FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 000-26011
INTERNET CABLE CORPORATION
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
87-0540291
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(I.R.S. Employer Identification No.)
195 RIVIERA DRIVE, UNIT 2, MARKHAM, ONTARIO L3R 5J6
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(Address of principal executive offices) (Zip Code)
(905) 479-5974
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
The number of shares outstanding of each of the issuer's classes of common
stock, as of October 29, 2001 was 10,643,984 shares, all of one class (common
stock), par value $0.001 per share.
INTERNET CABLE CORPORATION AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Balance Sheet as of September 30, 2001 3
(unaudited)
Condensed Statements of Operations (unaudited) for the 4
three and nine-month periods ended
September 30, 2000 and 2001
Condensed Statements of Cash Flows (unaudited) 6
for the nine-month periods ended
September 30, 2000 and 2001
Notes to Condensed Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis 12
of Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNET CABLE CORPORATION
CONDENSED BALANCE SHEET
ASSETS
September 30, 2001
(Unaudited)
-------------------
Current assets
Cash $282,548
Accounts receivable, net of allowance for doubtful 793,513
accounts of $161,505
Unbilled receivables 226,732
Inventories 115,150
Prepaid expenses and other current assets 103,760
----------
Total current assets 1,521,703
Property and equipment - at cost, less accumulated 969,407
depreciation of $805,121
Goodwill and other intangibles, net of accumulated 2,808,802
amortization of $1,512,432 ----------
$5,299,912
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, stockholders $ 100,077
Accounts payable and accrued expenses 1,515,279
Accrued lease cancellation charge 48,400
Accrued salaries and wages 950,316
Current portion of capital leases 127,521
Promissory note payable 250,000
--------------
Total current liabilities 2,991,593
Stockholders' equity
Preferred Stock, $0.001 par value, 5,000,000 shares -
- - authorized and no shares issued or outstanding
Common stock, $0.001 par value, 50,000,000 shares 10,644
authorized, 10,643,984 shares issued and outstanding
Additional paid-in capital 18,882,827
Cumulative translation adjustments (3,514)
Accumulated deficit (16,581,638)
--------------
Total stockholders' equity 2,308,319
--------------
$5,299,912
==============
The accompanying notes are an integral part of these condensed financial
statements
3
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2001 2000
------------ -----------
Sales and services $ 1,342,965 $ 3,259,723
Cost of sales
Direct costs 569,732 1,129,525
Indirect costs 400,232 828,364
Depreciation 45,252 43,752
------------ ------------
Gross operating profit 327,749 1,258,082
Operating costs
Selling, general and administrative expenses 529,434 1,158,635
Discontinued lease expense (recovery) (410,132) -
Depreciation 14,136 13,058
Gain on disposal of assets 28,043 4,319
Amortization of intangibles 216,063 378,902
------------ ------------
Income (loss) from operations 6,291 (288,194)
Interest expense 44,147 12,640
------------ ------------
Net loss $(37,856) $(300,834)
Change in cumulative foreign translation $5,015 $(9,721)
adjustment ------------ ------------
Comprehensive loss $(32,841) $(310,555)
============ ===========
Weighted average common shares outstanding 10,510,651 10,188,740
------------ -----------
Basic and diluted loss per share $(0.003) $(0.03)
The accompanying notes are an integral part of these condensed financial
statements
4
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2001 2000
------------ ------------
Sales and services $ 4,616,781 $ 8,421,666
Cost of sales
Direct costs 2,144,762 3,403,245
Indirect costs 1,697,889 2,198,148
Depreciation 137,905 113,852
------------ ------------
Gross operating profit 636,225 2,706,421
Operating costs
Selling, general and administrative expenses 2,293,510 3,968,969
Discontinued lease expense 48,400 -
Depreciation 43,283 35,745
Gain /(Loss) on disposal of assets 45,822 48,424
Amortization of intangibles 648,189 1,136,706
------------ ------------
Loss from operations (2,351,335) (2,483,423)
Interest expense (income) 156,835 (10,328)
------------ ------------
Pretax loss (2,508,170) (2,473,095)
Income tax (provision) benefit (1,381) 184,855
------------ ------------
Net loss before extraordinary item (2,509,551) (2,288,240)
Charge for early extinguishment of debt - 400,136
------------ ------------
Net loss $(2,509,551) $(2,688,376)
============ ============
Change in cumulative foreign translation $(6,787) $8,777
adjustment ------------ -----------
Comprehensive loss $(2,516,338) $(2,679,599)
============ ============
Weighted average common shares outstanding 10,510,651 10,210,864
------------ -----------
Basic and diluted loss per share $(0.24) $(0.26)
The accompanying notes are an integral part of these condensed financial
statements
5
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2001 2000
--------- ------------
Cash flows from operating activities $365,860 $(2,213,550)
Cash flows from investing activities
Notes receivable - 40,000
Release of deposits on acquisitions - 5,652,576
Disposal (acquisition) of property and 64,963 (444,127)
equipment
Loans receivable, employee - (14,200)
Business acquisitions, net of cash - (5,469,414)
balances acquired --------- ------------
Net cash provided by (used in) investing 64,963 (235,165)
activities
Cash flows from financing activities
Proceeds from line of credit - 450,000
Notes payable stockholder, net 14,000 (43,923)
Net payments against line of credit (498,000) -
Notes payable, net 250,000 (665,365)
Proceeds from issuance of common stock - 1,633,696
Stock offering costs - (153,000)
Capital lease payments (90,033) (34,539)
--------- ------------
Net cash (used in) provided by financing (324,033) 1,186,869
activities --------- ------------
Impact of foreign exchange on cash held 6,794 (8,777)
in foreign currency
Net increase (decrease) in cash 99,996 (1,270,623)
Cash, beginning of period 182,552 1,531,708
--------- ------------
Cash, end of period $282,548 $261,085
========= ============
The accompanying notes are an integral part of these condensed financial
statements
6
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION, GOING CONCERN AND REVENUE RECOGNITION
Basis of presentation
The condensed financial statements of Internet Cable Corporation (the "Company")
presented herein include the operations of its wholly owned subsidiaries Cable
Systems Technical Services, Inc. (incorporated under the laws of Ontario,
Canada), Cable Systems Technical Services, Inc. (incorporated under the laws of
Delaware) and Cable Systems TSI, NA (incorporated under the laws of Delaware),
collectively referred to as "TSI", Internet Cable corporation NA (incorporated
under the laws of Pennsylvania), and CAD Consultants, Inc. (incorporated under
the laws of New Jersey) referred to as "CAD". The condensed financial statements
of Internet Cable Corporation have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission for quarterly
reports of Form 10-QSB. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted pursuant to such
rules and regulations. It is suggested that these financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2000.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The financial information in this report reflects, in the opinion of management,
all adjustments of a normal recurring nature necessary to present fairly the
results for the interim period.
Due to the inherent seasonal nature of the businesses, quarterly operating
results may not be indicative of the actual operating results for the full year.
Inventory
Inventory, consisting primarily of goods held for resale, are valued at the
lower of cost or market. Cost is calculated using the average cost method for
quantities on hand.
Revenue recognition
For its TSI subsidiary, the Company recognizes revenue using either a unit of
measure (based on feet or other units) or contractually permitted hourly fees,
which represent earned revenue. Prior to its closure, the CAD subsidiary
recognized revenue upon the completion of a project, or if unrelated to a
project then upon the delivery of a service or the shipment of any products
sold.
Going concern
The Company has incurred significant losses from operations since inception. The
operating environment confronting the Company raises substantial doubt about the
Company's ability to continue as a going concern. The principal conditions
giving rise to this include the following:
o The Company experienced substantial downward pressures on its revenue
during the fourth quarter of 2000, which has continued through 2001
with the slow down in the US economy and the cut backs in capital
expenditures by major cable operators. This contributed to significant
operational losses in these periods.
o Although the Company repaid its outstanding line of credit on August
2, 2001, it must immediately obtain additional funding and a new
banking relationship to meet ongoing working capital requirements.
Securing financing in light of the Company's financial position will
likely prove challenging, and include onerous terms and (in the case
of equity financing) carry with it substantial dilution for
shareholders.
o The Company is subject to litigation, which could have a material
impact on the financial position of the Company (see Note 4 -
Commitments and contingencies)
7
Accordingly, the Company is seeking additional funding in the near term but if
management is unable to secure such funding, it may be compelled to consider
other alternatives, including the liquidation of the Company. The Company is
also addressing its overhead structure and, as a result, closed its West
Chester, Pennsylvania corporate headquarters during the second quarter. During
the third quarter, the Company made significant reductions in expenditures and
negotiated settlement of a number of liabilities for shares of common stock. The
Company has applied accounting principles based on the Company continuing as a
going concern. There remains substantial doubt about the Company's ability to
continue as a going concern and therefore about its ability to realize its
assets and discharge its liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classifications of liabilities that may be necessary if the entity is unable to
continue as a going concern.
There can be no assurance that the Company will be able to obtain additional
financing on terms acceptable to the Company or successfully restructure its
operations. The Company believes if it is able to obtain at least $1.5 million
in financing, it may have the financial resources necessary to meet its
presently anticipated business requirements for approximately the next 12
months. Nonetheless, depending on the market conditions, the Company may seek to
sell additional equity or debt securities or obtain alternative credit
facilities. The sale of additional equity or debt securities may result in
significant dilution to the existing shareholders and/or significant charges to
earnings. There is no assurance that the Company will be able to raise such
capital on terms acceptable to the Company, if at all.
NOTE 2 - PROMISSORY NOTE PAYABLE
On August 1, 2001 the Company borrowed $250,000 from two stockholders for which
the Company has issued two Promissory Notes in the principal amount of $125,000
each. These Notes bear interest at a rate of 9% per annum and are due and
payable in full along with interest 120 days after issuance. The Notes are
secured by certain assets of the Company.
In connection with the issuance of these Notes, the Company agreed to issue to
the holders warrants to purchase up to a total of 100,000 shares of Common stock
of the Company at an exercise price of $0.15 per share. The warrants are
immediately exercisable and expire on the fifth anniversary of the date of
issuance. The Black-Scholes model assigned a value of $14,200 to these warrants.
This amount has been recorded as a deferred financing cost in other current
assets and is being amortized ratably over the life of the Promissory Notes. As
such, $9,467 was amortized as interest expense in the period ending September
30, 2001. The remaining $4,733 will be amortized during the fourth quarter of
2001.
On August 15, 2000 the Company obtained a one-year $1,000,000 line of credit
with a bank. This line of credit was repaid in full on August 1, 2001. The loan
agreement required the issuance of 32,990 warrants at market price, which vested
immediately at a strike price of $6.0625 per share and which expire August 14,
2005. The Black Scholes model assigned a value of $159,605 to these warrants.
This amount was recorded as a deferred financing cost in other current assets
and was being amortized over the life of the loan agreement. The remaining
balance of $24,207 was amortized as interest expense in the period ending
September 30, 2001.
NOTE 3 - ACCRUED LEASE CANCELLATION CHARGE
As of June 1, 2001, the Company closed the West Chester office in Pennsylvania.
The office was subject to an operating lease with monthly payments of $8,333
plus common area costs escalating to $9,167 per month in the final year ending
March 2004. The costs relating to the discontinued office, totaling $458,532 was
charged to expense in the second quarter, as they have no substantive future use
or benefit to the Company. Included in the costs expensed during the second
quarter were any remaining unamortized leasehold improvements.
In October 2001 an agreement was reached satisfying in full the lease obligation
related to the West Chester office. The Company agreed to issue 220,000 shares
of common stock for full settlement of any and all obligations under the lease
including, but not limited to, any and all rent, taxes, attorney fees and any
and all other obligations whether past due or continuing. These shares will be
valued at the closing price of the Common Stock on the date the agreement was
entered into, October 4, 2001. As a result of the settlement, the Company has
reversed in the current quarter $410,132 of the accrued lease expense in the
second quarter.
8
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On March 31, 2000, a complaint was filed by James A. Sims, Jr. against the
Company in the Court of Common Pleas for the Ninth Judicial Circuit, County of
Charleston, South Carolina. The complaint alleges that the Company is a
successor by merger to Internet Channel, Inc. ("Internet Channel"), a company in
which the plaintiff claims to have had an equity interest. The complaint further
alleges that the Company failed to redeem plaintiff's equity interest in
Internet Channel or to exchange the Company's stock for the plaintiff's equity
interest in Internet Channel as part of the alleged merger. The complaint also
alleges that the Company altered certain account and loan documents in
connection with the alleged merger, failed to observe corporate formalities or
comply with statutory laws governing corporations and issued stock to
controlling persons without adequate consideration. The plaintiff seeks actual
damages in an amount to be determined at trial, which plaintiff believes is at
least $25 million, together with punitive damages, pre-judgment interest, costs
and attorney's fees. A complaint, alleging similar facts, was filed on September
8, 2000 by Jeff Adair against the Company in the same court. Mr. Adair's
complaint seeks similar damages, except that the plaintiff expresses no view as
to the minimum level of damages. In June 2000, the Company filed an answer to
the complaint brought by Mr. Sims and in February 2001 the Company filed an
answer to the complaint brought by Mr. Adair. The Company and Mr. Adair have
agreed to a settlement consisting of payment by the company to Mr. Adair of
$6,000 in cash and the issuance of shares of Common Stock valued at $40,000. The
action brought by Mr. Sims is currently in discovery. Management is currently
assessing the merits and other aspects of this claim. The Company believes it
has good defenses which it intends to vigorously pursue, but cannot be assured
of the outcome.
The Company has also been served with a complaint from a former vendor filed on
April 18, 2000 in the Court of Common Pleas, Richland County, South Carolina.
The complaint demands approximately $18,000 in past due amounts for alleged
services. The Company disputes any services were provided, is investigating the
complaint and has filed a counterclaim. The Company will vigorously pursue its
defense against this claim and its counterclaim.
The Company has been named as a defendant in a lawsuit filed in the United
States District Court for the Eastern District of Pennsylvania on or about
November 9, 2001. The plaintiffs, Michael F. Mulholland, William F. Walsh,
Robert F. Bronner, Richard H. Steele and William J. Flounders, are each former
management members of the Company who resigned in May 2001 pursuant to the terms
of a settlement agreement entered into at that time by such individuals and
Hovey Aiken III, a principal shareholder of the Company. The terms of that
agreement were previously disclosed in an 8-K filed on May 31, 2001. The
plaintiffs allege, among other things, that because the Company failed to timely
pay approximately $660,000 in amounts claimed under the settlement agreement for
back wages, they are now owed in excess of $1,600,000, representing collective
past and future amounts claimed to be owing under their employment contracts,
plus statutory penalties equal to 25% of their unpaid wages, interest, attorneys
fees and other amounts. The lawsuit also names as defendants Messrs. Joseph
Melanson, the Company's CEO, and Hovey Aiken. In addition to compensatory
damages, the plaintiffs seek punitive damages against such individuals for,
among other things, their alleged misrepresentations and false promises of
prompt payment of wages claimed to be due and owing to the plaintiffs. The
Company intends to vigorously defend itself against this action, and believes
that it has good defenses to the claims. However, we cannot assure that the
Company will be successful, and that an adverse outcome will not occur which
could materially impact the financial position of the Company.
The Company may be engaged in other legal actions arising in the ordinary course
of its business. The Company believes that the ultimate outcome of any such
matters will not have material adverse effect on the Company's consolidated
financial position but may have a material impact on results of operations in a
given period.
NOTE 5 - LOSS PER SHARE
The Company has reported loss per share in accordance with Statement of
Financial Accounting Standards No.128 ("SFAS 128"), "Earnings per Share". SFAS
128 requires the presentation of basic and diluted earnings per share for
companies with complex capital structures. Basic loss per share is computed by
dividing the net loss by the weighted average number of shares of common stock
outstanding during the period. As of September 30, 2001, certain executives, key
employees and investors have been granted a total of 9,761,012 warrants and
options, 5,572,262, of which are currently vested, to purchase shares of the
Company's common stock. In accordance with SFAS 128, these warrants and options
have been excluded from the calculation of diluted earnings per share for the
three and nine month periods ended September 30, 2001, as the results would be
anti-dilutive since the Company reported losses from operations in the period.
9
NOTE 6 - CONCENTRATION OF RISK
The Company provides broadband infrastructure engineering services to the major
cable plant operators. As such, and due to the continuing acquisitions and
consolidation in the cable plant industry, the Company has a high concentration
of sales to select group of customers as follows:
3 Months Ended 9 Months Ended
September 30, 2001 September 30, 2001
--------------------- -----------------------
Rogers Cable Systems $594,316 44.3% $ 1,533,358 33.2%
AOL/Time Warner 232,193 17.3% 1,454,809 31.5%
AT&T 243,178 18.1% 243,178 5.3%
IBM - - 405,786 8.8%
Cogeco Cable 149,827 11.1% 546,920 11.8%
Other 123,451 9.2% 432,730 9.4%
Total sales $1,342,965 100.0% 4,616,781 100.0%
NOTE 7 - RELATED PARTY TRANSACTIONS
In June 2000, the then acting Chairman of the Board and Chief Executive Officer
Michael Mulholland, loaned $67,842 to the Company. The terms of the loan include
9% interest and a repayment requirement upon the receipt of any bank loans,
lines of credit or other equity or debt financing. This loan was repaid from the
proceeds of the exercise of options. Subsequently, in July 2000, Mr. Mulholland
loaned the Company an additional $54,485 upon the same terms and exercised
certain stock options, acquiring 10,000 shares of common stock at a strike price
of $4.625 per share. The cost of the stock option exercise was applied against
the previous loans, resulting in a net loan to the Company of $76,077 as of July
31, 2000. During the third quarter of 2000, the Company repaid $40,000 of the
loan. During the second quarter of 2001, Mr. Mulholland loaned the Company an
additional $14,000 upon the same terms. No payments were made to September 30,
2001. As of September 30, 2001, the principal and accrued interest on the
outstanding loan was $50,077 and $3,794 respectively.
In November 1999, a previous Chairman and CEO, Timothy Karnes loaned $50,000 to
the Company. The terms of the loan include 10% interest and a repayment
requirement upon the receipt of any bank loans, lines of credit, or other equity
or debt financing. No payments have been made on principal or interest. As of
September 30, 2001 the principal and accrued interest on the outstanding loan
was $50,000 and $10,380, respectively. During the fourth quarter, the Company
and Mr. Karnes agreed to terms of settlement for all amounts owed, see Note 11
to the Financial Statements.
During the year ended December 31, 2000 and the quarter ended March 31, 2001,
certain executives and other employees voluntarily deferred receipt of payment
for their earned salaries and auto allowances. The total deferred and accrued
payroll at September 30, 2001 was $955,616 of which $729,193 was deferred by the
executive officers. During the third quarter an additional $73,653 in executive
officer salaries was deferred. Certain executive officers salaries have been
deferred since June 30, 2000.
On October 4, 2001, Mr. Joseph Melanson, the Company's CEO, agreed to purchase
$75,000 worth of Common Stock from the Company at a price equal to the market
price at that date, $ 0.15 per share. Payment of the purchase price is to be
made through the cancellation of $75,000 in back wages owing to Mr. Melanson. At
September 30, the Company owed Mr. Melanson approximately $125,000 in accrued
and unpaid wages. The Company has agreed to grant Mr. Melanson piggyback
registration rights for resale of these shares.
NOTE 8 - DISPOSITION OF CAD CONSULTANTS, INC.
At a board meeting held on March 2, 2001, the board approved a resolution
authorizing the management of the Company to pursue the sale or other
disposition of CAD. The Company's management believed that the core business of
CAD, a wireless integrator, does not possess a strong enough strategic fit with
the current focus of the
10
Company, which is to become the preferred vendor for outsourcing upgrades and
maintenance of cable plants. Additionally, management had determined that
continued funding of CAD's operating losses is not in the best interest of its
shareholders. As a result of this decision, the Company took steps to seek the
best solution in the sale, disposal or closure of CAD. The Company did enter
into negotiations with one potential buyer, but failed to arrive at mutually
acceptable terms. Therefore, on April 11, 2001, management closed down the
operations of CAD and terminated all related employees. Mr. Craig Lerman, who
was the sole shareholder of CAD prior to its acquisition by the Company and who
served as Wireless Division President of the Company until the closing of CAD,
has chosen to continue the business of CAD. He has assisted in collecting
outstanding accounts receivable and, for a fee, to complete short term pending
projects related to the CAD business. No definitive agreements have been entered
into with Mr. Lerman concerning the transition. Due to the failure to come to
terms with Craig Lerman, the former principal of CAD, concerning the
termination, the Company is potentially exposed to additional claims. While the
Company expects to resolve such claims without litigation the Company cannot
assure that it will be able to do so.
Th pro forma unaudited consolidated results of operations for the three-month
period ended September 30, for Internet Cable Corporation as though the
operations of CAD had been closed as of January 1, 2000 is as follows:
3 Months ended 3 Months ended
September 30, 2001 September 30, 2000
------------------ ------------------
Revenue $1,263,903 $3,011,625
Loss from operations (460,240) (247,505)
Net loss (506,593) (260,145)
Weighted average common shares 10,510,651 10,188,740
outstanding
Net loss per share $(0.05) $(0.03)
The pro forma unaudited consolidated results of operations for the nine-month
period ended September 30, for Internet Cable Corporation as though the
operations of CAD had been closed as of January 1, 2000 is as follows:
9 Months ended 9 Months ended
September 30, 2001 September 30, 2000
------------------ ------------------
Revenue $4,225,791 $7,429,572
Loss from operations (2,656,416) (2,294,873)
Net loss (2,816,022) (2,849,372)
Weighted average common shares 10,510,651 10,210,864
outstanding
Net loss per share $(0.27) $(0.28)
NOTE 10 - SUBSEQUENT ISSUANCE OF COMMON STOCK
During October 2001 the Company agreed to settle approximately $563,000 in
outstanding liabilities in consideration for the issuance of 800,000 shares of
Common Stock. Principal components of these liabilities include approximately
$458,000 owing under an existing lease for the Company's former offices in
Pennsylvania, see Note 3 to the Financial Statements, $75,000 owing to Mr.
Melanson for unpaid compensation and $30,000 owing for unpaid professional fees.
NOTE 11 - CHANGE IN BOARD OF DIRECTORS
On October 29, 2001 Timothy Karnes resigned from his position on the Board of
Directors of the Company. The resignation was pursuant to a Memorandum of
Understanding as of the same date entered into between Mr. Karnes and the
Company. The terms of the Memorandum include arrangements for payment of certain
past salary due to
11
Mr. Karnes ($21,917.81) and settlement of loans previously advanced to the
Company in the principal amount of $50,000 with accrued interest of $10,380
thereon. Both Mr. Karnes and the Company acknowledge that the Company currently
does not have the ability to pay such outstanding amounts without incurring
substantial detriment to its operations. The Company paid Mr. Karnes $7,000 upon
execution of the agreement and agreed to pay the balance at a minimum rate of
$1,000 per month, subject to the Company raising additional funds in a
contemplated private financing and subject to an increased payment rate
depending on the success of the financing.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introductory Note
This report contains, in addition to historical information, forward-looking
statements by the Company with regard to its expectations as to financial
results and other aspects of its business that involve risks and uncertainties
and may constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "may," "should,"
"anticipate," "believe," "plan," "estimate," "expect," and "intend," and other
similar expressions are intended to identify forward-looking statements. These
include statements regarding the sufficiency of the Company's liquidity,
including cash resources, the availability of additional equity funding,
utilization of lines of credit or other borrowing facilities or opportunities,
concentration of sales risk, gross margins, current and future expenses, future
revenues and shortfalls in revenues, contract pricing and pricing uncertainty,
growth and expansion plans, sales and marketing plans, availability of adequate
technical personnel, capital expenditures, seasonality, and operating results.
Such statements are based on management's current expectations and are subject
to a number of uncertainties and risks that could cause actual results to differ
materially from those described in any forward-looking statements. Factors that
may cause such a difference include, but are not limited to, the risks set forth
in the Company's filings with the Securities and Exchange Commission (see the
"Risk Factors" section in the Company's Form 10-KSB for the year ended December
31, 2000). The Company does not intend to update these cautionary statements or
any forward-looking statements.
GENERAL
The Company's primary business focus is to provide broadband engineering
services to the North American and other emerging broadband markets. Major cable
operators engage the Company's services to upgrade, maintain and expand the
technical network infrastructure (cable plant facilities and networks)
underlying their delivery of new, robust broadband services, including
high-speed Internet access, cable-phone (telephony), digital and interactive TV
cable, pay-per-view, alarm monitoring and smart home devices. The Company is
also a provider of broadband training and broadband diagnostic software
products.
Pro forma financials
On April 11, 2001 management closed operations of CAD and terminated all related
employees. The pro forma financial information assumes the operations of CAD had
been closed as of January 1, 2000.
12
Sales
Sales for the third quarter and year to date 2001 were $1,342,965 and $4,616,781
respectively. This represents a decrease of $1,916,758 or 58.8% from the third
quarter of 2000 and a decrease of $3,804,885 or 45.2% year to date from the
results of 2000. Pro forma sales, excluding the sales of CAD, for the third
quarter and year to date 2001 were $1,263,903 and $4,225,791, respectively. This
represents a decrease of $1,747,722 or 58.0% from the pro forma sales of
$3,011,625 for the third quarter of 2000 and a decrease of $3,203,781 or 43.1%
from the pro forma sales of $7,429,572 for the year to date in 2000. The
reduction in the Company's revenue can primarily be attributed to a decrease in
the volume of its business. The Company experienced a substantial reduction in
its revenue as a result of the loss of a significant customer during the fourth
quarter of 2000, which has continued through 2001. The Company believes that the
economic slowdown in the US combined with the reduction in capital expenditures
by the telecommunication industry has resulted in a continuation of the
reduction in revenue for the Company.
Cost of Sales
Direct costs for the third quarter and year to date 2001 were $569,732 and
$2,144,762 respectively. This represents a reduction of $559,793 or 49.6% from
the direct costs of $1,129,525 incurred in the third quarter of 2000 and a
reduction of $1,258,483 or 37.0% from the direct costs of $3,403,245 incurred in
the year to date in 2000. The decrease is a result of the lower sales volume
experienced in the third quarter and year to date in 2001 versus 2000. Pro forma
direct costs for the third quarter and year to date 2001 were $534,341 and
$1,792,290, respectively. This represents a reduction of $443,655 or 45.4% from
the direct costs of $977,996 incurred in the third quarter of 2000 and a
reduction of $1,001,772 or 35.8% from the direct costs of $2,794,062 incurred in
the year to date in 2000.
Indirect costs
Indirect costs for the third quarter and year to date 2001 were $400,232 and
$1,697,889 respectively. Indirect costs were reduced by $428,132 or 51.7% from
the third quarter of 2000 and were reduced by $500,259 or 22.8% from the level
expended during the year to date in 2000. This category of expense includes the
less variable type of project expenses such as project supervisors and long term
lease vehicle costs. As the Company experienced a drop in revenues since the
fourth quarter of 2000, the indirect costs were not as readily reduced. The
Company sought to maintain its skilled workforce in order to avoid the cost of
re-hiring and training new workers. During the second quarter of 2001, the
Company commenced efforts at cost containment through the lay off of project
supervisors and disposition of surplus assets thereby reducing indirect costs.
These cost containment efforts have continued through the third quarter as
business has remained slow. As the majority of CAD's cost of goods sold was
comprised of direct costs, the closure of CAD had little impact on indirect
costs.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") for the third quarter and
year to date 2001 were $529,434 (39.4% of revenue) and $2,293,510 (49.6% of
revenue) respectively. SG&A costs were reduced by $629,201 or 54.3% from
$1,158,635 during the third quarter of 2001 compared to the third quarter of
2000 and were reduced by $1,675,459 or 42.2% compared to the level expended
during the year to date in 2000. The reduction in SG&A expense is attributable
to cost containment efforts including the closure of the West Chester,
Pennsylvania office and reduction in executive salaries and related expenses.
Other cost reductions include outside professional services, advertising and
travel expenditures. During the second quarter of 2001, the Company recorded a
noncash SGA expense of approximately $458,000 relating to the discontinued use
of the West Chester property subject to a five-year operating lease. During the
third quarter, the Company reached an agreement that costs relating to the West
Chester property lease would be settled for 220,000 shares of common stock of
the Company. These shares have been valued at approximately $48,400. As a
consequence, approximately $410,000 of expense relating to the office closure
have been reversed in the third quarter.
Depreciation and amortization
The consolidated fixed assets of the Company amount to $1,774,528 with a net
book value of $969,407. The most significant component of the fixed assets is
technical testing equipment used by the technicians of TSI in the field. Current
year capital expenditures are generally being depreciated over five years using
the straight-line, half-year convention method. Total consolidated depreciation
expense was $59,388 and $56,810 for the quarters ended
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September 30 2001 and 2000 respectively. Total consolidated depreciation expense
was $181,188 and $149,597 for the year to date in 2001 and 2000 respectively.
Amortization expense was $216,063 and $648,189 for the third quarter and year to
date 2001 respectively. Amortization expense was $378,902 and $1,136,706 for the
third quarter and year to date 2000. Goodwill is being amortized over five years
using the straight-line method of amortization. The decrease in amortization
expense in 2001 versus 2000 reflects the Company's decision in December 2000 to
write off the goodwill associated with CAD due to the impairment of that asset.
At September 30, 2001 the balance sheet reflects gross goodwill of $4,321,234,
which relates solely to the TSI acquisition, net of accumulated amortization
thereon.
Interest
The Company incurred net interest expense of $44,147 for the quarter ended
September 30, 2001 and $156,835 for the year to date. In 2000 the Company had
net interest expense of $12,640 for the quarter ended September 30, 2000 and net
interest income of $10,328 for the year to date. The interest charges for 2001
are largely related to the interest on the Company's line of credit borrowings
as well as the interest expense associated with capitalized leases at TSI, the
amortization of the deferred finance charges associated with the warrants issued
with the Notes Payable and the amortization of the deferred finance charges
associated with the warrants issued with the bank Line of Credit. The increase
in interest expense in the year to date for 2001 as compared to the year to date
in 2000 is the result of the increase in the Company's indebtedness commencing
in the third quarter of 2000.
Liquidity and capital resources
Historically, the Company has financed its operations primarily through a
combination of private sales of equity securities and loans from the Company's
executive officers and private investors. During the third quarter of 2000, the
Company secured additional funding through a $1 million line of credit,
providing additional working capital secured by certain qualified accounts
receivable. As of August 2, 2001 the Company repaid the line of credit in full,
and the line of credit was cancelled. At September 30, 2001, the Company had
cash of $282,548; and the Company's current liabilities of $2,991,593 exceeded
its current assets of $1,521,703 by $1,469,890 providing a current ratio of 0.50
to 1.0. The Company is in need of additional financing to satisfy its immediate
working capital requirements. Accordingly, the Company is seeking additional
funding. If management is unable to secure such funding, it may be compelled to
consider other alternatives, including the liquidation of the Company. The
Company is also addressing its overhead structure and, as a result, has closed
its West Chester corporate headquarters and made numerous reductions in
expenditures. See Note 1, of the Notes to the Financial Statements concerning
doubt as to the Company's ability to continue as a going concern.
There can be no assurance that the Company will be able to obtain additional
financing on terms acceptable to the Company or successfully restructure its
operations. The Company believes if it is able to obtain at least $1.5 million
in financing, it may have the financial resources necessary to meet its
presently anticipated business requirements for the next 12 months. Nonetheless,
depending on the market conditions, the Company may seek to sell additional
equity or debt securities or obtain alternative credit facilities. The sale of
additional equity or debt securities may result in significant dilution to the
existing shareholders and/or significant charges to earnings. There is no
assurance that the Company will be able to raise such capital on terms
acceptable to the Company, if at all.
On August 1, 2001 the Company borrowed $250,000 from two stockholders for which
the Company has issued two Promissory Notes of $125,000 each. These Notes bear
interest at a rate of 9% per annum and are due and payable in full along with
interest 120 days after issuance. As additional consideration for these
borrowings, the Company has agreed to issue to each Holder a warrant to purchase
up to 50,000 shares of Common stock of the Company at an exercise price of $0.15
per share. The warrants are immediately exercisable and expire on the fifth
anniversary of the date of issuance.
For the nine-month period ended September 30, 2001, cash flow provided by
operating activities amounted to $365,860. This amount was derived from the loss
of $2,509,551, adding back non-cash expenditures of $794,135, principally
depreciation and amortization, and a net decrease in working capital of
$2,081,276. The decrease in working capital was due to a reduction in business
activity, resulting in, among other things, collection of accounts
14
receivable, the billing and subsequent collection of unbilled revenue and an
increase in accounts payable, accrued charges and other current liabilities.
Investing activities for the period ended September 30, 2001 provided net cash
in the amount of $64,963 due to the disposal of surplus fixed assets.
Cash used by financing activities for the period ended September 30, 2001
amounted to $324,033. This was comprised of an increase in stockholder notes
payable in the amount of $14,000, proceeds from the Promissory Notes payable in
the amount of $250,000, payments against the line of credit in the amount of
$498,000, and repayment of capital leases in the amount of $90,033.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Mr. Adair have agreed to a settlement consisting of payment by
the company to Mr. Adair of $6,000 in cash and the issuance of shares of Common
Stock valued at $40,000.
The Company has been named as a defendant in a lawsuit filed in the United
States District Court for the Eastern District of Pennsylvania on or about
November 9, 2001. The plaintiffs, Michael F. Mulholland, William F. Walsh,
Robert F. Bronner, Richard H. Steele and William J. Flounders, are each former
management members of the Company who resigned in May 2001 pursuant to the terms
of a settlement agreement entered into at that time by such individuals and
Hovey Aiken III, a principal shareholder of the Company. The terms of that
agreement were previously disclosed in an 8-K filed on May 31, 2001. The
plaintiffs allege, among other things, that because the Company failed to timely
pay approximately $660,000 in amounts claimed under the settlement agreement for
back wages, they are now owed in excess of $1,600,000, representing collective
past and future amounts claimed to be owing under their employment contracts,
plus statutory penalties equal to 25% of their unpaid wages, interest, attorneys
fees and other amounts. The lawsuit also names as defendants Messrs. Joseph
Melanson, the Company's CEO, and Hovey Aiken. In addition to compensatory
damages, the plaintiffs seek punitive damages against such individuals for,
among other things, their alleged misrepresentations and false promises of
prompt payment of wages claimed to be due and owing to the plaintiffs. The
Company intends to vigorously defend itself against this action, and believes
that it has good defenses to the claims. However, we cannot assure that the
Company will be successful, and that an adverse outcome will not occur which
could materially impact the financial position of the Company.
For a discussion of certain other legal proceedings to which the Company is a
party, see the Company's Annual Reports on Form 10-KSB for the year ended
December 31, 2000 and Form 10-QSB for the periods ended March 31 and June 30,
2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
During October, 2001, the Company sold an aggregate of 220,000 shares of Common
Stock in consideration for the settlement of outstanding liabilities aggregating
approximately $458,000. The Company did not receive any new cash proceeds from
the sale of these shares. These liabilities were in favor of a limited number of
sophisticated or accredited investors The Company relied on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 for the
offer and sale of these shares.
ITEM 5. OTHER INFORMATION
Effective October 29, 2001, Mr. Timothy Karnes resigned as a director of the
Company. See Note 11 to the Financial Statements, Change in Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
15
(b) Reports on Form 8-K
DATE OF REPORT ITEMS REPORTED DESCRIPTION
-------------- -------------- -----------
September 26, 2001 Item 4 Current Report - Change in
Registrant's Certifying
Accountant
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Internet Cable Corporation
/s/ JOSEPH M. MELANSON Date signed: November 14, 2001
- ------------------------------------
Joseph M. Melanson
Chairman and Chief Executive Officer
/s/ JILL MACDONALD Date signed: November 14, 2001
- ------------------------------------
Jill Macdonald, Corporate Controller
(Principal Financial Officer)
17