In March of 1998, the
Company adopted a plan to divest itself of its non-strategic subsidiaries, Omega
and ICNS. These segments were accounted for as discontinued operations in
accordance with APB 30, and for the three months ended March 31, 1998, the
Company recorded a loss from discontinued operations of $206,000, and an
additional estimated loss on disposal of discontinued operations of $237,000.
The total loss recognized for the quarter ended March 31, 1998 was $3,553,000.
Continuing Operations
Revenue
Revenue for the quarter ended March 31, 1999 decreased by $964,000, or 11.7%, as
compared to the quarter ended March 31, 1998. This decrease is partially due to
the reduced sales staff as a result of the restructuring in March 1998. The
average number of sales staff employed during the quarter ended March 31, 1999
was 21, as compared to 55 for the quarter ended March 31, 1998. The mix of
revenue remained comparable from 1998 to 1999, with 55% of revenue arising from
Network Integration sales and 45% of revenue arising from Network Services.
10
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Gross Margin
The gross margin percentage for the quarter ended March 31, 1999 was 28.4% as
compared to 22.2% for the quarter ended March 31,1998. During the quarter ended
March 31, 1998, the Company recorded a charge of $409,000 for product line
reduction as part of the restructuring. This charge accounted for 5.0% of the
improvement from 1998 to 1999. The remaining improvement in margins is related
to increased margins on Network Integration sales.
Selling
Selling expenses for the quarter ended March 31, 1999 decreased by $882,000, or
51.6% from the quarter ended March 31, 1998. Selling expenses as a percentage
of revenue were 11.4% for the quarter ended March 31, 1999 as compared to 20.8%
of revenue for the quarter ended March 31, 1998. This decrease in selling
expenses in primarily attributable to a $705,000 decrease in personnel related
expenditures. The remaining decrease in selling expenses is due to decreased
expenditures for recruiting and travel.
General and Administrative
General and Administrative expenses decreased by $491,000, or 25.7% for the
quarter ended March 31, 1999, as compared to the quarter ended March 31, 1998.
General and Administrative expenses as a percentage of sales were 19.5% for the
quarter ended March 31, 1999, as compared to 23.2% for the quarter ended March
31, 1998. Of the costs reductions, $351,000 came from reductions in personnel
expenses, and $103,000 came from reduced amortization and depreciation expenses.
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.
The restructuring resulted in the Company recognizing expenses totaling
$1,345,000 for the year ended December 31, 1998. The restructuring charge, as
initially recorded in the three month period ended March 31, 1998, was based on
management's best estimates at the time. As a result of the actual costs of the
restructuring, the Company revised its estimates during the fourth quarter of
1998.
A description of the major components of the restructuring expense and the
product line reduction are as follows:
Employee Severance of $664,000: The Company severed 50 positions, closed the
wholesale engineering business and accepted the resignations of the Company's
former president, CEO and a director, 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, the
former president 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, the
former secretary and vice president 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.
11
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Facilities Consolidation of $229,000: 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 of $43,000: Other represents legal fees related to the severance plan and
agreements and disposition of vehicles related to the restructuring.
Product Line Reduction of $409,000: 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 and has been included in cost of
sales.
The balance of these restructuring expenses remaining to be funded as of March
31, 1999 was approximately $81,000.
Discontinued Operations
Pursuant to a plan adopted in March 1998, the Company executed two separate
divestiture agreements on April 30, 1998 for its non-strategic subsidiaries,
Omega and ICNS. The subsidiaries have been accounted for as discontinued
operations in accordance with APB 30. The remaining assets and liabilities of
the subsidiaries at March 31, 1999 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 December 31, 1998, all of the contracts were completed.
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 Subsidiaries or the related interim period results of
operations. Based, in part, on the definitive agreements entered into on April
30, 1998, and an agreement entered into by the Company to terminate the last
major contract to be completed under the Company's plan to divest of ICNS,
management determined that a net loss on disposal would be incurred as well as
operating losses. Management has revised its estimates in the financial
statements for the year ended December 31, 1998. The Company recognized a loss
of $1,173,000 from discontinued operations for fiscal 1998.
12
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Year 2000 Risks
Currently, many computer systems, hardware and software products are coded to
accept only two digit entries in the date code field and, consequently, cannot
distinguish 21st century dates from 20th century dates. As a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company and third
parties with which the Company does business rely on numerous computer programs
in their day to day operations.
The Company has identified 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 all categories, the Company has substantially completed its inventory and
assessment 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.
As of the first quarter of 1999, testing, remediation and replacement had
commenced for all categories. By the end of the third quarter, the Company
intends to have developed a contingency plan that would be utilized if current
efforts by the Company and its vendors are unsuccessful.
In the event that the Company acquires other assets or 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 1999.
The Company has an estimate of approximately $50,000 for the costs required for
this effort, but may incur additional costs in resolving its Year 2000 issues.
If not resolved, this issue could have a material adverse impact on the
Company's business, operating results, financial condition and cash flow.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company's exposure to interest rate changes is primarily related to its
variable rate debt which may be outstanding from time to time under the
Company's credit facility. The Company's credit facility is a line of credit
with an interest rate based on the prime rate plus 1%. The credit facility
matures on March 1, 2000. Because the interest rate on the credit facility is
variable, the Company's cash flow may be affected by increases in the prime
rate. Management does not, however, believe that any risk inherent in the
variable-rate nature of the loan is likely to have a material effect on the
Company. As of March 31, 1999, the Company's outstanding balance on the credit
facility was $3,113,000.
Sensitivity Analysis. To assess exposure to interest rate changes, the Company
has performed a sensitivity
13
<PAGE>
analysis assuming the Company has a $4 million balance outstanding under the
line of credit (the limit on the line of credit). The monthly interest payment,
if the rate stayed constant, would be approximately $29,200. If the prime rate
rose 100 basis points, the monthly interest payment would be approximately
$32,500. The Company does not believe the risk resulting from such fluctuations
is material nor that the payment required would have material effect on cash
flow.
Part II OTHER INFORMATION
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, based on a merger agreement 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. RMI has
counterclaimed that the Company breached the merger agreement by failing to
file the merger proxy in a timely manner, misrepresenting the Company's
compatibility with RMI and failing to maintain satisfactory business
operations. The counterclaim seeks substantial damages based on RMI's
inability to complete a $175 million high yield debt offering as a result
of the Company's breach of contract. The Company believes RMI's
counterclaims are frivolous and without merit and intends to vigorously
defend its position and pursue its claim against RMI. In addition, both
parties have filed motions for partial summary judgement addressed to the
applicability of a provision of the merger agreement which would limit
damages upon termination to $1,050,000 for the non-breaching party. While
the ultimate outcome of these matters cannot be determined at this time,
management does not believe the resolution will have a material adverse
affect on the Company's financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
On December 30, 1998, the Company executed a stock purchase agreement with
Interwest Group, Inc., a related party. Under the terms of the agreement,
the Company issued Series A 7-1/8% convertible preferred stock, convertible
at $2.25 per share, in exchange for $5.0 million. On December 30, 1998,
$2.5 million was funded to the Company, of which $650,000 was restricted
for payment on the Company's credit facility. Of the balance of the
proceeds, $300,000 was used to pay down the note from the related party,
and $1,550,000 was used for working capital. The remaining $2.5 million
was funded to escrow subject to shareholder approval as required by NASDAQ
corporate governance rules. On February 23, 1999, the Company received
shareholder approval and the escrow was released. The Company used
$850,000 to pay down the Company's credit facility, $1,300,000 to pay the
balance of the note from the related party, and $350,000 for working
capital purposes. As a result of this equity investment, the Company
reduced its debt by $3.1 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
NONE
14
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On February 23, 1999 a Special Meeting of the Company's shareholders was
held to vote on a proposal contained in the proxy statement mailed to
shareholders on January 27, 1999. The Company's shareholders approved the
issuance of 50,000 shares of Series A Convertible 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. ("Group"), the Company's largest
shareholder. Of the 50,000 shares of Convertible Stock, 25,000 shares were
held in escrow pending shareholder approval, and 25,000 shares were
available to vote. The 25,000 shares of Convertible Stock voted by Group
are convertible into 1,111,111 shares of the Company's common stock,
bringing Group's beneficial ownership to 3,984,679 shares of the Company's
common stock. The number of total shares voted and against were as
follows:
<TABLE>
<CAPTION>
For Against Abstain
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Amendment 4,943,137 91,235 18,470
</TABLE>
ITEM 5. OTHER INFORMATION
-----------------
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
There were two reports on Form 8-Ks filed during the quarterly period
ending March 31, 1999. On January 13, 1999, the Company filed a Form 8-K
reporting that the Company completed a $5 million equity placement with
Interwest Group, Inc., a related party. Included in the filing were the
Company's press release dated January 4, 1999 and the Articles of Amendment
to the Articles of Incorporation for Internet Communications Corp. On March
31, 1999, the Company filed unaudited balance sheet information as of
February 28, 1999 at the request of The Nasdaq Stock Market.
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: May 17, 1999 By: /s/ John M. Couzens
--------------------------------------------------
John M. Couzens, President
Date: May 17, 1999 By: /s/ T. Timothy Kershisnik
--------------------------------------------------
T. Timothy Kershisnik, Chief Financial Officer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 208,000
<SECURITIES> 0
<RECEIVABLES> 6,498,000
<ALLOWANCES> 363,000
<INVENTORY> 2,933,000
<CURRENT-ASSETS> 10,539,000
<PP&E> 5,654,000
<DEPRECIATION> 4,332,000
<TOTAL-ASSETS> 13,624,000
<CURRENT-LIABILITIES> 9,363,000
<BONDS> 0
0
5,000,000
<COMMON> 14,915,000
<OTHER-SE> (15,890,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,624,000
<SALES> 7,270,000
<TOTAL-REVENUES> 7,270,000
<CGS> (5,203,000)
<TOTAL-COSTS> (7,451,000)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 108,000
<INCOME-PRETAX> (289,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (289,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (289,000)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
