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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 JUNE 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
--------------------------------------------------------------------------------
(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 JULY 28, 2000, 5,901,937 SHARES OF COMMON STOCK, NO PAR VALUE, WERE
OUTSTANDING.
Page 1 of 13 pages.
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INTERNET COMMUNICATIONS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Form 10-Q Cover Page 1
Index Page 2
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at 3
June 30, 2000 and December 31, 1999
Condensed Consolidated Statements of Operations for
the Three months and six months ended June 30, 2000
and June 30, 1999 4
Condensed Consolidated Statements of Cash Flows 5
for the Six months ended June 30, 2000 and June 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 11
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 12
Signature Page 13
</TABLE>
2
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash $ 24 459
Restricted cash -- 142
Trade receivables, net of allowance for
doubtful accounts and sales returns of $503 at
June 30, 2000 and $489 at December 31, 1999 2,242 3,143
Inventory 1,963 2,553
Prepaid expenses and other 413 310
Costs and estimated earnings in excess of billings 1,266 513
-------- -------
Total current assets 5,908 7,120
Equipment, net 888 1,069
Goodwill, net 728 765
Spares inventory 117 196
Net assets of discontinued operations -- 46
Other assets, net 247 334
-------- -------
Total assets $ 7,888 9,530
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 47 2,244
Notes payable to a related party 3,500 --
Accounts payable 2,178 3,043
Accrued expenses 690 516
Billings in excess of costs and estimated earnings 256 565
Unearned income and deposits 579 812
-------- -------
Total current liabilities 7,250 7,180
-------- -------
Notes payable 10 29
Deferred revenue 66 142
-------- -------
Total liabilities 7,326 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 1,822 1,800
Common stock, no par value, 20,000,000 shares authorized,
5,895,959 and 5,787,097 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively 15,687 15,390
Dividends Payable 124 145
Accumulated deficit (22,071) (20,156)
-------- -------
Total stockholders' equity 562 2,179
Commitments and contingencies
-------- -------
Total liabilities and stockholders' equity $ 7,888 9,530
======== =======
</TABLE>
See accompanying notes to these condensed consolidated financial statements
3
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INTERNET COMMUNICATIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For Three Months Ended For Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30 June 30,
2000 1999 2000 1999
----------------------------- -----------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales:
Network Services $ 2,392 3,223 4,961 6,519
Network Integration 3,804 3,031 6,826 7,006
------- ------ ------- -------
Total Sales 6,196 6,254 11,787 13,525
Cost of Sales (4,685) (4,583) (9,181) (9,831)
------- ------ ------- -------
Gross Margin 1,511 1,671 2,606 3,694
------- ------ ------- -------
Operating expenses:
Selling 708 795 1,419 1,623
General and administrative 1,152 1,717 2,381 3,093
Merger expenses 107 -- 243 --
------- ------ ------- -------
Total operating expenses 1,967 2,512 4,043 4,716
------- ------ ------- -------
Loss from Operations (456) (841) (1,437) (1,022)
Interest expense, net 135 113 230 221
------- ------ ------- -------
Net Income (Loss) $ (591) (954) (1,667) (1,243)
======= ====== ======= =======
Net Loss per share - basic and diluted:
Weighted average common shares outstanding 5,956 5,618 5,916 5,618
======= ====== ======= =======
Net Loss $ (0.12) (0.17) (0.32) (0.22)
======= ====== ======= =======
</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 Six Months Ended
--------------------------
June 30, June 30,
2000 1999
--------------------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (1,667) (1,243)
Adjustments to reconcile net loss from continued operations
Depreciation and amortization 419 458
Allowance for doubtful accounts and sale returns 120 480
Changes in operating assets and liabilities:
(Increase) decrease in:
Receivables 781 (281)
Inventory 621 30
Prepaid expenses and other (90) (22)
Costs in excess of billings and estimated earnings (753) 240
Increase (decrease) in:
Accounts payable and accrued expenses (865) 655
Unearned income and deferred revenue (309) (65)
Other Liabilities 173 72
Billings in excess of costs and estimated earnings (309) (376)
-------- -------
Net cash used in operating activities (1,879) (52)
Net cash provided by discontinued operations 46 85
Cash flows from investing activities:
Capital expenditures (80) (9)
Proceeds from sales of assets 1 5
-------- -------
Net cash used in investing activities (79) (4)
Cash flows from financing activities:
Proceeds from debt 9,633 9,224
Proceeds from debt from a related party 3,500 --
Repayment of debt (11,849) (10,787)
Repayment of note from a related party -- (1,300)
Subscription receivable from a related party -- 2,500
Proceeds from exercise of stock options 51 --
-------- -------
Net cash provided by (used in) financing activities 1,335 (363)
-------- -------
Increase (decrease) in cash: (577) (334)
Cash, beginning of period 601 664
-------- -------
Cash, end of period $ 24 330
======== =======
</TABLE>
See accompanying notes to these condensed consolidated financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 a definitive Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement RMI.NET, Inc.
("RMI") will, through a merger (the "Merger") of a wholly owned subsidiary of
RMI with and into the Company, acquire all of the issued and outstanding stock
of the Company in exchange for RMI common stock, as well as warrants to purchase
shares of RMI common stock. However, Interwest Group, Inc. ("Interwest") (the
Company's largest shareholder) 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 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 Merger Agreement
requires that, under certain circumstances, Interwest will be required to lend
up to an additional $600,000 to INCC prior to the closing of the Merger of
which, $250,000 was loaned on August 1, 2000. The loans bear interest at 12% per
annum and mature on September 30, 2000. Under the terms of the 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 RMI common stock on the same basis as the
other shares of INCC common stock, except that Interwest will not receive any
warrants.
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.
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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. 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 purchase of 5,000 shares of Series B 7 3/8% convertible
preferred stock ($500,000) subject to the Company meeting certain requirements.
The Company has not and does not anticipate selling any additional shares under
the commitment. As of June 30, 2000, Interwest owned approximately 50% of the
outstanding common stock of the Company and approximately 68% on an as 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
and six months ended June 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 $248,000 for the three and six months ended June 30, 2000,
respectively, which increased the loss per share.
NOTE 5 - LIQUIDITY
The Company's operating EBITDA (earnings before interest, tax, depreciation, and
amortization), excluding Merger costs was $773,000, $2,732,000, and $3,078,000
for the six months ended June 30, 2000, and the years ended December 31, 1999
and 1998, respectively. The Company has recorded operating losses of $1,437,000,
$3,807,000, and $5,723,000 for the six months ended June 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 $1,879,000, $462,000, and $4,826,000 for the six months ended June 30, 2000,
and the years ended December 31, 1999 and 1998, respectively.
Management of the Company believes that the results of operations combined with
available working capital resources 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.
NOTE 6 - 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 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
7
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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 fiscal years beginning
between December 16, 1999 and March 15, 2000. The Company has not yet assessed
the impact, if any, that SAB 101 might have on its financial position or results
of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On March 17, 2000, the Company executed a definitive Merger Agreement pursuant
to which RMI will acquire all of the issued and outstanding stock of the Company
in exchange for RMI common stock, as well as warrants to purchase shares of RMI
common stock. However, 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 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 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 and EBITDA
performance. The Company has experienced consistent improvement in results from
operations during the six months ended June 30, 2000. There have been six
consecutive months of EBITDA improvement. Revenue has grown by approximately 11%
each quarter, as compared to the fourth quarter of 1999. Margins are
experiencing
8
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improvement as strategic initiatives in the type of business taken on, and other
selling techniques implemented early in 2000 are taking hold. The Company has
not increased overhead costs during this period of revenue growth.
REVENUE
The Company has experienced consistent revenue growth over the past three
quarters. Quarterly revenue has increased from $4,998,000 for the quarter ended
December 31, 1999 to $5,592,000 for the quarter ended March 31, 2000, and to
$6,196,000 for the quarter ended June 30, 2000. Total revenue increased during
the first two quarters of 2000, as compared to the fourth quarter of 1999, due
to strategic initiatives implemented early in the year to shift focus to growth
areas in markets that provide increased demand and profitability. Revenue for
the quarter ended June 30, 2000 was $6,196,000, as compared to $6,254,000 for
the quarter ended June 30, 1999. Revenue for the six months ended June 30, 2000
was $11,787,000, as compared to $13,525,000 for the six months ended June 30,
1999.
For the three and six months ended June 30, 2000, Lucent Technologies, Inc.
("Lucent"), represented approximately $1,812,000, or 29.2%, and $2,982,000, or
25.3% of the Company's revenue. The Company provides hardware installation and
maintenance services on a project by project basis to Lucent.
GROSS MARGIN
Gross margin has seen consistent improvement over the past three quarters. The
gross margin percentage for the quarter ended June 30, 2000 improved to 24.4 %
from 19.6% for the quarter ended March 31, 2000, and from 10.5% for the quarter
ended December 31, 1999, primarily due to more efficient use of labor related
resources in installation projects.
SELLING
Selling expenses for the quarter June 30, 2000 were $708,000, or 11.4% of
revenue as compared to $795,000, or 12.7% of revenue for the comparable period
in 1999. Selling expenses for the six months ended June 30, 2000 were $1,419,000
or 12.0% of revenue as compared to $1,623,000, or 12.0% of revenue for the six
months ended June 30, 1999. The decrease in selling expenses is primarily
attributable to improved focus of the sales force together with new strategies
intended to increase efficiency of sales calls, closing percentage, and gross
profit.
GENERAL AND ADMINISTRATIVE
General and Administrative expenses decreased by 32.9%, from $1,717,000 to
$1,152,000, for the three months ended June 30, 2000 as compared to the three
months ended June 30, 1999. During the second quarter of 2000 the Company
realized the benefit of improved collections efforts reflected in a decrease in
bad debt expenses of $350,000. There were also cost reductions in legal and
professional fees, public company fees, personnel related expenses and
amortization and depreciation. General and Administrative expenses for the six
month period ending June 30, 2000 were $2,381,000 as compared to $3,093,000 for
the six months ended June 30, 1999, a 23.0% decrease.
General and administrative expenses as a percentage of revenue for the three and
six months ended June 30, 2000 were 18.6% and 20.2% respectively, as compared to
27.5% and 22.9% for the three and six months ended June 30, 1999.
9
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MERGER EXPENSES
As previously discussed the Company executed a definitive Agreement and Plan of
Merger, pursuant to which RMI will acquire INCC. The Company incurred $107,000
of legal and professional fees in the quarter ended June 30, 2000, related to
this announced Merger. The Company incurred $243,000 of Merger related expenses
for the first six months of 2000. The Company is recognizing all expenses
related to the Merger as incurred.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
EBITDA performance has consistently improved over the most recent three
quarters, and consecutively over the first six months of 2000. Quarterly EBITDA,
excluding Merger expenses, has increased from ($1,529,000) for the quarter ended
December 31, 1999 to ($632,000) for the quarter ended March 31, 2000, and to
($141,000) for the quarter ended June 30, 2000.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns, was $2,242,000 as of June 30, 2000 as compared to $3,143,000 as
of December 31, 1999. Days sales outstanding improved from 67 days for the
quarter ended December 31, 1999 to 40 days for the quarter ended June 30, 2000.
Costs in excess of billings and estimated earnings increased by $753,000 during
the six months ended June 30, 2000. 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 $2,868,000 as of June 30, 2000 as
compared to $3,559,000 as of December 31, 1999. Reduced inventory levels,
improved collections, and use of borrowings for working capital purposes
accounted for the decrease.
The Company made investments in support of its technical operations of $80,000
in equipment during the quarter ended June 30, 2000. Most of the 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 controls over its capital purchases.
The Company's cash position decreased by $577,000 during the six months ended
June 30, 2000. This decrease is primarily due to operating losses offset by
increased borrowings. The Company's current ratio decreased to .81 at June 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.
Management of the Company believes that the results of operations combined with
available working capital resources 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.
10
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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, Interwest loaned the
Company $3 million. 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 Merger Agreement
requires that, under certain circumstances, Interwest will be required to lend
up to an additional $600,000 to INCC prior to the closing of the Merger of
which, $250,000 was loaned on August 1, 2000. Under the terms of the 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 RMI common stock on the same
basis as the other shares of INCC common stock, except that Interwest will not
receive any warrants.
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 provides a one year commitment for an additional
purchase of 5,000 shares of Series B 7 3/8% convertible preferred stock
($500,000) subject to the Company meeting certain requirements. The Company has
not and does not anticipate selling 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, 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.
11
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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 disclosed in the Company's Form 10-K for the year ended 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, (the date the Merger may be
terminated if the closing does not occur). There can be no assurance that the
NASDAQ Stock Market will agree to temporary relief and the NASDAQ Market may
take action against the Company, including, but not limited to removing the
Common Stock from the SmallCap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
NONE
12
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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: August 10, 2000 By: /s/ Thomas C. Galley
-----------------------------------
Thomas C. Galley, President and
Chief Executive Officer
Date: August 10, 2000 By: /s/ T. Timothy Kershisnik
-----------------------------------
T. Timothy Kershisnik, Chief Financial Officer
13
