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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 SEPTEMBER 30, 2000
[ ] 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
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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 NOVEMBER 7, 2000, 6,027,586 SHARES OF COMMON STOCK, NO PAR VALUE, WERE
OUTSTANDING.
Page 1 of 12 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Form 10-Q Cover Page 1
Index Page 2
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at 3
September 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations for the 4
Three Months and Nine Months Ended
September 30, 2000 and September 30, 1999
Condensed Consolidated Statements of Cash Flows 5
for the Nine Months Ended September 30, 2000
and September 30, 1999
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 12
Part II OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities and Use of Proceeds 12
Item 3 - Defaults upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of 12
Security Holders
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 13
Signature Page 14
</TABLE>
2
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 75 459
Restricted cash -- 142
Trade receivables, net of allowance for doubtful accounts and sales returns of
$517 at September 30, 2000 and $489 at December 31, 1999 2,849 3,143
Inventory 1,613 2,553
Prepaid expenses and other 306 310
Costs and estimated earnings in excess of billings 907 513
--------------- ---------------
Total current assets 5,750 7,120
Equipment, net 773 1,069
Goodwill, net 710 765
Spares inventory 94 196
Net assets of discontinued operations -- 46
Other assets, net 258 334
--------------- ---------------
Total assets $ 7,585 9,530
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 40 2,244
Notes payable to a related party 3,750 --
Accounts payable 2,207 3,043
Accrued expenses 621 516
Accrued interest payable to a related party 243 --
Billings in excess of costs and estimated earnings 731 565
Unearned income and deposits 538 812
--------------- ---------------
Total current liabilities 8,130 7,180
--------------- ---------------
Notes payable 3 29
Deferred revenue 48 142
--------------- ---------------
Total liabilities 8,181 7,351
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
Series B Convertible Preferred Stock, issued and outstanding
19,000 shares, stated value of $100.00 1,828 1,800
Common stock, no par value, 20,000,000 shares authorized, 6,003,440 and
5,787,097 shares issued and outstanding at September 30, 2000 and December
31, 1999, respectively 15,818 15,390
Dividends Payable 125 145
Accumulated deficit (23,367) (20,156)
--------------- ---------------
Total stockholders' equity (596) 2,179
Commitments and contingencies
--------------- ---------------
Total liabilities and stockholders' equity $ 7,585 9,530
=============== ===============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales:
Network integration $ 3,550 3,132 10,377 10,138
Network services 2,249 2,795 7,210 9,313
------------ ------------ ------------ ------------
Total sales 5,799 5,927 17,587 19,451
Cost of sales (4,921) (4,584) (14,102) (14,330)
------------ ------------ ------------ ------------
Gross margin 878 1,343 3,485 5,121
------------ ------------ ------------ ------------
Operating expenses:
Selling 747 897 2,166 2,520
General and administrative 1,091 1,321 3,471 4,498
Merger expenses 74 -- 317 --
------------ ------------ ------------ ------------
Total expenses 1,912 2,218 5,954 7,018
------------ ------------ ------------ ------------
Loss from operations (1,034) (875) (2,469) (1,897)
Interest expense, net 138 76 369 297
------------ ------------ ------------ ------------
Net loss $ (1,172) (951) (2,838) (2,194)
============ ============ ============ ============
Net loss per share - basic and diluted:
Weighted average common shares
outstanding 6,021 5,621 5,978 5,619
============ ============ ============ ============
Net loss $ (0.22) (0.17) (0.54) (0.39)
============ ============ ============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For Nine Months Ended
----------------------------
September 30, September 30,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (2,838) (2,194)
Adjustments to reconcile net loss from continued operations
Depreciation and amortization 615 692
Allowance for doubtful accounts and sale returns 150 540
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables 144 777
Inventory 976 338
Prepaid expenses and other (3) (7)
Costs in excess of billings and estimated earnings (394) 222
Increase (decrease) in:
Accounts payable and accrued expenses (489) (65)
Unearned income and deferred revenue (368) (53)
Billings in excess of costs and estimated earnings 166 (628)
------------ ------------
Net cash used in operating activities (2,041) (378)
Net cash provided by discontinued operations 46 46
Cash flows from investing activities:
Capital expenditures (115) (141)
Proceeds from sales of assets 1 5
------------ ------------
Net cash used in investing activities (114) (136)
Cash flows from financing activities:
Proceeds from debt 9,633 16,944
Proceeds from debt from a related party 3,750 --
Repayment of debt (11,863) (20,055)
Repayment of note from a related party -- (1,300)
Subscription receivable from a related party -- 2,500
Proceeds from sale of preferred stock, net -- 1,888
Proceeds from sale of common stock under employee stock purchase
plan and exercise of stock options 63 --
------------ ------------
Net cash provided by (used in) financing activities 1,583 (23)
------------ ------------
Decrease in cash: (526) (491)
Cash, beginning of period 601 664
------------ ------------
Cash, end of period $ 75 173
============ ============
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein have been prepared by Internet
Communications Corporation ("INCC" 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, 1999. The financial data for the interim
periods may not necessarily be indicative of results to be expected for the
year.
On March 17, 2000, the Company executed an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which RMI.NET, Inc. ("RMI") agreed to acquire
through a merger (the "Merger") of a wholly owned subsidiary of RMI with and
into the Company, all of the issued and outstanding shares of common stock of
the Company in exchange for shares of RMI common stock, as well as warrants to
purchase shares of RMI common stock. On October 18, 2000, the parties amended
and restated the terms of the Merger Agreement (the "Amended and Restated Merger
Agreement"). Except as described below, each share of Company common stock
outstanding at the time of the Merger will be exchanged for 0.55 shares of RMI
common stock, and a warrant to purchase one share of RMI common stock. Shares of
common stock of the Company held by Interwest Group, Inc. ("Interwest") (the
Company's largest shareholder) will be exchanged for 0.45 shares of RMI common
stock. Interwest and the Company's directors will not receive the warrants in
exchange for their shares of Company common stock. The Company's board of
directors has approved the Merger and has recommended that the shareholders
approve the Merger. Consummation of the Merger remains subject to shareholder
approval of both RMI and the Company and other customary conditions.
NOTE 2 - NOTES PAYABLE
As of December 31, 1998, there was $5,000,000 outstanding under the
line-of-credit. The Company paid down the amount outstanding by $650,000 on
January 4, 1999, and by $850,000 on February 23, 1999. The facility bore
interest at prime plus 1% (9.50% at December 31, 1999). As of December 31, 1999,
there was $2,188,000 outstanding under the line-of-credit. The line-of-credit
was collateralized by accounts receivable and inventory and matured on March 1,
2000. The line-of-credit was paid off and terminated on March 17, 2000.
In connection with the execution of the Merger Agreement with RMI, Interwest
loaned $3 million to the Company. The $3 million loan was used in part to repay
INCC's outstanding line of credit, which matured on March 1, 2000. In addition,
Interwest loaned $500,000 to INCC on February 2, 2000. The Amended and Restated
Merger Agreement provides that, under certain circumstances, Interwest will be
required to lend up to $5,000,000 to INCC prior to the closing of the Merger of
which, $250,000 was loaned on August 1, 2000 and $350,000 was loaned on October
3, 2000, bringing the total borrowings to $4,100,000. The loan bears interest at
12% per annum and matures on December 31, 2000. Under the terms of the Amended
and Restated Merger Agreement, the amounts loaned by Interwest to INCC will be
converted into common stock of INCC immediately prior to consummation of the
Merger at a price of $2.50 per share and thereafter be exchanged for 0.45 shares
of RMI common stock. Additionally, pursuant to the Amended and Restated Merger
Agreement Interwest will receive a warrant exercisable one year from closing,
which may provide Interwest with the right to purchase additional RMI shares,
depending on the value of RMI common stock.
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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 bore
interest at 10% and interest payments were due quarterly. As of December 31,
1998, the balance on the note was $1,300,000. This amount was paid off on
February 24, 1999.
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. 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.
On August 12, 1999, the Company executed a stock purchase agreement with
Interwest. Under the terms of the agreement, the Company issued 19,000 shares of
Series B, 7 3/8% convertible preferred stock, convertible at $2.9063 per share,
and 100,000 warrants to purchase common stock (exercisable for four years at
$2.9063) in exchange for $1,900,000. For financial reporting purposes the
warrants were assigned an attributed value of $100,000. The proceeds were used
for working capital. In addition, the agreement provides a one year commitment
for an additional sale of 5,000 shares of Series B 7 3/8% convertible preferred
stock ($500,000) subject to the Company meeting certain requirements. The
Company did not sell any additional shares under the commitment. As of September
30, 2000, Interwest owns approximately 52% of the outstanding common stock of
the Company and approximately 67% on an as converted basis.
NOTE 4 - NET 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, 2000 and 1999, as all of the Company's
potentially dilutive securities were anti-dilutive during these periods. The
loss per share to common shareholders reflects the impact of the preferred stock
dividends of $124,000 and $373,000 for the three and nine months ended September
30, 2000, respectively, which increased the loss per share.
NOTE 5 - LIQUIDITY
The Company's EBITDA (earnings before interest, tax, depreciation, and
amortization) losses excluding Merger costs were ($1,559,000), ($2,732,000) and
($3,078,000) for the nine months ended September 30, 2000, and the years ended
December 31, 1999 and 1998, respectively. The Company has recorded losses from
operations of ($2,469,000), ($3,807,000), and ($5,723,000) for the nine months
ended September 30, 2000, and the years ended December 31, 1999 and 1998,
respectively. Additionally, the Company generated negative cash flow from
operating activities of continuing operations of ($2,041,000), ($462,000), and
($4,826,000) for the nine months ended September 30, 2000, and the years ended
December 31, 1999 and 1998, respectively.
Management believes that the results of operations combined with available
working capital resources and additional funding will be sufficient to fund
future operations. In the event that additional funding is required, management
will explore fund raising alternatives; however no assurance can be made that
the necessary resources will be available.
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NOTE 6 - IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 December 15, 2000. 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.
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements", which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with the fiscal years beginning
between December 16, 1999 and March 15, 2000. The Company will be required to
implement this guidance in the fourth quarter of 2000. Although management of
the Company has not completed its assessment of the impact of SAB 101 on its
consolidated results of operations and financial position, management estimates
that the impact of SAB 101 will not be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On March 17, 2000, the Company executed an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which RMI.NET, Inc. ("RMI") agreed to acquire,
through a merger (the "Merger") of a wholly owned subsidiary of RMI with and
into the Company, all of the issued and outstanding shares of common stock of
the Company in exchange for shares of RMI common stock, as well as warrants to
purchase shares of RMI common stock. On October 18, 2000, the parties amended
and restated the terms of the Merger Agreement (the "Amended and Restated Merger
Agreement"). Except as described below, each share of Company common stock
outstanding at the time of the Merger will be exchanged for 0.55 shares of RMI
common stock, and a warrant to purchase one share of RMI common stock. Shares of
common stock of the Company held by Interwest Group, Inc. ("Interwest") (the
Company's largest shareholder) will be exchanged for 0.45 shares of RMI common
stock. Interwest and the Company's directors will not receive the warrants in
exchange for their shares of Company common stock. The Company's board of
directors has approved the Merger and has recommended that the shareholders
approve the Merger. Consummation of the Merger remains subject to shareholder
approval of both RMI and the Company and other customary conditions.
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 risks and uncertainties that
could effect future results include, but are not limited to, the following:
- Changing technology.
- Competition.
- Possible future government regulation.
- Competition for talented employees.
- Achieving funding for future operations.
The following is management's discussion and analysis of certain significant
factors, which have affected
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the Company's financial condition, and results of operations during the periods
included in the accompanying condensed financial statements.
RESULTS OF OPERATIONS
HIGHLIGHTS
Management's critical business concerns are focused on trends, gross margin and
EBITDA (earnings before interest, tax, depreciation, and amortization)
performance. In the third quarter, management implemented new strategies to
shift its sales focus to products and services that generate higher gross
margins. As a result of these strategies, the Company experienced a decrease in
sales generated from certain less profitable products and services. However,
that decrease was offset, in part, by increases in sales of products and
services that management believes will generate higher gross margins.
Overall, during the third quarter ended September 30, 2000, the Company's
operating results reflected the shift in focus to products and services that
management believes will ultimately generate improved gross margin for the
Company. Operating highlights are as follows:
o Network Integration revenue during the third quarter reflected a shift
in the revenue mix, as revenue generated from installation services
increased over both the third quarter of 1999 and the second quarter of
2000, while sales of hardware decreased as compared to the same
periods. The shift in sales was due to increased focus on selling
installation services that management believes will provide the Company
with higher gross margin returns, while there was a decreased focus on
selling certain lower margin hardware. During the third quarter certain
installation projects had lower than expected gross margins. These
lower margins were primarily attributable to project selection and
inefficient use of labor resources. Management believes it has taken
actions to address these issues and anticipates that such actions will
have a positive impact on the Company's Network Integration operations
during the fourth quarter of 2000.
o Network Services revenue decreased during the third quarter of 2000 as
compared with both the third quarter of 1999 and the second quarter of
2000. These decreases were primarily attributable to decreases in
revenue generated from carrier services, which has historically
generated lower gross margins for the Company. Carrier services revenue
during the third quarter of 2000 was $1,022,000 as compared to
$1,481,000 in the third quarter of 1999 while carrier services revenue
during the second quarter of 2000 was $1,113,000.
In connection with the focus on selling products and services geared to
improving the Company's gross margin and EBITDA, the Company launched a new
multi-tenant building strategy in the fourth quarter of 2000. This strategy
packages the Company's existing products across its operating divisions and
offers a competitive and effective product to the multi-tenant building market.
REVENUE
Total revenue increased during each of the first three quarters of 2000 as
compared to the fourth quarter of 1999. Consistent with 1999, the Company's 2000
third quarter revenue decreased as compared to the second quarter. Revenue for
the quarter ended September 30, 2000 decreased by $397,000 as compared to the
quarter ended June 30, 2000. Revenue for the quarter ended September 30, 1999
decreased by $327,000 as compared to the quarter ended June 30, 1999. Revenue
for the quarter ended September 30, 2000 was $5,799,000, as compared to
$5,927,000 for the quarter ended September 30, 1999, a decrease of $128,000.
Revenue for the nine months ended September 30, 2000 was $17,587,000, as
compared to $19,451,000 for the nine months ended September 30, 1999, a decrease
of $1,864,000.
For the three and nine months ended September 30, 2000, Lucent Technologies,
Inc. ("Lucent"), represented approximately $1,530,000, or 26.4%, and $4,512,000,
or 25.7% of the Company's revenue. The Company provides hardware installation
and maintenance services on a project-by-project basis to Lucent.
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GROSS MARGIN
The gross margin percentage for the quarter ended September 30, 2000 was 15.1%
as compared to 22.7% for the quarter ended September 30, 1999, and 24.4% for the
quarter ended June 30, 2000. The gross margin percentage for the nine months
ended September 30, 2000 was 19.8% as compared to 26.3% for the nine months
ended September 30, 1999. Gross Margin percentage was impacted by installation
project selection and inefficient use of labor resources during the third
quarter of 2000, as previously discussed.
SELLING
Selling expenses for the quarter ended September 30, 2000 were $747,000, or
12.9% of revenue as compared to $897,000, or 15.1% of revenue for the quarter
ended September 30, 1999. Selling expenses for the nine months ended September
30, 2000 were $2,166,000 or 12.3% of revenue as compared to $2,520,000, or 13.0%
of revenue for the nine months ended September 30, 1999. The decrease in selling
expense is primarily attributable to improved focus of the sales force together
with the new strategies intended to increase efficiency of sales calls, closing
percentage, and gross profit.
GENERAL AND ADMINISTRATIVE
General and administrative expenses continue to improve, as they decreased by
17.4% from $1,321,000 for the three months ended September 30, 1999 to
$1,091,000 for the three months ended September 30, 2000. General and
Administration expenses for the nine month period ending September 30, 2000 were
$3,471,000 as compared to $4,498,000 for the nine months ended September 30,
1999, a 22.8% decrease. Decreases in 2000 as compared to 1999 were primarily
attributable to cost reductions in bad debt expense, legal and professional
fees, personnel related expenses and amortization and depreciation.
General and Administrative expenses as a percentage of revenue for the three and
nine months ended September 30, 2000 were 18.8% and 19.7% respectively, as
compared to 22.3% and 23.1% for the three and nine months ended September 30,
1999, respectively.
MERGER EXPENSES
As previously discussed the Company executed an Amended and Restated Merger
Agreement, pursuant to which RMI will acquire all of the issued and outstanding
shares of common stock of INCC. The Company incurred $74,000 of legal and
professional fees in the quarter ended September 30, 2000 related to this
announced Merger. The Company incurred $317,000 of Merger related expenses for
the first nine months of 2000. The Company is recognizing all expenses related
to the Merger as incurred.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
EBITDA performance during the most recent three quarters has improved over the
quarter ended December 31, 1999. Quarterly EBITDA, excluding merger expenses,
was ($1,529,000) for the quarter ended December 31, 1999. EBITDA, excluding
merger expenses, was ($632,000) for the quarter ended March 31, 2000, ($141,000)
for the quarter ended June 30, 2000, and ($786,000) for the quarter ended
September 30, 2000. EBITDA for the quarter ended September 30, 2000 was impacted
by installation project selection and inefficient use of labor resources, as
discussed above.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns, was $2,849,000 as of September 30, 2000 as compared to $3,143,000
as of December 31, 1999. Days sales
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outstanding improved from 67 days for the quarter ended December 31, 1999 to
46 days for the quarter ended September 30, 2000.
Costs in excess of billings and estimated earnings increased by $394,000 during
the nine months ended September 30, 2000 as compared to December 31, 1999. The
Company has several large, multi-site installation contracts in progress. The
Company recognizes revenue on a percentage of completion basis and invoices upon
completion of each site.
Accounts payable and accrued expenses were $2,828,000 as of September 30, 2000
as compared to $3,559,000 as of December 31, 1999. Reduced inventory levels and
the use of borrowings for working capital purposes accounted for the decrease.
The Company made investments in support of its technical operations of $25,000
and $115,000 in equipment during the three months and nine months ended
September 30, 2000, respectively. Most of this investment was related to
upgrades in, and addition to, network monitoring equipment and transport
facilities for providing high-speed data services. There are no material
commitments for capital expenditures and the Company is maintaining tight
control over its capital purchases.
The Company's cash position decreased by $526,000 during the nine months ended
September 30, 2000. This decrease is primarily due to operating losses offset by
increased borrowings. The Company's current ratio decreased to .71 at September
30, 2000 from .99 at December 31, 1999.
The Company borrowed $3,500,000 from a related party during the quarter ended
March 31, 2000. The borrowings were used to pay off the matured line of credit
and for working capital. The Company borrowed an additional $250,000 and
$350,000 on August 1, 2000 and October 3, 2000, respectively, from the related
party.
Management believes that the results of operations combined with available
working capital resources and additional funding will be sufficient to fund
future operations. In the event that additional funding is required, management
will explore fund raising alternatives; however no assurances can be made that
the necessary resources will be available.
CAPITAL RESOURCES
During 1999, the Company maintained outstanding balances under its Credit
Agreement with a commercial bank. As of December 31, 1998, there was $5,000,000
outstanding under the line-of-credit. The Company paid down the amount
outstanding by $650,000 on January 4, 1999, and by $850,000 on February 23,
1999. The facility bore interest at prime plus 1% (9.50% at December 31, 1999).
As of December 31, 1999, there was $2,188,000 outstanding under the
line-of-credit. The line-of-credit was collateralized by accounts receivable and
inventory and matured on March 1, 2000. The line-of-credit was paid off and
terminated on March 17, 2000.
In connection with the execution of the Merger Agreement with RMI, Interwest
loaned $3 million to the Company. The $3 million loan was used in part to repay
INCC's outstanding line of credit, which matured on March 1, 2000. In addition,
Interwest loaned $500,000 to INCC on February 2, 2000. The Amended and Restated
Merger Agreement provides that, under certain circumstances, Interwest will be
required to lend up to $5,000,000 to INCC prior to the closing of the Merger of
which, $250,000 was loaned on August 1, 2000 and $350,000 was loaned on October
3, 2000, bringing the total borrowings to $4,100,000. The loan bears interest at
12% per annum and matures on December 31, 2000. Under the terms of the Amended
and Restated Merger Agreement, the amounts loaned by Interwest to INCC will be
converted into common stock of INCC immediately prior to consummation of the
Merger at a price of $2.50 per share and thereafter be exchanged for 0.45 shares
of RMI common stock. Additionally, pursuant to the Amended and Restated Merger
Agreement, Interwest will receive a warrant exercisable one year from closing,
which may provide Interwest with the right to purchase additional RMI shares,
depending on the value of RMI common stock.
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On August 12, 1999, the Company executed a stock purchase agreement with
Interwest. Under the terms of the agreement the Company issued 19,000 shares of
Series B, 7 3/8% convertible preferred stock, convertible at $2.9063 per share,
and 100,000 warrants to purchase common stock (exercisable for four years at
$2.9063) in exchange for $1,900,000. The proceeds were used for working capital.
In addition, the agreement provided a one year commitment for an additional sale
of 5,000 shares of Series B 7 3/8% convertible preferred stock ($500,000)
subject to the Company meeting certain requirements. The Company did not sell
any additional shares under the commitment.
On December 30, 1998, the Company executed a stock purchase agreement with
Interwest. 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. 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.
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
bore interest at 10% and interest payments were due quarterly. At December 31,
1998, $1,300,000 was outstanding on this note. This note was paid in full on
February 24, 1999 upon release of the escrowed funds as mentioned above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is not subject to market risk as all debt is at a fixed interest
rate.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the normal course of business the Company is a party to litigation. The
Company is currently one of multiple defendants in two separate cases. The
Company's insurance company has assumed the defense in each of the cases.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
The Company's Common Stock is traded on the Nasdaq SmallCap Market under the
symbol INCC. As
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of December 31, 1999, the Company no longer met the consolidated net tangible
asset condition for continued listing on the Nasdaq SmallCap Market. In a notice
letter dated April 7, 2000, Nasdaq confirmed that the Company no longer
satisfied the conditions for continued listing on the Nasdaq SmallCap Market. In
a letter dated April 20, 2000, the Company requested a waiver of the continued
listing requirements until September 13, 2000, based on the announced merger
with RMI. In a subsequent notice letter dated September 19, 2000, Nasdaq
informed the Company that it determined to deny the Company's request for
continued listing on the Nasdaq SmallCap Market. By letter dated September 25,
2000, the Company requested an oral hearing with the Nasdaq Listing
Qualifications Department to appeal Nasdaq's determination, which letter stayed
the delisting of the Company's securities on the Nasdaq SmallCap Market pending
Nasdaq's decision following the hearing. A hearing to appeal the decision to
delist the Company's stock was held with Nasdaq on October 20, 2000. The
delisting has been stayed until the result of the hearing is released. On
November 3, 2000, Nasdaq informed the Company that it was no longer in
compliance with the $1.00 per share minimum bid price required for continued
listing on the Nasdaq SmallCap Market. The Company responded by letter dated
November 8, 2000, which set forth the Company's definitive plan of compliance to
address the deficiency. The Nasdaq SmallCap Market has not yet responded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
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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 14, 2000 By: /s/ Thomas C. Galley
----------------------------------------------
Thomas C. Galley, President
and Chief Executive Officer
Date: November 14, 2000 By: /s/ T. Timothy Kershisnik
----------------------------------------------
T. Timothy Kershisnik, Chief Financial Officer
14
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
