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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K.--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-19578
INTERNET COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
COLORADO 84-1095516
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 E. BELLEVIEW AVE., STE. 201, GREENWOOD VILLAGE, COLORADO 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (303) 770-7600
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
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(TITLE OF EACH CLASS) (NAME OF EXCHANGE)
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Common Stock, no par value The Nasdaq Stock Market
SmallCap System
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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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 10, 2000, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $9,510,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by The
Nasdaq Stock Market SmallCap System on that date). Shares of Common Stock held
by each officer, director, and holder of 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of March 10, 2000, 5,792,764 shares of registrant's common stock were
outstanding.
DOCUMENTS REPORTED BY REFERENCE.
(1) Portions of the Registrant's Proxy Statement related to the 2000 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
Annual Report on Form 10-K where indicated.
The table of exhibits filed appears on page 41.
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INTERNET COMMUNICATIONS CORPORATION
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Form 10-K cover page 1
Index page 2
Part I
Item I - Business 3
Item 2 - Properties 9
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a Vote of Securities 10
Holders
Part II
Item 5 - Market for Registrant's Common Equity and 10
Related Stockholder Matters
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Item 7A - Quantitative and Qualitative Disclosure About 18
Market Risk
Item 8 - Financial Statements and Supplementary Data 19
Item 9 - Changes in and disagreements with Accountants 40
on Accounting and Financial Disclosure
Part III
Item 10 - Directors and Executive Officers of the 40
Registrant
Item 11 - Executive Compensation 40
Item 12 - Security Ownership of Certain Beneficial Owners 40
and Management
Item 13 - Certain Relationships and Related transactions 40
Part IV
Item 14 - Exhibits, Financial Statement Schedules and 41
Reports on Form 8-K
Signature page 43
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ITEM 1. BUSINESS
GENERAL
Internet Communications Corporation ("INCC" or the "Company") is a
multi-faceted telecommunications integration and network services company.
INCC specializes in the design, implementation, maintenance and management of
premise and network-based communications for wide area networks ("WANs"). The
Company targets medium-sized corporations and institutions that use
technology to operate and optimize their business over data, voice and
integrated networks.
On March 17, 2000, INCC executed a definitive Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which RMI.NET, Inc. ("RMI") will acquire
INCC in exchange for RMI common stock and warrants to purchase shares of RMI
common stock.
The acquisition will be effected through a merger (the "Merger") of a wholly
owned subsidiary of RMI with and into INCC, with INCC as the surviving
corporation. Upon consummation of the Merger, INCC shareholders will be
entitled to receive a number of shares of RMI common stock equal to $2.50
divided by the average of the closing prices of RMI common stock for the
fifteen consecutive trading days ending on the date immediately prior to the
closing of the Merger. For example, if the fifteen-day average closing sales
price of RMI were $10.00, each holder of INCC common stock would receive 0.25
shares of RMI common stock for each share of INCC common stock. The value
attributed to the RMI common stock will not exceed $12.89, 125% of the
average closing price of the RMI common stock for the fifteen consecutive
trading days ending on the day immediately prior to the signing of the Merger
Agreement (the "Signing Price"), nor will the value attributed to the RMI
common stock be less than $6.19, 60% of the Signing Price. It is currently
anticipated that up to approximately 11,346,000 shares of INCC common stock
will be outstanding on the closing date of the Merger, including shares of
INCC common stock to be issued upon (1) payment of dividends on INCC
preferred stock, (2) conversion of INCC preferred stock to INCC common stock,
(3) repayment of loans made by Interwest Group, Inc. (as further described
below) and (4) the exercise of outstanding options and warrants. In addition
to the shares of RMI common stock, the shareholders of INCC (excluding
Interwest Group, Inc., INCC's largest shareholder, and the directors of
INCC), will be entitled to receive in exchange for each share of INCC common
stock, a warrant exercisable for one share of RMI common stock at $11.50, and
cancelable on 30-days notice by RMI if RMI's share price exceeds $13 for five
consecutive trading days. The exercise period for each warrant will begin
thirty days after the closing date of the Merger and will expire two years
thereafter.
INCC'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.
In connection with the execution of the Merger Agreement, INCC's largest
shareholder, Interwest Group, Inc., loaned $3 million to INCC. The $3 million
loan was used in part to repay INCC's outstanding line of credit, which matured
on March 1, 2000. The Merger Agreement requires that, under certain
circumstances, Interwest Group, Inc. will be required to lend up to an
additional $600,000 to INCC prior to the closing of the Merger. Under the terms
of the Merger Agreement, the amounts loaned by Interwest Group, Inc. to INCC,
including a $500,000 loan made on February 2, 2000, 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 Group,
Inc. will not receive any warrants.
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BACKGROUND
The Company was created in 1996 with the merger of two Colorado communications
companies - INCC, a data communications network services company which began
operations in 1986, and Interwest Communications Corporation ("Interwest"), a
telecommunications interconnect company which began operations in 1977. This
combination provided the company with data and voice integration capabilities.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This 10-K 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-K 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 affect 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
PRODUCTS AND SERVICES
INCC offers a wide array of communication services such as network management,
maintenance, professional services, Internet access, web hosting, project
management, network integration and transport services.
INCC's ability to understand its customers' business dilemmas begins with INCC's
sales and technical staff. INCC understands the critical nature of designing and
deploying the most efficient and cost effective technology. The Company's
services are designed to capitalize on this experience.
NETWORK MANAGEMENT SERVICES
As part of its service offerings, the Company provides network management
through its network control center ("NCC"). The NCC provides network management
of SNMP-based communications devices as well as the circuits associated with the
network 24 hours a day, seven days a week. NCC engineers can quickly identify,
resolve and often prevent network problems. In addition, engineers are able to
collect performance data to identify and analyze performance trends. Such
analysis permits the Company to take preventive measures before the network
experiences interruption or down time. INCC offers several levels of service to
help its customers maintain optimal network performance.
INCC provides round-the-clock network monitoring and problem resolution. The
network management services include fault detection, diagnosis and customer
reporting. Should an alarm signal a network problem, NCC engineers quickly
notify vendor contacts, coordinate repair, escalate if necessary and
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notify a designated customer contact. The objective is to facilitate the timely
and complete correction of problems as they arise.
In addition, the Company offers a performance management service designed to
optimize network performance and to proactively prevent network failures from
occurring, thereby maximizing network up-time. By combining the collection and
reporting of information about network performance trends with expert analysis
of that information by NCC engineers, potential problems are identified before
they generate failures.
NETWORK MAINTENANCE
The Company also provides maintenance service plans for its customers' networks.
The Company's on-site equipment maintenance service includes 24-hour technical
support, contracted response times, on-site trouble-shooting, parts replacement,
verification testing, and customer notification.
PROFESSIONAL SERVICES
INCC's professional services group offers in-depth thorough analysis of
enterprise networks. INCC consultants provide a range of services that help
customers determine if and how their network is performing to meet business
objectives. These services include:
- - Network Assessment and Baseline, which provides a view of the network through
an audit process. INCC monitors the customer's network to determine
traffic/protocol distribution, utilization, network congestion, application
usage and performance inefficiencies.
- - Enterprise Network Architecture and System Design, which provides design and
redesign of enterprise networks that conform to current and future technology
needs of the customer. Connectivity options such as remote access, dial-in,
Internet and wide-area connectivity are evaluated. In addition, INCC
determines requirements for e-mail, groupware, thin client applications and
then implements them thus creating a more robust environment for sharing
information across the enterprise.
- - Network Security, which provides security assessment, security policy and
firewall evaluation for customers who need a more demanding and comprehensive
review of their security requirements.
- - Technology Assessment, which provides solutions to help customers
differentiate themselves and strengthen their market position within their
given industry. INCC takes into account the customers' business strategy and
offers core competencies in technologies such as Internet protocol telephony
and voice-over frame relay which support that strategy.
INTERNET ACCESS AND WEB HOSTING SERVICES
The Company is an Internet Service Provider, offering complete Internet access
services. INCC provides high-speed connections to the Internet, carrier
circuits, domain name set-up, network routing, mail routing, self-healing
networks, network monitoring, termination and routing equipment, electronic
mailboxes and newsgroup access. In addition, INCC provides Web hosting services
for customers' Web pages, including technical support, 24 hour server
maintenance and security, daily Web site statistics reporting, and virtual post
office.
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PROJECT MANAGEMENT AND NETWORK INTEGRATION SERVICES
The Company provides project management and network integration services to
facilitate the implementation of customer networks pursuant to design
specifications. INCC's project management expertise encompasses legacy
technologies and state-of-the-art technologies enabling the rollout of turnkey
solutions delivering fully operational enterprise networks. The Company also
programs and furnishes premise-based components of integrated networks utilizing
complex network technologies across multi-vendor environments.
NETWORK TRANSPORT SERVICES
INCC provides a broad range of transport services for multi-location enterprise
network connectivity. Services include dedicated private line, frame relay,
Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP"). These services
are blended with INCC's network management and integration services. To provide
transport services, the Company has agreements with a number of long-distance
carriers, including MCI Worldcom, ICG, TCG, Sprint, and AT&T and with
approximately 30 LEC's (local exchange carriers), including US West, across the
country. INCC operates as a FCC approved inter-exchange carrier and a PUC
approved local exchange carrier. INCC operates extensive dedicated and frame
relay networks, and with affiliated network resources, is able to provide,
manage and maintain service across the country. INCC's competitive advantage is
its track record in deploying voice-over-data for enterprise networking in both
frame relay and internet protocol environments.
STRATEGY
INCC's strategic focus is on delivering increased value to its customers through
its technical capabilities in data, voice and integrated multi-media enterprise
networks. The Company is pursuing three interrelated initiatives:
- - Strengthen its long-standing reputation as an innovator in the application of
networking technologies for business solutions with additional employee
training and educational programs.
- - Strengthen its position as a network services and integration company.
- - Secure wholesale national partnerships to leverage its Network Control
Center, knowledge base and technical infrastructure.
INCC promotes life cycle management of the networking infrastructure for its
growing installed base. Customers benefit by using multiple INCC services,
maximizing their use of the Company's technical resources. Currently, many
customers contract with INCC for multiple services. The Company attributes the
growth in sales of Network Services to its strategy of delivering increased
value both by being a complete service provider and by cross-selling its
services to a long-standing customer base.
INDUSTRY OVERVIEW AND MARKET NICHE
Enterprises are accelerating the deployment of increasingly complex network
architectures. This is due to technology advancements for business applications
that reduce operating expenses and improve customer care. Advancements in WAN
technologies such as ATM switches, frame relay switches, and IP tools,
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enable businesses to reach and serve broader customers bases faster and more
efficiently than ever. In addition, hardware and carrier technologies have
enabled data and voice applications to run on a common infrastructure thereby
reducing operating expenses, especially for businesses operating in a WAN
environment. Furthermore, intranets, extranets and virtual private networks are
becoming viable solutions for enterprises looking to communicate and collaborate
with their customers and partners without geographic limitations.
Advancements in carrier technologies like IP, ATM and Sonet facilitate
simultaneous transportation of data, voice and multimedia applications, at
vastly higher speeds and with greater quality of service than previously thought
possible. Carrier providers are expected to continue significant network
infrastructure investment in order to keep up with the demand for evolving
technologies. In addition, cable operators are investing in deployment of
two-way broadband services across hybrid fiber coaxial cable providing yet
another choice for high-speed data transmission and telephony.
With technology so accessible and affordable and geographic boundaries all but
eliminated, enterprises are faced with the same challenges as before, magnified
by the probability that their competitors are using technology to win and retain
customer loyalty. The challenges businesses, financial institutions,
governmental entities and other enterprises are faced with are significant and
are centered around:
- - Competitive advantage through information technologies
- - Financial risk associated with network downtime
- - Financial risk associated with new project implementation
- - Network security
- - Shortage of technical personnel
Communications companies that provide solutions to these challenges and can
bring together all the components that comprise a network - the systems and
equipment that switch, route and terminate information, the circuits that carry
information and the services that make the network work and keep it working -
are well positioned.
COMPETITION
Industry competition includes a variety of companies from all sectors of the
telecommunications industry. Examples include: hardware manufacturers and
carriers who sell their own products, sales agents who act on behalf of
manufacturers and carriers, and distributors who buy and resell products.
Hardware manufacturers include multinational companies like Cisco Systems, Inc.
and Lucent Technologies Inc. Carriers include regional bell operating companies,
such as US West, and interexchange carriers such as MCI Worldcom, AT&T and
Sprint. Distributors include national systems integrators such as EDS, IBM
Global Services and large consulting firms. Many of the Company's competitors
have substantially greater resources than INCC.
GOVERNMENT REGULATION
Certain aspects of the Company's operations are subject to regulation by the
Federal Communications Commission ("FCC"). The FCC has the authority to regulate
prices charged by inter-city common carriers. In August 1982, the FCC
substantially deregulated non-facilities-based, resale carriers such as the
Company, and no longer requires certification of these type of carriers or the
filing of tariffs. The Company is consequently not obligated to file tariffs
with the FCC for the interstate circuits it provides to customers.
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The Company and other such carriers, however, will still be required to provide
service upon reasonable request and will be prohibited from engaging in
discriminatory activities.
The Company's ability to provide intrastate circuits is also subject to
regulation in each state by the appropriate state regulatory agency. Although
the Company has no immediate plans to offer these services, it has been
certified by the Colorado Public Utilities Commission to resell intrastate
circuits in that state.
SALES
INCC's sales efforts are currently staffed by 26 sales personnel. The
Company's sales representatives initially contact potential customers from
referrals from other customers or by local market knowledge. Thereafter, the
Company is engaged to evaluate and recommend a network integration solution
and network services. One of INCC's strengths is the continuing customer
relationships that provide both cross selling and repeat business
opportunities and a solid base for references. The Company's sales efforts
are divided into two areas: one targeting new business and the other
targeting INCC's installed base.
CUSTOMERS
The Company has an installed base of approximately 5,000 business, government
and institutional customers, ranging from single location, single system
customers to national accounts with integrated networks dispersed over a wide
geographic area. For the year ended December 31, 1999, Lucent Technologies Inc.
represents approximately $3,530,000 or 14.5% of the Company's revenue. The
Company provides hardware and installation and maintenance services on a project
by project basis.
SEASONALITY
The sales of the Company are not seasonal to any significant extent. Sales may
decrease or increase at various times throughout a year due to customers'
purchasing decisions.
BACKLOG
The Company receives orders for the sale and installation of network systems
and network services to be installed and provisioned in the future. As of
December 31, 1999 and 1998, there were $2.2 million and $3.1 million,
respectively of orders received from various customers which are expected to
account for future sales for the Company.
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In addition, the Company has on-going contracts with customers that range from 3
months to 5 years for network management, maintenance service and transport
services which provide monthly recurring revenue to the Company. The total
monthly revenue provided by these contracts is approximately $682,000 per month
as of December 31, 1999.
EMPLOYEES
On March 10, 2000, the Company employed 132 full-time employees including 4
executive officers, 26 in sales and marketing, 78 in network operations and
technical services, and 24 in accounting, administration, and other support
areas.
RESEARCH AND DEVELOPMENT
INCC is primarily a network integrator and network services provider and as such
is not involved in any significant research and development efforts.
LOCATIONS
The Company's headquarters and principal office is located at 7100 East
Belleview Avenue, Suite 201, Greenwood Village, Colorado 80111. Its telephone
number is (303) 770-7600.
ITEM 2. PROPERTIES
The Company leases under multi-year agreements approximately 41,000 square feet
of office and/or office/warehouse space at lease rates ranging from $6.00 to
$19.00 per square foot at locations in Greenwood Village, Colorado Springs and
Fort Collins, Colorado.
ITEM 3. LEGAL PROCEEDINGS
In April 1998, the Company entered into a contract with El Paso County School
District No.11 ("D-11") for an Integrated Technology Communication System,
Wiring and Cable Infrastructure for sixty locations throughout district No. 11
schools and other locations. In August 1998, through mutual agreement, the
contract was terminated and superseded by a Settlement Agreement between the
Company and D-11 pursuant to which the Company was to complete certain locations
and upon completion receive payment. The Company completed its work under the
Settlement Agreement but was not paid. On July 16, 1999 the Company filed suit
against D-11 in the District Court of El Paso County, Colorado for breach of the
Settlement Agreement. D-11 responded in the suit by filing a Motion to Dismiss
based upon the Company's alleged failure to mediate, and on other grounds. The
Court denied the Motion and set a trial date of June 19, 2000. On February 25,
2000 the Company entered into a settlement agreement with D-11 and received
approximately $200,000 and all claims by each party were released.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) PRINCIPAL MARKET OR MARKETS. The Company's Common Stock is traded on The
Nasdaq Stock Market SmallCap System under the symbol INCC. As of December 31,
1999, the Company no longer met the consolidated net tangible asset condition
for continued listing on the Nasdaq Stock Market SmallCap System. If the
Merger is not completed and the Company is otherwise unable to meet the
continued listing requirements at that time, the Company will seek temporary
relief to continue its listing on the SmallCap System while it endeavors to
meet the requirements. There can be no assurance that the Nasdaq Stock Market
will agree to temporary relief and the Nasdaq Stock Market may take action
against the Company, including, but not limited to removing the Common Stock
from the SmallCap System.
The following table represents the range of high and low closing prices for the
Common Stock for the eight fiscal quarters ended December 31, 1999.
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QUARTER ENDED
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MARCH 31-98 JUNE 30-98 SEPT 30-98 DEC 31-98
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High Low High Low High Low High Low
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6.25 4.44 6.75 4.63 6.72 4.38 5.25 2.13
QUARTER ENDED
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MARCH 31-99 JUNE 30-99 SEPT 30-99 DEC 31-99
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High Low High Low High Low High Low
3.94 2.13 4.69 2.13 3.13 2.50 6.06 1.63
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(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK AND WARRANTS. As of March 10,
2000, there were 117 record holders and an additional estimated 1,500 beneficial
holders of INCC's Common Stock.
(c) DIVIDENDS. The Company has paid no cash dividends on its Common Stock and
has no present intention of paying cash dividends in the foreseeable future. It
is the present policy of the Board of Directors to retain all earnings to
provide for the growth of the Company. Payment of cash dividends in the future
will depend upon, among other things, the Company's future earnings,
requirements for capital improvements and financial condition. The Company's
loan agreement which was in place through March 17, 2000 required lender
approval of dividend payments.
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ITEM 6. SELECTED FINANCIAL DATA
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11 MOS. YEAR
YEAR ENDED ENDED ENDED
JANUARY 31, DECEMBER 31, (1) DECEMBER 31,
1996 1997 1997 1998 1999
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STATEMENT OF OPERATIONS DATA:
Revenue .................................... 18,528 26,505 33,113 32,086 24,450
Cost of sales .............................. 13,502 18,815 23,693 23,688 18,798
Gross margin ............................... 5,026 7,690 9,420 8,398 5,652
Operating expenses ......................... 5,806 8,246 12,370 14,121(3) 9,459
Operating loss ............................. (780) (556) (2,950) (5,723) (3,807)
Interest expense ........................... 325 378 400 643 258
Net loss from continuing operations ........ (997) (934) (3,350) (6,366) (4,065)
Net loss per share from continuing
operations(2) ........................... (0.41) (0.28) (0.64) (1.15) (0.79)
OTHER DATA:
Net cash provided - (used in) by:
Operating activities - continuing ...... (66) (3,143) 732 (4,826) (462)
Investing activities ................... (724) (604) (995) (135) (207)
Financing activities ................... 691 2,590 1,873 5,180 382
BALANCE SHEET DATA:
Cash and cash equivalents .................. 473 643 -- 14 459
Working capital (deficit) .................. 892 5,990 (1,488) 4,536 (60)
Total assets ............................... 7,450 18,372 18,113 16,767 9,530
Notes payable net of current portion ....... -- 5,587 209 3,585 29
Total Stockholders' Equity ................. 2,917 7,405 5,984 4,315 2,179
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(1) INCC elected to change its fiscal year from January 31 to December 31
effective February 1, 1997.
(2) Loss per share is computed based on 2,397,000; 3,371,000; 5,216,000;
5,523,000 and 5,647,000 shares outstanding for 1996 and 1997, the eleven
months ended December 31, 1997, and the years ended December 31, 1998, and
December 31, 1999 respectively. This represents the weighted average common
shares outstanding for both basic and diluted earnings per share for common
shareholders for each period.
(3) Operating expenses includes $936,000 of restructuring cost and $1,215,000
of goodwill impairment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the periods included in the accompanying financial statements.
The Company elected to change its fiscal year end to December 31 from January
31, effective February 1, 1997. References to fiscal 1997 relate to the eleven
months ended December 31, 1997. References to fiscal 1998 and 1999 relate to the
twelve months ended December 31, 1998 and 1999.
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LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
On December 30, 1998, the Company executed a stock purchase agreement with
Interwest Group, Inc., a wholly owned subsidiary of Anschutz Company. 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.
On August 12, 1999, the Company executed a stock purchase agreement with
Interwest Group, Inc., a related party. 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 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 has not and does not anticipate selling any additional shares under
the commitment.
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 (as previously
discussed in Item 1), INCC's largest shareholder, Interwest Group, Inc., loaned
$3 million. The $3 million loan was used in part to repay INCC's outstanding
line of credit, which matured on March 1, 2000. The Merger Agreement requires
that, under certain circumstances, Interwest Group, Inc. will be required to
lend up to an additional $600,000 to INCC prior to the closing of the Merger. In
addition to the loan discussed above, Interwest Group, Inc. loaned $500,000 to
INCC on February 2, 2000. Under the terms of the Merger Agreement, the amounts
loaned by Interwest Group, Inc. 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 Group, Inc. 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 ("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
12
<PAGE>
outstanding on this note. This note was paid in full on February 23, 1999 upon
release of the escrowed funds as mentioned above.
LIQUIDITY
The Company's cash position decreased by $63,000 in 1999. Operating cash held in
a depository account offset reductions in restricted cash. The restricted cash
held at December 31, 1999 relates to the settlement of the final contract for
ICNS, a former subsidiary of the Company. These funds were released in March,
2000, and were used for working capital.
The Company's cash position increased by $664,000 in 1998. Of this increase,
$650,000 was classified as restricted cash at December 31, 1998, and used to pay
down the line of credit on January 4, 1999. The Company's cash position
decreased by $571,000 in 1997. The Company's current ratio decreased to .99 at
December 31, 1999 from 1.52 at December 31, 1998, as compared to .87 at December
31, 1997. The decrease is primarily attributable to the decrease in the
subscription receivable for the balance of the preferred stock investment, and a
decrease in inventory levels. The significant factors in the improvement of the
current ratio in 1998 were the reclassification of a portion of the Company's
bank note payable from short-term to long-term, due to a renegotiation of the
credit facility, and the subscription receivable for the balance of the
preferred stock investment.
The Company had an outstanding receivable at December 31, 1997, related to a
project for which the Company was a subcontractor. This receivable related to
the cost of delays and inefficiencies, as a result of environmental hazards at
the worksite. The Company sold this receivable to a related party during the
fourth quarter of 1998 for $500,000 recognizing a loss on the receivable of
$109,000. The Company recognized an additional loss on this receivable of
$44,000 in 1999, in accordance with an agreement regarding the collection of the
receivable.
The Company's accounts receivable, net of allowance for doubtful accounts and
sales returns was $3,143,000 at December 31, 1999, as compared to $5,637,000 at
December 31, 1998, and $4,907,000 at December 31, 1997. The decrease in accounts
receivable in 1999 is due to decreased revenue, and aggressive credit review and
collection efforts. A credit manager was hired during the second quarter of
1999, and additional resources were committed to collection efforts. Based on
accounts receivable collection efforts made by the Company this year, $708,000
was charged against the allowance in 1999, as compared to $203,000 in 1998.
These charges against the allowance were primarily due to customer billing
problems when the Company implemented new software in 1998, data base and
process problems on changes in recurring service contract terms, negotiated
settlements on installation and recurring service contracts, as well as for
customers which had ceased business. The Company recorded bad debt expense of
$725,000 in 1999, as compared to $374,000 in 1998 and $204,000 in 1997. The
allowance for doubtful accounts was $489,000 at December 31, 1999, as compared
to $472,000 at December 31, 1998, and $301,000 at December 31, 1997.
Accounts payable and accrued expenses at December 31, 1999 were $3,559,000,
as compared to $3,741,000 at December 31, 1998, and $4,706,000 at December
31, 1997. Decreases in inventory carrying levels contributed to the decrease
at December 31, 1999. The additional working capital provided by the equity
investment at December 30, 1998, contributed to the decrease at December 31,
1998.
The Company's investment in equipment in support of its technical operations was
$213,000 in 1999, $188,000 in 1998, and $995,000 in 1997. Most of the investment
for 1999 was related to upgrades in, and
13
<PAGE>
additions to, 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 balance of goodwill as of December 31, 1999 is $765,000. Goodwill represents
the balance paid for an acquired entity in excess of the net assets of the
acquired company prior to the acquisition. The goodwill included in the balance
sheet relates to the acquisition of Interwest. The goodwill is being amortized
over a remaining period of 10 years.
The Company has recorded operating losses of $3,807,000, $5,723,000 and
$2,950,000 for the years ended December 31, 1999 and 1998, and the eleven months
ended December 31, 1997, respectively. Additionally, the Company generated
negative cash flow from operating activities of continuing operations of
$652,000 and $4,826,000 in 1999 and 1998, respectively.
Management of the Company believes that the results of operations combined with
available working capital resources, including those discussed above, 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.
RESULTS OF OPERATIONS:
As previously noted, references to fiscal 1997 relate to the eleven-month period
ended December 31, 1997. The Company recorded a loss from continuing operations
of $4,065,000 for 1999, as compared to $6,366,000 for fiscal 1998, and
$3,350,000 for fiscal 1997. The 1998 loss includes restructuring costs of
$936,000, product line discontinuation related to the restructuring of $409,000,
direct out-of-pocket expenses associated with the failed merger of $165,000 and
goodwill impairment of $1,215,000. The 1997 loss included goodwill impairment of
$259,000 and a loss from the sale of a subsidiary of $152,000. In March of 1998,
the Company adopted a plan to divest itself of its nonstrategic subsidiaries,
Omega and ICNS. These segments were accounted for as discontinued operations in
accordance with APB 30. The Company recorded a loss from discontinued operations
of $190,000, $1,173,000, and $1,225,000 in fiscal 1999, 1998 and 1997,
respectively.
CONTINUING OPERATIONS
REVENUE
Revenue in fiscal 1999 decreased by $7,636,000, or 23.8% as compared to fiscal
1998. The Company experienced significant turnover and attrition in its sales
force during, and as a result of, the failed merger with Rocky Mountain Internet
in 1998. As a result, management had to restaff the sales department in the
first half of 1999. The Company also experienced a problem with its primary
carrier service provider during 1999, whereby a number of customers were without
connectivity for up to ten days. As a result of this problem, several customers
either cancelled or failed to renew their recurring service contracts with the
Company in the last quarter of 1999.
Revenue in fiscal 1998 decreased by $1,027,000, or 3%, as compared to fiscal
1997. This decrease is due, in part, to the phase out in 1997 of the Telesales
division, which accounted for $1,490,000 of 1997 revenue. In addition, the 1997
revenue included $545,000 of revenue related to a subsidiary, Work Telcom
Services, Inc. ("WTS"), which was sold in 1997. Revenue on continuing business
increased in fiscal 1998 by $1,008,000, or 3% when compared to fiscal 1997. This
increase is primarily services revenue and is the result of the Company's
strategy to cross-sell services to its customers.
14
<PAGE>
The Company continues to focus sales efforts on "total network solutions" which
include value-added and recurring service sales, rather than on stand-alone
equipment and installation sales. Of the total revenue in 1999, 48.6% came from
Network Services, as compared to 45.7% in 1998 and 37.3% in fiscal 1997.
GROSS MARGIN
The gross margin percentage for 1999 was 23.1% of revenue, as compared to 26.2%
in 1998 and 28.5% in 1997. A significant contributing factor to the decline in
the margin in 1999 was the cost of labor. Although labor related expenditures
decreased by $1,095,000 in 1999, the margin on labor related sales declined by
7.6%, due to delays in projects and the Company's decision to maintain a core
group of skilled employees while sales were down. The remaining decline in
margin is due to lower margins on carrier services, a component of network
services.
The decrease in gross margin in 1998 was due, in part, to the Company's
restructuring, which included discontinuing certain product lines resulting in
expenses of $409,000. This expense accounts for 1.3% of the decline in the gross
margin. The remaining decline was due to tightening margins on network
integration sales and lower returns in carrier services, a component of network
services.
SELLING
Selling expenses for 1999 decreased by $1,725,000, or 33.9% as compared to 1998.
The decrease in selling expenses is primarily due to the reduction of $1,678,000
in personnel related expenditures in 1999 as compared to 1998, attributed to a
smaller sales force. Additional savings were realized in lower travel expenses.
Selling expenses as a percentage of revenue were 13.8% in 1999 as compared to
15.8% in 1998 and 17.3% in fiscal 1997.
Selling expenses for 1998 decreased by $630,000, or 11% as compared to fiscal
1997. The decrease in selling expenses and percentage of revenue is attributable
to the controls and cost containment measures implemented in the restructuring
in March of 1998.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $786,000, or 11.4% in 1999 as
compared to 1998. Decreases in personnel related expenses of $743,000,
recruiting fees, professional fees, and training expenses were offset by
increases of $351,000 in the allowance for doubtful accounts. General and
administrative expenses were 24.9% of revenue in 1999, as compared to 21.4% of
revenue in 1998 and 19.3% of revenue in fiscal 1997.
General and administrative expenses increased by $489,000 in fiscal 1998
compared to fiscal 1997. The increase is primarily due to increases in the
allowance for doubtful accounts of $171,000, costs associated with the failed
merger with RMI of $165,000, loss on sale of an account receivable of $109,000,
settlement costs of $63,000 and various personnel costs of $463,000 which were
incurred prior to the restructuring.
15
<PAGE>
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.
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, and 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.
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.
In 1999, the Company reversed the remaining accrual of approximately $80,000 for
facilities consolidation expenses which failed to materialize. As of December
31, 1999, there is no remaining balance of restructuring costs.
16
<PAGE>
GOODWILL IMPAIRMENT
The Company recognized an impairment of goodwill in the amount of $1,215,000 in
fiscal 1998. The goodwill arose from the 1996 purchase of Interwest. This
non-cash charge represents the difference between the historical book value of
the goodwill and the discounted cash flow expected from the related operations.
The Company recognized an impairment of goodwill in the amount of $259,000 in
fiscal 1997. The impairment was determined based on a comparison of the
realizable value of the goodwill to its book basis. The goodwill relates to a
1996 purchase business combination and was determined to have been impaired
because the purchased business was generating recurring operating losses and key
employees were transferred to other operating units of the Company.
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 December 31, 1999 consists of the net realizable value of an
account receivable on the final contract of ICNS. The balance of this receivable
was collected in March, 2000.
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 revised its estimates in the financial statements
for the year ended December 31, 1998. Further estimated losses were recorded in
1999 as the Company reached an agreement on the last major contract completed by
ICNS. The Company recognized a loss of $190,000 from discontinued operations in
1999, $1,173,000 in 1998, and $1,225,000 for fiscal 1997.
17
<PAGE>
INFLATION
In the last three fiscal years, inflation and changing prices have not had a
material impact on INCC's net sales and revenue or income from continuing
operations.
ITEM 7A. 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
matured 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 December 31, 1999, the Company's outstanding balance on the
credit facility was $2,188,000.
Sensitivity Analysis. To assess exposure to interest rate changes, the Company
has performed a sensitivity analysis assuming the Company has a $3 million
balance outstanding under the line of credit. The monthly interest payment, if
the rate stayed constant, would be approximately $23,800. If the prime rate rose
100 basis points, the monthly interest payment would be approximately $26,300.
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.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 20
Consolidated Balance Sheets, December 31, 1999 and December 31, 1998 21
Consolidated Statements of Operations, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997 22
Consolidated Statement of Stockholders' Equity, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997 23
Consolidated Statements of Cash Flows, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997 24
Notes to Consolidated Financial Statements 25-39
</TABLE>
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
INTERNET COMMUNICATIONS CORPORATION:
We have audited the accompanying consolidated balance sheets of Internet
Communications Corporation and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1999 and 1998 and the eleven-month
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Internet
Communications Corporation and subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for the years ended
December 31, 1999 and 1998 and the eleven-month period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG LLP
March 22, 2000
20
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, 1999 AND
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 459 14
Restricted cash 142 650
Trade receivables, net of allowance for doubtful accounts and sales returns
of $489 and $472 at December 31, 1999 and 1998, respectively 3,143 5,637
Subscription receivable from a related party -- 2,500
Inventory 2,553 3,296
Prepaid expenses and other 310 350
Costs and estimated earnings in excess of billings 513 772
--------------- -------------
Total current assets 7,120 13,219
Equipment, net 1,069 1,458
Goodwill, net 765 838
Spares inventory 196 252
Net Assets of discontinued operations 46 460
Other assets, net 334 540
--------------- -------------
Total assets $ 9,530 16,767
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,244 1,569
Notes payable to a related party -- 1,300
Accounts payable 3,043 2,933
Accrued expenses 516 808
Billings in excess of costs and estimated earnings 565 1,239
Unearned income and deposits 812 834
--------------- -------------
Total current liabilities 7,180 8,683
--------------- -------------
Notes payable 29 3,585
Deferred revenue 142 184
--------------- -------------
Total liabilities 7,351 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
Series B Convertible Preferred Stock, issued and outstanding
19,000 shares, stated value of $100.00 1,800 --
Common stock, no par value, 20,000,000 shares authorized, 5,787,097 and
5,617,637 shares issued and outstanding at December 31, 1999
and December 31, 1998, respectively 15,390 14,826
Dividends Payable 145 --
Stockholders' notes -- (22)
Accumulated deficit (20,156) (15,489)
--------------- -------------
Total stockholders' equity 2,179 4,315
Commitments and contingencies (note 7)
--------------- -------------
Total liabilities and stockholders' equity $ 9,530 16,767
=============== =============
</TABLE>
See accompanying notes to these consolidated financial statements.
21
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE ELEVEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1999 1998 1997
------------------ ---------------- -----------------
<S> <C> <C> <C>
Revenue:
Network Integration $ 12,575 17,415 20,744
Network Services 11,875 14,671 12,369
------------------ ---------------- -----------------
Total revenue 24,450 32,086 33,113
Cost of Sales 18,798 23,688 23,693
------------------ ---------------- -----------------
Gross margin 5,652 8,398 9,420
------------------ ---------------- -----------------
Operating expenses:
Selling 3,367 5,092 5,722
General and administrative 6,092 6,878 6,389
Restructuring -- 936 --
Goodwill impairment -- 1,215 259
------------------ ---------------- -----------------
Operating expenses 9,459 14,121 12,370
------------------ ---------------- -----------------
Operating loss (3,807) (5,723) (2,950)
Interest expense, net (258) (643) (400)
------------------ ---------------- -----------------
Loss from continuing operations (4,065) (6,366) (3,350)
Discontinued operations--
Loss from operations -- (206) (1,225)
Estimated loss on disposal (190) (967) --
------------------ ---------------- -----------------
Net Loss $ (4,255) (7,539) (4,575)
================== ================ =================
Loss per share to common shareholders -
basic and diluted:
Weighted average common shares
outstanding 5,647 5,523 5,216
Loss from continuing operations $ (0.79) (1.15) (0.64)
Loss from discontinued operations $ (0.03) (0.21) (0.24)
Net Loss $ (0.82) (1.36) (0.88)
</TABLE>
See accompanying notes to these consolidated financial statements
22
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1999 AND
1998 AND THE ELEVEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STOCKHOLDER'S
PREFERRED STOCK COMMON STOCK DIVIDENDS STOCKHOLDERS' ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT PAYABLE NOTES DEFICIT TOTAL
------ ------ ------ ------ ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 31, 1997 -- $ -- 4,738,727 $ 10,811 -- (31) (3,375) 7,405
Stock options exercised -- -- 8,333 41 -- -- -- 41
Stock issued in connection with
purchase of Pueblo -- -- 12,570 100 -- -- -- 100
Stock issued in connection with
private placement, net -- -- 631,579 2,973 -- -- -- 2,973
Stock issued to directors and
advisors -- -- 6,678 40 -- -- -- 40
Net Loss -- -- -- -- -- -- (4,575) (4,575)
--------- ------- ---------- -------- --------- --------- ------------ ------------
Balances, December 31, 1997 -- -- 5,397,887 13,965 -- (31) (7,950) 5,984
Stock options exercised -- -- 219,750 916 -- -- -- 916
Series A Convertible Preferred
stock issued, net of costs 50,000 5,000 -- (55) -- -- -- 4,945
Payment on stockholders' note -- -- -- -- -- 9 -- 9
Net loss -- -- -- -- -- -- (7,539) (7,539)
--------- ------- ---------- -------- --------- --------- ------------ ------------
BALANCES, DECEMBER 31, 1998 50,000 5,000 5,617,637 14,826 -- (22) (15,489) 4,315
Stock options exercised -- -- 41,350 163 -- -- -- 163
Series B Convertible Preferred
stock issued net of costs 19,000 1,800 -- 87 -- -- -- 1,887
Series A Preferred Dividend -- -- 103,902 267 90 -- (357) --
Series B Preferred Dividend -- -- -- -- 55 -- (55) --
Directors' Compensation -- -- 23,240 56 -- -- -- 56
Employee Stock Purchase Plan -- -- 5,968 13 -- -- -- 13
Cancel stockholders' note -- -- (5,000) (22) -- 22 -- --
Net loss -- -- -- -- -- -- (4,255) (4,255)
--------- ------- ---------- -------- --------- --------- ------------ ------------
BALANCES, DECEMBER 31, 1999 69,000 $ 6,800 5,787,097 $ 15,390 145 -- (20,156) 2,179
========= ======= ========== ======== ========= ========= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1999 AND 1998 AND THE
ELEVEN MONTHS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31 December 31 December 31
1999 1998 1997
--------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from continuing operations $ (4,065) (6,366) (3,350)
Adjustments to reconcile net loss from continued operations
to net cash provided by (used in) operating activities
Depreciation and amortization 961 1,262 1,469
Allowance for doubtful accounts and sale returns 725 374 204
Directors compensation 56 -- --
Goodwill impairment -- 1,215 259
Changes in operating assets and liabilities, net of effect from
disposition of businesses:
Trade receivables 1,769 (1,104) 1,681
Inventory 702 38 (1,130)
Prepaid expenses and other 51 184 270
Costs and estimated earnings in excess of billings 259 1,053 (1,114)
Accounts payable and accrued expenses (182) (960) 762
Billings in excess of costs and estimated earnings (674) (298) 1,537
Deferred revenue and extended warranty (64) (224) 144
--------------- ---------- -----------
Net cash provided by (used in) operating activities
continued operations (462) (4,826) 732
Net cash provided by (used in) operating activities
discontinued operations 224 445 (2,181)
Cash flows from investing activities:
Capital expenditures (213) (188) (995)
Proceeds from sale of equipment 6 53 --
--------------- ---------- -----------
Net cash provided by (used in) operating activities
continued operations (207) (135) (995)
Cash flows from financing activities
Proceeds from debt 23,607 6,265 11,766
Repayment of debt (26,488) (5,755) (12,906)
Proceeds from related party -- 1,600 --
Repayment of note/advances from related party (1,300) (300) --
Proceeds from sale of common including exercise of stock options 176 916 3,013
Proceeds from sale of preferred stock, net 1,887 4,945 --
Escrow of proceeds from sale of preferred stock 2,500 (2,500) --
Repayment of stockholders' note -- 9 --
--------------- ---------- -----------
Net cash provided by financing activities of
continued operations 382 5,180 1,873
--------------- ---------- -----------
Increase (decrease) in cash and cash equivalents (63) 664 (571)
Cash and cash equivalents, at beginning of period 664 -- 571
--------------- ---------- -----------
Cash and cash equivalents, at end of period $ 601 664 --
=============== ========== ===========
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 408 582 391
=============== ========== ===========
</TABLE>
See accompanying notes to these consolidated financial statements.
24
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Internet Communications Corporation ("INCC" or "the Company") is a
multi-faceted telecommunications integration and network services company.
INCC specializes in the design, implementation, maintenance and management
of premise and network-based communications for wide area networks
("WANs"). The Company targets medium-sized corporations and institutions
that use technology to operate and optimize their business over data,
voice and integrated networks.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company;
its wholly-owned subsidiaries Interwest and Interwest Cable Network
Systems, Inc. (ICNS); and its 80% subsidiary, Omega Business
Communications Services, Inc. (Omega). ICNS and Omega have been accounted
for as discontinued operations, as more fully described in Note 11. All
material intercompany transactions and amounts have been eliminated in
consolidation.
CHANGE IN FISCAL YEAR END
The Company changed its fiscal year end to December 31 from January 31,
effective February 1, 1997. References to fiscal year 1997 relate to the
eleven months ended December 31, 1997.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased
with an original maturity of three months or less to be cash equivalents.
The Company may deposit funds in a financial institution in excess of
amounts insured by the Federal Deposit Insurance Corporation.
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of customers
or counterparties when they have similar economic characteristics that
would cause their ability to meet contractual obligations to be similarly
affected by changes in economic or other conditions.
Substantially all of the Company's accounts receivable result from data
and telecommunications services and hardware sales. The Company's
activities are primarily located in the State of Colorado, however,
activities are conducted throughout the United States.
25
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventory, which consists of finished goods (communications equipment), is
stated at average cost. Spares inventory consists of finished parts used
in servicing customer maintenance contracts and is depreciated over a
five-year period. These amounts are stated at the lower of cost or market
and a provision is provided for expected obsolescence.
EQUIPMENT
Equipment is stated at cost, and depreciation is calculated on a
straight-line basis over the estimated useful lives of these assets
generally five to seven years. Leasehold improvements are amortized over
the lesser of the useful lives of the assets or the lease term.
Expenditures for maintenance and repairs are expensed as incurred. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts and any
gain or loss on the disposition is reflected in operations.
Equipment consists of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Telecommunications equipment $ 2,562 2,402
Office furniture and equipment 2,174 2,178
Leasehold improvements and other 482 487
-------- -------
5,218 5,057
Less accumulated depreciation and
amortization (4,149) (3,599)
-------- -------
Total $ 1,069 1,458
======== =======
</TABLE>
GOODWILL
The excess of the purchase price over the net fair value of assets and
liabilities acquired in the acquisition of Interwest is recorded as
goodwill. Goodwill is being amortized on a straight-line basis over a
remaining period of 10 years. Accumulated amortization at December 31,
1999 is approximately $73,000. During 1998, the Company recorded a
$1,215,000 impairment of goodwill, accordingly, at December 31, 1998 there
was no accumulated amortization. The amortization expense for the year
ended December 31, 1999 and 1998, and the eleven months ended December 31,
1997 for the above goodwill was approximately $73,000, $199,000 and
$168,000, respectively.
26
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Other assets is comprised primarily of noncompete agreements and purchased
customer lists which are being amortized on a straight-line basis over
five years. At December 31, 1999 and 1998, the related accumulated
amortization is approximately $658,000 and $592,000.
The amortization expense for the year ended December 31, 1999 and 1998 and
the eleven months ended December 31, 1997 for the above intangibles was
approximately $164,000, $283,000 and $406,000, respectively.
REVENUE RECOGNITION
Most of the Company's contracts are short-term. For contract revenue, the
Company utilizes the percentage-of-completion method under which revenue
is recognized by measuring the percentage of costs incurred to date to
estimated total costs for each contract. Contract costs include direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, and tools.
Operating costs are charged to expense as incurred. Provisions for
estimated losses on incomplete contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions,
and estimated profitability may result in revisions to costs and income
and are recognized in the period in which the revisions are determined.
Revenue on maintenance contracts is recognized straight-line over the term
of the agreement. Unearned income represents the current month's advance
billings and revenue received in advance for services under contract.
These amounts will be recognized as revenue when earned. Commissions paid
in advance are expensed over the term of the related noncancelable service
agreements.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled.
27
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE TO COMMON SHAREHOLDERS
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE (SFAS 128), which was
effective for financial statements issued for periods ending after
December 15, 1997. Under SFAS 128, basic loss per share is computed on the
basis of weighted-average common shares outstanding. Diluted loss per
share considers potential common stock in the calculation, and is the same
as basic loss per share for the years ended December 31, 1999 and 1998 and
the eleven months ended at December 31, 1997, as all of the Company's
potentially dilutive securities were anti-dilutive during these periods.
If the effect had been dilutive, potential common shares would have
included the effects of the assumed conversion of the preferred shares and
the assumed exercise of the outstanding options and warrants using the
treasury stock method of assumed conversion. The convertible preferred
shares are convertible or convert into 2,875,974 shares of Company common
stock. The outstanding options and warrants would have been anti-dilutive,
even if the Company had net income in the three years presented, because
of the relationship between the exercise price and the quoted market price
of the Company stock. The loss per share to common shareholders reflects
the impact of the preferred stock dividends of $412,000, which increased
the loss per share.
USE OF ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company's consolidated financial statements are based on a number of
significant estimates, including the percentage of completion on projects
in progress at year-end which is the basis for the calculation of revenue
earned for these projects. The Company's estimates to complete are
determined by management for all projects in process at year-end and could
change as future information becomes available. Management believes it is
reasonably possible that there will be changes to total revenue and
expenses on projects in process at year-end through change orders that
will affect these projects' ultimate profitability.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values for financial instruments under SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, are determined at
discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with precision.
At December 31, 1999 and 1998, the Company believes the carrying values of
its receivables, notes payables and accounts payable approximate their
estimated fair values.
28
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the carrying value of such assets
may not be recoverable, in accordance with Statement of Accounting
Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121). This review consists
of a comparison of the carrying value of the asset with the asset's
expected future undiscounted cash flows without interest costs. Estimates
of expected future cash flows are to represent management's best estimate
based on reasonable and supportable assumptions and projections. If the
expected future cash flow exceeds the carrying value of the asset, no
impairment is recognized. If the carrying value of the asset exceeds the
expected future cash flows, an impairment exists and is measured by the
excess of the carrying value over the fair value of the asset. Fair value
of the asset may be determined by sales of similar assets, or other
estimates of fair value such as discounting estimated future cash flows.
Any impairment provisions recognized are permanent and may not be restored
in the future.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, (SFAS 123). SFAS 123 encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock
options and other equity instruments to employees based on fair value.
Companies that do not adopt the fair value accounting rules must disclose
the impact of adopting a new method in the notes to the financial
statements. Transactions in equity instruments with non-employees for
goods or services must be accounted for on the fair value method. The
Company has elected not to adopt the fair value accounting method
prescribed by SFAS 123 for employee stock compensation, and is subject
only to the disclosure requirements prescribed by SFAS 123. Adoption of
SFAS 123 has no effect on the Company's consolidated financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 requires that all items which are
components of comprehensive earnings or losses be reported in a financial
statement in the period in which they are recognized. The Company has no
items which are components of comprehensive earnings or losses, other than
net income (loss), accordingly the adoption of this pronouncement had no
effect on the accompanying financial statements.
29
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Financial Accounting Standards Board 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the 1999 presentations. Such reclassifications
have no effect on net income.
(2) LIQUIDITY
The Company has recorded operating losses of $3,807,000, $5,723,000 and
$2,950,000 for the years ended December 31, 1999 and 1998, and the eleven
months ended December 31, 1997, respectively. Additionally, the Company
generated negative cash flow from operating activities of continuing
operations of $652,000 and $4,826,000 in 1999 and 1998, respectively.
Management of the Company believes that the results of operations combined
with available working capital resources, including those discussed in
Note 14, 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.
(3) ACQUISITIONS
During 1997, the Company acquired its remaining interest in Interwest
Communications Pueblo Corporation for 12,570 shares of common stock,
valued at $100,000. Any pro-forma results of operations are immaterial to
the consolidated financial statements.
30
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(4) CONTRACTS IN PROGRESS
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Costs incurred on uncompleted contracts $ 628 4,385
Estimated earnings 312 1,447
----- -----
940 5,832
Less: Billings to date 992 6,299
----- -----
$ (52) (467)
===== =====
Included in the accompanying balance sheet accounts
under the following captions:
Costs and estimated earnings in excess of billings $ 513 772
Billings in excess of costs and estimated earnings 565 1,239
----- -----
$ (52) (467)
===== =====
</TABLE>
The Company has entered into various contracts for the installation of
wide-area and local-area data and voice networks. Progress billings are
made to customers upon contract acceptance and completion of certain
milestones. The Company expects to bill and collect all costs and
estimated earnings in excess of billings as of December 31, 1999 in 2000.
(5) GOODWILL
In 1998, the Company recognized a goodwill impairment of $1,215,000. The
goodwill arose from the 1996 purchase of Interwest. This non-cash charge
represents the difference between the historical book value of the
goodwill and the discounted estimated future cash flows expected from the
related operations. Considerable management judgement is necessary to
estimate discounted future cash flows. Accordingly, actual results could
vary from such estimates.
In 1997, the Company recognized a goodwill impairment of $746,000 which is
directly associated with discontinued operations (note 11). The goodwill
is related to two of the Company's non-core business segments which the
Company's Board of Directors adopted a plan to sell during 1998.
In addition, in 1997, the Company recognized a goodwill impairment of
$259,000. The goodwill relates to a 1996 purchase business combination and
was determined to have been impaired because the purchased business was
generating recurring operating losses and key employees were transferred
to other operating units of the Company.
31
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(6) NOTES PAYABLE
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.
(See Note 14, Subsequent Events)
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.
The Company also has various notes payable agreements with various
individuals totaling approximately $85,000 at December 31, 1999. In
general, these notes are unsecured, however, a few are collateralized by
certain equipment of the Company. Interest accrues on these notes at
between approximately 7% and 14% per annum.
Future debt maturities as of December 31, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
2000 $2,244
2001 29
------
$2,273
======
</TABLE>
32
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(7) COMMITMENTS AND CONTINGENCIES
The Company leases office space, equipment and vehicles under
noncancelable operating leases. Total rental expense for the years ended
December 31, 1999, December 31, 1998, and the eleven months ended December
31, 1997 was $850,000, $981,000 and $930,000, respectively. The total
minimum rental commitments as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<S> <C>
2000 $ 663
2001 561
2002 355
2003 17
----------
$ 1,596
==========
</TABLE>
The Company also leases telecommunications circuits under noncancelable
leases. The Company subleases these circuits to its customers as part of
its normal operations. Minimum commitments under these agreements total
approximately $1,180,000 for fiscal 2000, $1,200,000 for fiscal 2001,
$1,200,000 for fiscal 2002, $860,000 for fiscal 2003, and only minimal
commitments thereafter.
(8) 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. On August 12, 1999, the
Company executed a stock purchase agreement with Interwest Group. 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 has not and does not anticipate selling
any additional shares under the commitment. As of December 31, 1999,
Interwest Group owns approximately 52% of the outstanding common stock of
the Company and approximately 68% on an if converted basis.
33
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
In April 1997, the Company issued 631,579 shares of common stock for
$3,000,000 and 63,158 warrants to purchase common stock at $5.70 per share
exercisable for a period of 5 years to Interwest Group.
During the fiscal year 1996, the Company adopted, and the stockholders
approved, an Incentive Stock Plan (Plan), that authorizes the issuance of
up to 875,000 shares of common stock. At the Company's Annual
Shareholders' meeting held on May 19, 1998, the shareholders approved an
amendment to the Company's 1996 Incentive Stock Plan to increase the
number of options which may be granted from 857,000 shares to 975,000
shares. Pursuant to the Plan, the Company may grant "incentive stock
options" (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended), non-qualified stock options and stock purchase
rights or a combination thereof.
Incentive stock options may not be granted at an exercise price of less
than the fair market value of the common stock on the date of grant
(except for holders of more that 10% common stock, whereby the exercise
price must be at least 110% of the fair market value at the date of grant
for incentive stock options). The term of the options may not exceed ten
years.
During the fiscal year 1996, the Company also adopted the Non Employee
Directors' Stock Option Plan (Outside Directors' Plan), which provides for
the grant of stock options to non-employee directors of the Company and
any subsidiary. An aggregate of 40,000 shares of common stock are reserved
for issuance under the Outside Directors' Plan. The exercise price of the
options will be the fair market value of the stock on the date of grant.
All options granted vest over a 3-year period from the date of the grant.
During 1999, 41,350 options to purchase common stock were exercised for
total proceeds to the Company of $163,000. During 1998, 219,750 options to
purchase common stock were exercised for total proceeds to the Company of
$916,000.
34
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
The following is a summary of activity under these stock option plans for
the years ended December 31, 1999 and 1998, and the eleven months ended
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Balances, January 31, 1997 659,844 $ 4.18
Granted 221,800 5.52
Exercised (8,333) 4.95
Forfeitures (40,867) 4.53
-------- -------
Balances December 31, 1997 832,444 4.62
Granted 535,994 3.22
Exercised (219,750) 4.17
Forfeitures (532,044) 5.01
-------- -------
Balance, December 31, 1998 616,644 3.22
Granted 219,050 2.19
Exercised (41,350) 3.94
Forfeitures (309,443) 3.45
-------- -------
Balance, December 31, 1999 484,901 $ 2.55
======== =======
</TABLE>
The following tables summarize certain information about the Company's
stock options at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------------
Weighted Weighted
Range of Number of average average
exercise outstanding remaining exercise
Prices Options Contractual Life Price
------ ------- ---------------- -----
<S> <C> <C> <C>
$1.63-2.00 35,000 9.9 years $ 1.72
$2.01-2.50 375,451 8.8 2.31
$2.51-4.00 44,250 6.7 3.12
$4.01-6.12 30,200 4.5 5.58
--------
$1.63-6.12 484,901 8.4 $ 2.55
========
</TABLE>
Of the options outstanding, 129,036 are exercisable as of December 31,
1999 at a weighted average exercise price of $3.29.
35
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
PRO FORMA STOCK BASED COMPENSATION DISCLOSURES
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options and warrants which are granted to
employees. Accordingly, no compensation cost was recognized for grants of
options during the year ended December 31, 1999 and 1998, and the eleven
months ended December 31, 1997 to employees since the exercise prices were
not less than the fair value of the Company's common stock on the grant
dates. Had compensation cost been determined based on the fair value
method described in SFAS 123, the Company's net loss and net loss per
share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Eleven
months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to
common shareholders:
As reported $ (4,255) (7,539) (4,575)
Pro forma $ (4,476) (8,386) (5,612)
Net loss per common share
basic and diluted:
As reported $ (0.82) (1.36) (0.88)
Pro forma $ (0.86) (1.52) (1.08)
</TABLE>
The per share weighted average fair value of options granted in the year
ended December 31, 1999 and 1998, and the eleven months ended December 31,
1997 on the date of grant was estimated to be $1.79, $2.58 and $4.05,
respectively, using the Black-Scholes option-pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
Eleven
months
Year ended Year ended ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected volatility 111% 96% 57%
Risk-free interest rate 6% 6% 6%
Expected dividends -- -- --
Expected term (in years) 6 6 10
</TABLE>
36
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
(9) INCOME TAXES
Deferred income taxes are provided for differences between the tax and
book basis of assets and liabilities as a result of temporary differences
in the recognition of revenue or expenses for tax and financial reporting
purposes.
At December 31, 1999 and 1998, these differences consist of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income tax loss carryforward $ 5,848 4,302
Allowance on assets 450 500
Equipment and goodwill expense 276 262
Other 85 65
------- --------
6,659 5,129
Less valuation allowance (6,659) (5,129)
------- ---------
Net $ -- --
======== =========
</TABLE>
The Company did not recognize tax benefits in the year ended December 31,
1999 and 1998, due to increases in the valuation allowance for deferred
tax assets in those periods. The valuation allowance for deferred tax
assets increased from $3,015,000 at December 31, 1997 to $5,129,000 at
December 31, 1998 and to $6,659,000 at December 31, 1999, due primarily to
an increase in the Company's net operating loss carryforwards.
As of December 31, 1999, the Company has income tax loss carryforwards of
approximately $15,600,000 which expire in the years 2006 through 2019. The
utilization of certain of these net operating loss carryforwards have been
restricted because of ownership changes. These restrictions limit the
amount of utilizable net operating loss carryforwards each year.
(10) EMPLOYEE PLANS
The Company had provided two separate savings plans to its' employees: (1)
the Internet Communications Employee Retirement Savings Plan and Trust,
and (2) the Interwest Communications Employee Thrift Retirement Plan.
Effective January 1, 1998, the Company adopted a new 401(k) plan. The new
plan merged the two existing plans together.
The Internet Communications Employee Retirement Savings Plan and Trust
permits employees to make contributions by salary reductions pursuant to
section 401(k) of the Internal Revenue Code. This plan covers
substantially all of the Internet Communications Corporation employees who
have been employed with the Company for six months and are at least 21
years of age. Each employee's contribution, up to a maximum of 6%, is
matched 50% by the Company. The
37
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
Company may also make additional cash contributions at the discretion of
the Board of Directors. Employees are fully vested in employer
contributions after they complete six years of service. Company
contributions charged against income for the years ended December 31, 1999
and 1998, and the eleven month period ended December 31, 1997 were
$88,000, $122,000 and $98,000, respectively.
On May 27, 1999, the Companys shareholders approved the 1999 Employee
Stock Purchase Plan (the "ESPP"). The number of shares of common stock
that may be purchased by participating employees under the ESPP will not
in the aggregate exceed 250,000 shares. Each employee of the Company is
eligible to participate in the ESPP if such employee is regularly
scheduled to work more than 20 hours per week and more than five calendar
months in any calendar year. An eligible employee may elect to participate
in the ESPP for any calendar quarter through June 30, 2009, by designating
an amount not less than 1% nor more than 15% of the employee's eligible
compensation to be deducted for each pay period. The per share purchase
price of the common stock will be 85% of the lesser of the fair market
value of the common stock on the date of grant or the last day of the
option period. Participation in the ESPP commenced on October 1, 1999 and
the plan purchased 5,968 shares at $2.125 on December 31, 1999.
(11) 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 eleven months 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 has revised its estimates in the financial
statements for the year ended December 31, 1998. The 1999 financial
statements reflect the final disposition of the remaining assets of the
Segments, which resulted in an additional loss on disposal of $190,000.
(12) 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.
38
<PAGE>
INTERNET COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
- --------------------------------------------------------------------------------
These restructuring actions resulted in the Company recognizing expenses
totaling $1,345,000. In the accompanying financial statements, cost of
sales includes $409,000 related to the product line reductions. The
remaining $936,000 is classified in operating expenses as restructuring.
In 1999, the Company reversed the remaining accrual of approximately
$80,000 for facilities consolidation expenses which failed to materialize.
As of December 31, 1999 there is no remaining balance of restructuring
costs.
(13) RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions in the normal course of
business with related parties. As of December 31, 1999 and 1998, the
Company had outstanding related party receivables of $43,000 and $182,000,
which are included in trade receivables. There were no related party
payables at December 31, 1999, and $103,000 at December 31, 1998, which
are included in accounts payable and accrued expenses.
The Company had an outstanding receivable at December 31, 1997, related to
a project for which the Company was a subcontractor. This receivable
related to the cost of delays and inefficiencies, as a result of
environmental hazards at the worksite. The Company sold this receivable to
a related party during the fourth quarter of 1998 for $500,000 recognizing
a loss on the receivable of $109,000. The Company is required to pursue
collection of the receivable and is subject to reimbursing the purchaser
up to $100,000 if the actual collection does not exceed $500,000. Based on
the amount collected, the Company reimbursed the purchaser $44,000 in
1999.
(14) SUBSEQUENT EVENT
On February 2, 2000, Interwest Group, Inc., the Company's largest
shareholder, loaned $500,000 to the Company for general working capital
purposes.
On March 17, 2000, the Company executed a definitive Agreement and Plan of
Merger pursuant to which RMI.NET, Inc. ("RMI") will acquire the Company in
exchange for RMI common stock, as well as warrants to purchase shares of
RMI 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. In connection with the execution of the merger Agreement,
Interwest Group, Inc., loaned $3 million to the Company. The $3 million
loan was used in part to repay the Company's outstanding line of credit,
which matured on March 1, 2000.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
The information required by Part III: Item 10 - Directors and Executive
Officers of the Registrant; Item 11 - Executive Compensation; Item 12
Security Ownership of Certain Beneficial Owners and Management, and Item 13
Certain Relationships and Related Transactions of Form 10-K are incorporated
herein by reference to Registrant's definitive Proxy Statement to be filed in
connection with the 2000 Annual Meeting of Shareholders.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
The following Financial Statements are filed as part of this Report:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1999 and December 31, 1998
Consolidated Statements of Operations, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997
Consolidated Statement of Stockholders' Equity, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997
Consolidated Statements of Cash Flows, For the Years Ended
December 31, 1999 and 1998 and the Eleven Months Ended
December 31, 1997
Notes to Consolidated Financial Statements
Exhibits:
<TABLE>
<CAPTION>
No. Exhibit Location
<S> <C> <C>
3.1 Corporate Bylaws Incorporated by reference to
Exhibit No. 3.1 to the
Registrant's Form S-18
Registration Statement No.
33-24299-D
3.2 Restated Articles of Incorporation Incorporated by reference to
filed with the Colorado Secretary Registrant's Form 10-KSB for the
of State on January 23, 1998 fiscal year ended December 31, 1997
3.3 Articles of Amendment to the Incorporated by reference to
Articles of Incorporation filed Registrant's definitive proxy,
with the Colorado Secretary of dated January 13, 1999
State on December 30, 1998
10.1 Share Exchange Agreement, Stock Incorporated by reference to
Registration Agreement, and Loan Registrant's Form 8-K, dated May
Agreement dated May 29, 1996, 29, 1996
between Internet Communications
Corporation and Interwest Group
10.2 1995 Non-employee Director Stock Incorporated by reference to
Option Plan, dated September 12, Registrant's definitive proxy,
1996 dated August 12, 1996
10.3 1995 Non-employee Director Stock Incorporated by reference to
Option Plan, dated September 12, Registrant's Form S-8, dated
1996 (as amended) September 8, 1997
10.4 1996 Incentive Stock Plan, dated Incorporated by reference to
September 12, 1996 Registrant's definitive proxy,
dated August 12, 1996
10.5 1996 Incentive Stock Plan, dated Incorporated by reference to
September 12, 1996 (as amended Registrant's definitive proxy,
September 1996) dated May 30, 1997
41
<PAGE>
10.6 1996 Incentive stock Plan, dated Incorporated by reference to
September 12, 1996 (as amended Registrant's definitive proxy,
December 10, 1997) dated April 23, 1998
10.7 Convertible Promissory Note dated Incorporated by reference to
March 20, 1998 in the amount of Registrant's Form 10-KSB for the
$1,600,000 fiscal year ended December 31, 1997
10.8 Employment Agreement between John Incorporated by reference to
M. Couzens and Internet Registrant's Form 10-Q for the
Communications Corporation dated quarter ended March 31, 1998
April 28, 1997
10.9 1999 Employee Stock Purchase Incorporated by reference to
Plan Registrant's definitive proxy,
dated April 30, 1999
22.1 Subsidiaries of the Registrant Incorporated by reference to
Exhibit 22.1 to Registrant's
Report on Form 10-K for the
fiscal year ended January 31,
1997
23.1 Consent of KPMG LLP Filed herewith
27.1 Financial Data Schedule Filed herewith
</TABLE>
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarterly period ended
December 31, 1999.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTERNET COMMUNICATIONS CORPORATION
(Registrant)
Date: March 30, 1999 By: /S/ THOMAS C. GALLEY
--------------------
Thomas C. Galley, President and
Chief Executive Officer
In accordance the Exchange Act, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
<TABLE>
<S> <C>
Date: March 30, 1999 By: /s/ T. Timothy Kershisnik
-------------------------
T. Timothy Kershisnik, Chief
Financial Officer, Vice President
and Secretary
Date: March 30, 1999 By: /s/ Thomas C. Galley
--------------------
Thomas C. Galley, President, Chief
Executive Officer and Director
Date: March 30, 1999 By: /s/ John M. Couzens
-------------------
John M. Couzens, Director
Date: March 30, 1999 By: /s/ Peter A. Guglielmi
-----------------------
Peter A. Guglielmi, Director
Date: March 30, 1999 By: /s/ Richard Liebhaber
---------------------
Richard Liebhaber, Director
Date: March 30, 1999 By: /s/ William J. Maxwell
----------------------
William J. Maxwell, Director
Date: March 30, 1999 By: /s/ Craig D. Slater
-------------------
Craig D. Slater, Director
</TABLE>
43
<PAGE>
The Board of Directors and Stockholders
Internet Communications Corporation:
We consent to incorporation by reference in the registration statement (No.
333-35113) on Form S-8 of Internet Communications Corporation of our report
dated March 22, 2000, relating to the consolidated balance sheets of Internet
Communications Corporations and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1999 and 1998, and the
eleven-month period ended December 31, 1997, which report appears in the
December 31, 1999, annual report on form 10-K of Internet Communications
Corporation.
KPMG LLP
Denver, Colorado
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 459,000
<SECURITIES> 0
<RECEIVABLES> 3,362,000
<ALLOWANCES> 489,000
<INVENTORY> 2,553,000
<CURRENT-ASSETS> 7,120,000
<PP&E> 5,726,000
<DEPRECIATION> 4,657,000
<TOTAL-ASSETS> 9,530,000
<CURRENT-LIABILITIES> 7,180,000
<BONDS> 0
0
6,800,000
<COMMON> 15,390,000
<OTHER-SE> (20,014,000)
<TOTAL-LIABILITY-AND-EQUITY> 9,530,000
<SALES> 24,450,000
<TOTAL-REVENUES> 24,450,000
<CGS> (18,798,000)
<TOTAL-COSTS> (28,257,000)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 725,000
<INTEREST-EXPENSE> 258,000
<INCOME-PRETAX> (4,065,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,065,000)
<DISCONTINUED> (190,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,255,000)
<EPS-BASIC> (.82)
<EPS-DILUTED> (.82)
</TABLE>
