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, 2002
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
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
87-0540291
(I.R.S. Employer Identification No.)
195 RIVIERA DRIVE, UNIT 2, MARKHAM, ONTARIO, CANADA
L3R 5J6 (Address of principal executive offices)
(Zip Code)
(313) 218-2276
(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 x No____
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 30, 2002, was 14,234,391 shares, all of one class (common
stock), par value $0.001 per share.
Transitional Small Business Disclosure Format (check one);
Yes ____ No x
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNET CABLE CORPORATION
CONDENSED BALANCE SHEET
ASSETS
September 30, 2002
(Unaudited)
----------
Current assets
Cash $138,749
Accounts receivable, net of allowance for doubtful accounts of $196,036 983,055
Unbilled receivables 156,087
Prepaid expenses and other current assets 154,003
----------
Total current assets 1,431,894
Property and equipment - at cost, less accumulated depreciation of $983,685 788,386
Goodwill, net of accumulated amortization of $1,728,494 2,930,404
----------
Total assets $5,150,684
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, stockholders $50,000
Accounts payable and accrued expenses 1,550,656
Current portion of capital leases 4,117
Promissory note payable 100,000
Short term portion of long term liability 318,240
Income taxes payable 14,176
----------
Total current liabilities 2,037,189
Long term debt 236,620
----------
Total liabilities 2,273,809
Stockholders' equity
Preferred Stock, $0.001 par value, 5,000,000 shares authorized; no shares -
issued or outstanding
Common stock, $0.001 par value, 50,000,000 shares authorized; 14,234,391 14,234
shares issued and outstanding
Additional paid-in capital 19,725,070
Cumulative translation adjustments (661)
Accumulated deficit (16,861,768)
-----------
Total stockholders' equity 2,876,875
-----------
Total liabilities and stockholders' equity $5,150,684
===========
The accompanying notes are an integral part of these condensed financial statements
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2002 2001
---------------------------------------
Sales and services $1,066,798 $1,342,965
Cost of sales
Direct costs 631,384 569,732
Indirect costs 339,199 400,232
Depreciation 31,737 45,252
---------------------------------------
Gross operating profit 64,478 327,749
Operating costs
Selling, general and administrative expenses 437,448 529,434
Discontinued lease expense (recovery) - (410,132)
Depreciation 19,578 14,136
Gain on disposal of assets (47,946) 28,043
Amortization of goodwill - 216,063
Recovery from accrual reversal upon settlement of lawsuit (329,604) -
Recoverable from insurance proceeds (275,000) -
---------------------------------------
Income from operations 260,002 6,291
Interest expense 14,210 44,147
---------------------------------------
Pretax income (loss) 245,792 (37,856)
Income tax (provision) benefit - -
---------------------------------------
Net income (loss) 245,792 (37,856)
Other comprehensive income (loss)
Translation adjustment (24,930) 5,015
---------------------------------------
Total comprehensive income (loss) $220,862 $(32,841)
=======================================
Basic weighted average common shares outstanding 13,056,037 10,543,984
Basic income (loss) per share $0.02 $(0.003)
=======================================
Diluted weighted average common shares outstanding 18,577,391 10,543,984
Diluted income (loss) per share $0.01 $(0.04)
=======================================
The accompanying notes are an integral part of these condensed financial statements
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2002 2001
---------------------------------------
Sales and services $4,635,459 $4,616,781
Cost of sales
Direct costs 2,539,494 2,144,762
Indirect costs 1,103,875 1,697,889
Depreciation 112,358 137,905
---------------------------------------
Gross operating profit 879,732 636,225
Operating costs
Selling, general and administrative expenses 1,266,511 2,293,510
Discontinued lease expense - 48,400
Depreciation 46,492 43,283
Gain on disposal of assets (93,150) (45,822)
Amortization of goodwill - 648,189
Recovery from accrual reversal upon settlement of lawsuit (329,604) -
Recoverable from insurance proceeds (275,000) -
---------------------------------------
Income (loss) from operations 264,483 (2,351,335)
Interest expense 26,624 156,835
---------------------------------------
Pretax income (loss) 237,859 (2,508,170)
Income tax (provision) benefit 341,322 (1,381)
---------------------------------------
Net income (loss) 579,181 (2,509,551)
---------------------------------------
Other comprehensive income (loss)
Translation adjustment (4,372) (6,787)
---------------------------------------
Total comprehensive income (loss) $574,809 $(2,516,338)
=======================================
Weighted average common shares outstanding 12,941,518 10,543,984
Basic income (loss) per share $0.04 $(0.24)
=======================================
Diluted weighted average common shares outstanding 18,577,391 10,543,984
Diluted income (loss) per share $0.03 $(0.24)
=======================================
The accompanying notes are an integral part of these condensed financial statements
INTERNET CABLE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2002 2001
---------------------------------------
Net income (loss) $579,181 $(2,509,551)
Adjustments to reconcile net loss to cash provide by (used
in) operating activities
Depreciation 158,850 181,188
Amortization of goodwill - 648,189
Amortization of discount on notes payable 13,430 -
Stock-based compensation and stock issued for services 118,491 22,500
Stock issued in settlement of claims 37,722 -
Warrants issued for services 69,475 -
Gain on disposal of assets (93,150) (35,242)
Changes in working capital:
Accounts receivable (487,706) 889,278
Unbilled receivables 27,398 186,160
Inventory 13,190 93,049
Other current assets (72,606) 105,681
Accounts payable and accrued expenses (375,960) 766,503
Allowance for income taxes payable (355,498) -
---------------------------------------
Cash flows provided by (used in) operating activities (367,183) 347,755
---------------------------------------
Cash flows from investing activities
Purchase of property and equipment (104,388) -
Disposal of property and equipment 151,938 64,963
Business acquisitions (95,214) -
Proceeds on disposal of other assets -- 18,105
---------------------------------------
Net cash (used in) provided by investing activities (47,664) 83,068
Cash flows from financing activities
Promissory note payable 100,000 14,000
Net payments against line of credit - (248,000)
Capital lease payments (76,795) (90,033)
---------------------------------------
Net cash provided by (used in) financing activities 23,205 (324,033)
---------------------------------------
Cumulative translation adjustment (4,372) (6,794)
Net increase (decrease) in cash (396,014) 99,996
Cash, beginning of period 534,763 182,552
---------------------------------------
Cash, end of period $138,749 $282,548
=======================================
The accompanying notes are an integral part of these condensed financial
statements
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION, REVENUE RECOGNITION, GOING CONCERN
AND LIQUIDITY
Basis of presentation
The accompanying consolidated financial statements of Internet Cable Corporation
(the "Company") presented herein include the operations of its wholly owned
subsidiaries Cable Systems Technical Services, Inc. (a corporation organized
under the laws of Ontario, Canada), Cable Systems Technical Services, Inc. (a
corporation organized under the laws of Delaware) and Cable Systems TSI, NA (a
corporation organized under the laws of Delaware), collectively referred to as
"TSI"; Internet Cable corporation NA (a corporation organized under the laws of
Pennsylvania) and CAD Consultants, Inc. (a corporation organized under the laws
of New Jersey) referred to as "CAD." The consolidated 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 on 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, 2001.
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.
Revenue recognition
The Company recognizes revenue over the term of its contracts as services are
being performed. Depending on the nature of the contract, income is recognized
using either a unit of measure (based on feet or other units) or hours worked.
Going concern and liquidity
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 From inception until the first quarter of 2002 the Company experienced
recurring losses from operations. Although the Company has achieved
profit in the second and third quarters of 2002 and year to date in
2002, it has an accumulated deficit of $16,861,762 and a working
capital ratio of 0.70.
o The Company has experienced downward pressure on its revenue since
2001 primarily due to a continued reduction in capital expenditures by
broadband clients. This has resulted in a work shortage for the
Company.
As at September 30, 2002 the consolidated group had negative working capital in
the amount of $605,289. The Company's inactive subsidiary, CAD Consultants Inc.
("CAD") had a working capital deficiency of approximately $293,000. The CAD
working capital deficiency includes unsecured trade payables. Although CAD's
creditors have no recourse against other companies in the group, it is
management's intention to settle the trade payables with shares of the Company.
The Company's operating subsidiary, Cable Systems Technical Services Inc.
("TSI"), had positive working capital of approximately $342,000. The remainder
of the working capital deficit is attributable to the group's parent company,
Internet Cable Corporation.
Although the Company expects to be able to internally generate working capital
to meet its anticipated business requirements for the next 12 months, the
Company is seeking additional funding in the near term. Management is actively
pursuing new sources of financing which may include additional sales of the
Company's securities to provide additional working capital, fund future
potential acquisitions and satisfy any unfavorable judgments. However, despite
the fact that historically the Company has successfully obtained sufficient
financing to meet its obligations, no assurances can be provided as to the
likelihood of its continued success. If management is unable to secure funding,
it may be compelled to consider other alternatives, including the liquidation of
the Company.
The Company has applied accounting principles based on the Company continuing as
a going concern. The financial statements do not include any adjustment that
might result if the Company cannot continue as a going concern.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statements No. 141 Business Combinations (SFAS 141) and No. 142 Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase
method of accounting and prohibits the use of the pooling-of-interest method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142 that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires among other things, that companies no longer amortize goodwill
but instead test goodwill for impairment at least annually. In addition, SFAS
142 requires that the Company identify reporting units for the purposes of
assessing potential future impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS 142. The Company adopted SFAS 142 beginning January 1, 2002 and assessed
all goodwill recognized at that date regardless of when those assets were
initially recognized. SFAS 142 required the Company to complete a transitional
goodwill impairment test six months from the date of adoption. No impairment was
present upon adoption of SFAS No. 142. The Company cannot predict the occurrence
of certain events that might adversely affect the reported value of goodwill.
Such events may include, but are not limited to, strategic decisions made in
response to economic and competitive conditions, the impact of the economic
environment on the Company's customer base, or a material negative change in its
relationships with significant customers.
The following reflects the impact of excluding goodwill amortization on prior
year net loss and loss per common share:
Nine months Three months
ended ended
September 30, September 30,
2001 2001
(Unaudited) (Unaudited)
--------------- --------------
Reported net loss $(2,509,551) $(37,856)
Cease goodwill amortization 648,189 216,063
---------------------------------
Adjusted net income (loss) $(1,861,362) $178,207
Reported loss per common share - Basic and Diluted $(0.24) $(0.004)
Cease goodwill amortization 0.07 0.01
---------------------------------
Adjusted loss per common share - Basic and Diluted $(0.17) $(0.02)
=================================
In August 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires the
fair value of a liability for an asset retirement obligation to be recognized in
the period in which it is incurred if a reasonable estimate of fair value can be
made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. The Company will adopt SFAS 143 on
January 1, 2003. The Company believes the adoption of this statement will have
no material impact on its financial statements.
In October 2001, the SFAS issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 requires that those long-lived assets
be measured at the lower of carrying amount or fair value, less cost to sell,
whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
144 was effective for the Company's financial statements beginning January 1,
2002 and, generally, is to be applied prospectively. The adoption of this
statement did not have a material impact on the Company's financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
145 rescinds several statements, including SFAS 4, "Reporting Gains and Losses
from Extinguishment of Debt." The statement also makes several technical
corrections to other existing authoritative pronouncements. SFAS 145 is
effective in May 2002, except for the rescission of SFAS 4, which is effective
in January 2003. The Company does not expect the adoption of SFAS 145 to have a
significant impact on its financial statements.
In July 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146
addresses the financial accounting and reporting for certain costs associated
with exit or disposal activities, including restructuring actions. SFAS 146
excludes from its scope severance benefits that are subject to an on-going
benefit arrangement governed by SFAS 112, "Employer's Accounting for
Postemployment Benefits," and asset impairments governed by SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The Company has not determined the effect
that the adoption of SFAS 146, effective January 1, 2003, will have on its
earnings or financial position.
NOTE 3 - ACQUISITION
On September 11, 2002 the Company completed the acquisition of Clearview
Communications Inc., a corporation organized under the laws of the Province of
Ontario, Canada ("Clearview"), which resulted in Clearview becoming a wholly
owned subsidiary of the Company. Subsequent to the acquisition, on September 18,
2002 Clearview and Cable Systems Technical Services Inc. were amalgamated to
form a single operating company, Cable Systems Technical Services Inc. The
Company purchased one hundred percent (100%) of the issued and outstanding
common stock of Clearview in consideration of: (i) cash in the amount of one
hundred and fifty thousand dollars Canadian ($150,000 CDN) and (ii) 750,000
shares of common stock of the Company.
Clearview provides major Canadian communications operators with project
management services; headend data and fiber wiring and outside plant maintenance
and rebuild services.
The acquisition was accounted for using the purchase method of accounting. The
preliminary allocation of the purchase price resulted in goodwill in the amount
of $337,664.
The unaudited results of operations for the acquired entity Clearview, for the
period up to its amalgamation with TSI on September 18, are as follows:
July 1 to Sept 18, Jan 1 to Sept 18,
2002 2002
Net sales $112,575 $476,930
Gross operating profit (14,373) 22,769
Net income (loss) $(23,712) $(11,211)
The pro forma unaudited consolidated results of operations prepared in a manner
as though Clearview had been acquired as of the beginning of Fiscal 2002 are as
follows:
July 1 to Sept 18, Jan 1 to Sept 18,
2002 2002
Net sales $1,173,390 $5,106,409
Gross operating profit 44,125 806,521
Net income (loss) 222,080 567,970
Income (loss) per share $0.02 $0.05
NOTE 4 - PROMISSORY NOTE PAYABLE
During the quarter ended June 30, 2002 the Company received $100,000 in funding
from a private placement. Under the terms of the private placement, the Company
offered units consisting of a 10% convertible promissory note in the principal
amount of $100,000 and a warrant to purchase 50,000 shares of common stock. The
promissory note is due December 31, 2002 and is convertible into 200,000 common
shares of the Company on or before December 31, 2002. The warrants granted
average a term of five years and a strike price of $0.50 per share. The holders
of units are granted a security interest in all of the Company's assets, which
security interest is subordinate only to bank financing secured by the Company's
assets. During the year the Company has accrued $4,630 in interest expense
related to the note payable.
The terms of the private placement required the issuance of 50,000 warrants
which vested immediately. Each warrant has an exercise price of $0.50 per share
and expires on April 14, 2007. The Black-Scholes model assigned a value of
$20,750 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 note. As such, $7,320 was amortized as interest expense in the
quarter ended September 30, 2002. The remaining $7,320 will be amortized during
the fourth quarter.
NOTE 5 - INCOME TAXES
During the period ended June 30, 2002 the Company reversed a provision relating
to an unassessed income tax refund resulting from a loss carryback claimed with
respect to a subsidiary company's fiscal 2000 year end. Management believes that
the subsidiary will not be required to repay any amount on account of the refund
received.
As at December 31, 2001 a valuation allowance was provided to offset the net
deferred tax assets as management had determined that it is more likely than not
that the deferred tax asset would not be realized. As at December 31, 2001 the
Company had available net operating loss carryforwards of approximately $10.2
million, which can be applied to U.S. federal and state taxable income. These
carryforwards expire during the years 2011 to 2021. The Company also had
available net capital loss carryforwards of $250,000, which can be applied to
net capital gains expiring in 2002.
Income taxes payable in the amount of $14,176 are payable on the net profits of
Clearview prior to acquisition by the Company.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During the quarter ended September 30, 2002, the Company entered into a
settlement agreement with respect to the previously disclosed lawsuits with
plaintiffs Michael F. Mulholland, William F. Walsh, Robert F. Bronner, Richard
H. Steele and William J. Flounders, former members of the management of the
Company. The Company agreed to pay: (1) $275,000 within 30 days of settlement;
(2) $60,000 plus interest to be paid in equal monthly installments over 18
months, beginning at the same time as payment of the $275,000; and (3) $200,000
plus interest at prime rate plus two percentage points to be paid in equal
monthly installments over 24 months, beginning in the thirteenth month, with no
interest accruing during the first 12 months. The Company's insurance carrier
has indicated that it intends to provide $275,000 towards the settlement.
Although the Company was, and remains ready, willing, and able to make its
$275,000 payment obligation that was due on October 30, 2002, the Company has
not made such payment in that the plaintiffs have not provided the Company with
proper payment and allocation documentation and instructions. As a result of the
settlement agreement the financial statements for the three and nine months
ended September 30, 2002 include a reduction of the previously recorded
provision for the estimated indebtedness in the amount of $604,604, representing
the difference between the settlement amount and the estimated indebtedness
after taking into consideration the amount to be covered by insurance of
$275,000.
The Company has 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 an answer containing a counterclaim. The Company will
vigorously pursue its counterclaim and its defense against this claim.
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 7 - COMMON STOCK
The Company has issued stock warrants and options to purchase the Company's
common stock to officers, key employees, directors and outsiders as compensation
and for services rendered.
The Company measures compensation in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25 in accounting for stock
options issued to employees. No compensation cost has been recorded for warrants
and options issued to employees for the nine months ended September 30, 2002 and
2001 as the exercise price equaled or exceeded the quoted market price at the
date of grant.
The Company accounts for stock warrants and options issued to non-employees
under the fair value method, pursuant to SFAS No. 123, "Accounting for
Stock-Based Compensation." The fair value of these warrants and options was
calculated at the date of issuance using a Black-Scholes option valuation model
assuming an interest rate of 4.5% and volatility of 40%. These warrants and
options issued to non-employees have an expected life equal to their contractual
life.
During the nine months ended September 30, 2002, the Company issued 1,820,407
common shares of which 1,456,707 common shares were issued during the quarter
ended September 30, 2002. The shares were issued as follows: 20,000 shares with
an assigned value of $5,000 were issued to new employees pursuant to offers of
employment, 150,000 shares with an assigned value of $60,000 were issued for
consulting services, 100,000 shares with an assigned value of $25,000 were
issued upon the exercise of certain stock options. 50,000 shares with an
assigned value of $20,000 were issued in the quarter ended September 30, 2002 to
terminated employees as part of a severance package. The preceding issuances
were recorded in the statement of operations, as compensation expense, in the
amount of $110,000. 93,700 shares with an assigned value of $37,722 were
issued in settlement of trade accounts payable. 750,000 shares with an assigned
value of $300,000 were issued in the quarter ended September 30, 2002 in
consideration for the acquisition of Clearview and 656,707 shares were issued in
the quarter ended September 30, 2002 upon the exercise of certain warrants on a
cashless basis.
In addition the Company recorded stock-based compensation expense in the amount
of $69,425, comprised of $44,225 related to the issuance of warrants and $25,250
related to the re-pricing of warrants.
NOTE 8 - EARNINGS PER SHARE
The Company has reported earnings per share in accordance with SFAS 128,
"Earnings per Share." SFAS 128 requires the presentation of basic and diluted
earnings per share for companies with complex capital structures. Basic earnings
per share is computed by dividing the net profit or loss by the weighted average
number of shares of common stock outstanding during the period. As of September
30, 2002, certain executives, key employees and investors have been granted a
total of 11,143,015 warrants and options, 9,128,765 of which are currently
vested, to purchase shares of the Company's common stock. In addition, the
Company has issued a $100,000 convertible promissory note (see Note 4 -
Promissory Note Payable). In accordance with SFAS 128, the common stock that
would have been outstanding if the dilutive shares had been issued has been
included in the weighted average common shares for purposes of calculating
diluted earnings per share for the three and nine month periods ended September
30, 2002.
The following table shows how earnings per share were computed for the three and
nine months ended September 30, 2002 and 2001.
Three months ended Nine months ended
September 30 September 30
------------------------------------ ---------------------------------
2002 2001 2002 2001
------------------ ----------------- ----------------- ---------------
Basic earnings per share
Net income (loss) 245,792 (2,509,551) 579,181 (37,856)
Weighted average shares 13,506,037 10,510,651 12,941,518 10,510,651
Basic earnings per share $0.02 $(0.003) $0.04 $(0.24)
Diluted earnings per share
Net income (loss) 245,792 (2,509,551) 579,181 (37,856)
Interest on promissory note 9,868 - 18,060 -
Net income (loss) $255,660 $(2,509,551) $597,241 $(37,856)
Weighted average shares 13,506,037 10,543,984 12,941,518 10,543,984
Plus incremental shares based on options 5,071,354 - 5,635,873 -
and warrants currently vested and
convertible promissory note
Adjusted weighted average shares 18,577,391 10,543,984 18,577,391 10,543,984
Diluted earnings per share $0.01 $(0.03) $0.03 $(0.24)
As at September 30, 2001, 5,572,262 common shares related to warrants and
options were not included in the computation of diluted earnings per share for
the comparative three and nine month periods ended September 30, 2001, as the
results would be anti-dilutive since the Company reported losses from operations
in these periods.
NOTE 9 - 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 a select group of customers as follows:
3 Months Ended 9 Months Ended
September 30, 2002 September 30, 2002
-------------------- --------------------
WideOpenWest $90,000 8.4% $1,889,480 40.8%
Rogers Cable Systems 726,929 68.2% 1,724,508 37.2%
AOL / Time Warner 204,052 19.1% 857,568 18.5%
Other 45,817 4.3% 163,903 3.5%
-------------------------------------------------------------------------
Total sales $1,066,798 100.0% $4,635,459 100.0%
=========================================================================
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%
=========================================================================
Substantially all accounts receivable of September 30, 2002 and 2001 are from
these customers.
NOTE 10 - 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. 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. No further payments have been made to date. During
the second quarter of 2001, Mr. Mulholland loaned the Company an additional
$14,000 upon the same terms. On May 4, 2001 the Company executed a promissory
note with Mr. Mulholland in the amount of $53,759 the terms of which included
10% interest and due on demand or in 90 days from the date of the note,
whichever time was later, along with interest on the unpaid principal. As
previously disclosed, Mr. Mulholland brought a claim against the Company
relating to the payment of this note. As of September 30, 2002 settlement terms
were reached. The Company agreed to pay $60,000 plus interest to be paid in
equal monthly installments over 18 months.
On October 29, 2001 Tim Karnes resigned as a Director of the Company and entered
into a Memorandum of Understanding with the Company. Mr. Karnes and the Company
agreed that a total of $82,298 was owing to Mr. Karnes as of October 29, 2001,
included in which was the principal amount of $50,000 owing under a loan made in
1999 bearing interest at 10% per annum and due and payable upon receipt of any
bank loans, lines of credit, or other
equity or debt financing, interest accrued to date in the amount of $12,873 and
deferred salary in the amount of $21,918 net of an advance in the amount of
$5,000. Upon execution of the agreement $7,000 was paid to Mr. Karnes, to be
applied to the past due salary owing. As of September 31, 2002, Mr. Karnes was
owed $14,918 in deferred salary. The Company has agreed to repay the balance
owing to Mr. Karnes subject to raising equity financing. No further payments
have been made to date. The Company further agreed to issue Mr. Karnes 100,000
shares of common stock and/or options to purchase said stock, as may be agreed
by and between the Company and Mr. Karnes. On September 1, 2002 Mr. Karnes was
issued 100,000 five-year warrants with a strike price of $0.25. In addition, the
Company agreed to reduce the strike price of any and all options and/or warrants
currently issued and outstanding to Mr. Karnes to $0.15. On September 1, 2002
the strike price of Mr. Karnes 250,000 warrants was reduced to $0.15.
During the quarters ended September 30, 2002 and September 30, 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, 2002 was $337,865 of which the Chief Executive Officer deferred
$93,750. At September 30, 2001 deferred and accrued payroll was $932,923 of
which the Chief Executive Officer deferred $50,000.
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, 2001). 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 broadband market. Major cable operators engage
the Company's services to upgrade/expand, maintain and provision/control the
technical network infrastructure (cable plant facilities and networks)
underlying their delivery of new, robust broadband services: digital and
interactive cable TV, pay-per-view, alarm monitoring, high speed Internet
access, cable-phone (telephony), and smart home devices.
SALES
Sales for the third quarter and year to date 2002 were $1,066,798 and
$4,635,459, respectively. This represents a decrease of $276,167 or 20.6% from
the third quarter of 2001 and an increase of $18,678 or 0.4% year to date from
the results of 2001. The Company experienced a substantial reduction in its
revenue in 2001 primarily as a result of the reduction in capital expenditures
by its existing customers. In late 2001 the Company entered into a contract to
provide ongoing monthly maintenance services for WideOpenWest ("WOW"), a
multiple system operator ("MSO") operating in the Columbus, OH, Cleveland, OH,
Detroit, MI and Chicago, IL markets. The revenues from this contract contributed
to the increase in sales in the first half of 2002 over the first half of 2001.
In June 2002 WOW
terminated the contract with the Company in order to provide maintenance
services using in house staff. The revenues from this contract accounted for
approximately $300,000 per month from January 2002 to mid June 2002.
During the last two years, the telecommunications industry suffered a severe
downturn. The downturn adversely affected capital expenditures for
infrastructure projects in general, including with respect to users that had not
been experiencing financial difficulties. Capital expenditures by
telecommunications clients in 2002 are expected to remain at low levels in
comparison with prior years. Although we have refocused our business on
providing services generating recurring revenue from our customers operating
budgets and decreasing our services that require capital spending, there can be
no assurance that our clients will continue to outsource these operating
functions or fund capital expenditures for infrastructure projects at current
levels, or that we will be able to increase our market share. Further decreases
in our client's capital expenditures could reduce our cash flows and adversely
impact our liquidity.
COST OF SALES
Costs of sales are broken down into three major categories: direct, indirect and
depreciation costs. Direct costs, made up largely of labor and labor related
costs, represent those costs that are directly related to the production of
income and, within certain limitations, should be directly variable in their
relationship to sales. Indirect costs are generally made up of those
semi-variable production related overhead costs such as production supervision
wages and benefits, field office administration, field office rents and
supplies, and production vehicle leases and operating costs. The depreciation
charge included in the cost of sales is the portion of the total annual
depreciation charge that relates to those fixed assets, which are deployed on
projects.
Direct costs for the third quarter and year to date 2002 were $631,384 and
$2,539,494, respectively. This represents an increase of $61,652 or 10.8% from
the direct costs of $569,732 incurred in the third quarter of 2001 and an
increase of $394,732 or 18% from the direct costs of $2,144,762 incurred in the
year to date in 2001. The increase in direct costs as a percentage of revenue
was a result of the Company's increased use of subcontractors in capital project
work. The proportionately higher direct costs associated with providing services
related to cable operations rather than capital projects also resulted in higher
direct costs in the quarter. The Company incurred $108,074 (17.1% of direct
costs) in subcontractor costs during the quarter ended September 30, 2002 and
$324,007 (12.8% of direct costs) for the year to date. As a result the direct
costs as a percentage of the Company's revenues has increased from 46.4% for the
nine months ended September 30, 2001 (42.4% for the 3 months ended September 30,
2001) to 54.8% in the same period ended September 30, 2002 (59.2% for the 3
months ended September 30, 2002).
INDIRECT COSTS
Indirect costs for the third quarter and year to date 2002 were $339,199 and
$1,103,875, respectively. Indirect costs were reduced by $61,033 or 15.2% from
the third quarter of 2001 and were reduced by $594,014 or 35.0% from the year to
date in 2001. This category of expense includes the less variable type of
project expenses such as project supervisors and long term lease vehicle costs.
The Company reduced its indirect costs by reducing the number of unemployed
assets and by reducing the number of salaried supervisors. The Company used more
working supervisors whose wage expense was categorized as direct labor during
the quarter, fewer supervisors were required for the direct labor costs relating
to subcontractors, and fewer supervisors are required for non-capital project
direct labor.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses ("SG&A") decreased by 17.4% or
$91,986 to $437,448 (41.0% of revenue) from $529,434 (39.4% of revenue) during
the third quarter of 2002 compared to the third quarter of 2001. Year to date,
the Company decreased SG&A expense by 44.8% or $1,026,999 to $1,266,511 (27.3%
of revenue) from $2,293,510 (49.7% of revenue) in 2001. The reduction in SG&A
expense year over year is primarily attributable to a significant reduction in
executive management and administrative salaries and benefits, and office rent.
In the quarter, the Company has continued to reduce its expenditures as a result
of its second quarter reduction in its management. The Company's primary
objective has been to reduce SG&A expenditures to a level appropriate for the
Company's level of revenue and to concentrate on areas in which the Company
could achieve profitability.
DEPRECIATION AND AMORTIZATION
The consolidated fixed assets of the Company amount to $1,772,071 with a net
book value of $788,386. The most significant component of the fixed assets is
the technical testing equipment used by technicians 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 $51,315 and $59,388 for the quarters ended September 30, 2002 and
2001, respectively. Total consolidated depreciation expense was $158,850 and
$181,188 for the year to date in 2002 and 2001, respectively.
Amortization expense was $0 and $216,063 for the third quarter of 2002 and 2001,
respectively. Amortization expense was $0 and $648,189 for the year to date 2002
and 2001, respectively. The Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," in the current year. Previously, the Company amortized
goodwill over five years using the straight line method of amortization. If no
amortization had been expensed in 2001, the Company's net income would have been
$178,207 for the third quarter and net loss would have been $1,861,362 for the
year to date.
INTEREST
The Company incurred net interest expense of $14,210 for the quarter ended
September 30, 2002 and $26,624 for the year to date. In 2001 the Company
incurred net interest expense of $44,147 for the quarter ended September 30,
2001 and $156,835 for the year to date. The interest charges for 2002 are
largely related to the promissory note payable entered into in the second
quarter as well as interest on capital leases and interest accruals on
shareholder loans. 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 for technical testing equipment.
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.
In the second quarter of 2002 the Company received $100,000 in funding from a
private placement. Under the terms of the private placement, the Company offered
units consisting of a 10% convertible promissory note, in the principal amount
of $100,000, and a warrant to purchase 50,000 shares of common stock. The
warrants granted have a term of five years and a strike price of $0.50 per
share. The holders of units are granted a security interest in all of the
Company's assets. This security is subordinate only to any bank financing
secured by the Company.
At September 30, 2002, the Company had cash of $138,749, and the Company's
current liabilities of $2,037,189 exceeded its current assets of $1,431,894 by
$605,295 providing a current ratio of 0.70 to 1.0.
The Company's inactive subsidiary, CAD, had a working capital deficiency of
approximately $293,000. CAD's working capital deficiency includes unsecured
trade payables. Although CAD's creditors have no recourse against other
companies in the group, it is management's intention to settle the trade
payables by issuing shares of common stock of the Company.
The Company's operating subsidiary, TSI, had positive working capital of
approximately $341,936 at the end of the quarter ended September 30, 2002.
The Company is seeking additional funding in the near term to provide positive
working capital. Management is actively pursuing new sources of financing which
may include additional sales of the Company's securities to provide additional
working capital, fund future potential acquisitions and satisfy any unfavorable
judgments. However, despite the fact that historically the Company has
successfully obtained sufficient financing to meet its obligations, no
assurances can be provided as to the likelihood of its continued success. If
management is unable to successfully secure funding, it may be compelled to
consider other alternatives, including the liquidation of the Company.
Cash used for operating in the nine months ended September 30, 2002 equals
$367,183, which includes the reduction in current liabilities in the amount of
$375,960 due to the settlement of the litigation as discussed in Note 6 -
Commitments and Contingencies and Note 10 - Related Party Transactions. In
accordance with the terms of the settlement agreement, $236,620 of the remaining
liabilities has been reclassified as long term as this amount is not due within
the next twelve months. An additional amount of $318,240 is due within the next
twelve months, of which $275,000 the Company expects to be paid by its insurance
carrier. During the nine months ended September 30, 2002, the Company
experienced an increase in accounts receivable in the amount of $487,706,
$275,000 of which the Company expects to be paid to the Company by its insurance
carrier, as stated above, and approximately $129,000 relates to accounts
receivable held back by customers pending audit of completed capital projects.
During the nine months ended September 30, 2001 cash was provided through the
collection of accounts receivables and deferral of accounts payable.
Investing activities for the nine months ended September 30, 2002 required net
cash in the amount of $47,664 due to the acquisition of Clearview net of the
disposal of certain assets. Investing activities for the period ended September
30, 2001 provided net cash in the amount of $83,068 due to the disposal of
surplus fixed assets.
Cash provided by financing activities for the year to date ended September 30,
2002 amounted to $23,205 versus $324,033 used in financing activities in the
nine months ended September 30, 2001. This was comprised of the promissory note
proceeds of $100,000 and repayment of capital leases in the amount of $76,795.
During 2001, cash of $248,000 was used in the repayment of the Company's line of
credit.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and the Chief
Financial Officer ("CFO") of the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
Company's CEO and CFO have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the Exchange Act) are
effective. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these internal
controls subsequent to the completion of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended September 30, 2002, the Company entered into a
settlement agreement with plaintiffs Michael F. Mulholland, William F. Walsh,
Robert F. Bronner, Richard H. Steele and William J. Flounders. The Company
agreed to pay: (1) $275,000 within 30 days of settlement; (2) $60,000 plus
interest to be paid in equal monthly installments over 18 months, beginning at
the same time as payment of the $275,000 and (3) $200,000 plus interest at prime
rate plus 2 percentage points to be paid in equal monthly installments over 24
months, beginning in the thirteenth month, with no interest accruing during the
first twelve months. The Company expects its insurance carrier to provide
$275,000 towards the settlement.
As previously reported, the Company was 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 memorandum of understanding entered into at that time by such
individuals. The terms of that agreement were previously disclosed in the
Company's Current Report filed on Form 8-K as filed on May 31, 2001. The
plaintiffs alleged, among other things, that because the Company failed to
timely pay approximately $660,000 in amounts claimed under the memorandum of
understanding for back wages, they were 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 named
Messrs. Joseph Melanson, the Company's CEO, and Hovey Aiken III as defendants.
In addition to compensatory damages, the plaintiffs sought
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. This litigation was settled pursuant to the
settlement agreement described above.
The Company was also served with a complaint from Mr. Mulholland filed on
January 10, 2002, in the Court of Common Pleas of Montgomery County,
Pennsylvania. The complaint alleges that the Company is in default of its
payment obligations under a promissory note delivered by the Company on May 4,
2001. Mr. Mulholland is seeking damages in the amount of $63,430 consisting of
$53,759 for the unpaid balance under the promissory note, $3,709 in interest
accrued to January 10, 2002 and $5,962 in legal fees and other costs. This
litigation was also settled pursuant to the settlement agreement described
above.
The Company has been served with a complaint from a former vendor, Jackson
Engineering, 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 intends
to vigorously pursue its counterclaim and its defense against this claim.
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 a material adverse effect on the Company's consolidated
financial position but may have a material impact on results of operations in a
given period.
For a discussion of certain other legal proceedings to which the Company is a
party, see the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2001.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2002, the Company issued 1,456,707 common
shares as follows: 50,000 shares were issued to an employee as part of a
severance package, with an assigned fair value of $20,000; 750,000 shares were
issued in consideration for the acquisition of Clearview, with an assigned fair
value of $300,000; and 656,707 shares were issued upon the exercise of certain
warrants on a cashless basis. In addition, during the second quarter 2002,
connection with a private placement, the Company issued five year warrants for
the purchase of 50,000 shares of common stock at an exercise price of $.50 per
share and a convertible promissory note in the principal amount of $100,000,
which can be converted into 200,000 shares of common stock. These issuances were
intended to be exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) and/or Regulation D promulgated thereunder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.3 Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
99.4 Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C.ss.1350, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
DATE OF REPORT ITEMS REPORTED DESCRIPTION
September 17, 2002 Item 2 Current Report -
Acquisition of Assets
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 19, 2002
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Joseph M. Melanson
Chairman and Chief Executive Officer
/s/ Jill Macdonald Date signed: November 19, 2002
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Jill Macdonald,
(Chief Financial Officer)