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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 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 No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
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(212) 271-7640
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(Registrants telephone number, including area code)
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Redeemable Class A Warrants
Redeemable Class B Warrants
Units consisting of Class A Common Stock,
Redeemable Class A Warrants and
Redeemable Class B Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained herein, and will not be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |_|
As of October 26, 2001 the issuer had outstanding 9,778,106 shares of
Class A Common Stock and 1,930 shares of Class B Common Stock that are
convertible into Class A Common Stock. The aggregate market value of the Class A
Common Stock held by nonaffiliates as of October 26, 2001 was approximately
$28,845,413 based on a closing price for the Class A Common Stock of $2.95 on
the Nasdaq National Market on such date.
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INTERNET COMMERCE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I .................................................................... 1
Item 1. Business............................................... 1
Item 2. Description of Properties..............................12
Item 3. Legal Proceedings......................................12
Item 4. Submission of Matters to a Vote of Security Holders....12
PART II ....................................................................13
Item 5. Market for Internet Commerce Corporation's Common
Equity and Related Stockholder Matters.................13
Item 6. Selected Consolidated Financial Data...................15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................26
Item 8. Financial Statements and Supplementary Data............26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................27
PART III ....................................................................28
Item 10. Directors and Executive Officers of Internet
Commerce Corporation...................................28
Item 11. Executive Compensation.................................31
Item 12. Security Ownership of Certain Beneficial Owners
and Management.........................................35
Item 13. Certain Relationships and Related Transactions.........36
PART IV ....................................................................37
Item 14. Financial Statements, Financial Statement Schedules,
Exhibits and Reports on Form 8-K.......................37
Signatures ........................................................40
PART I
Item 1. Business
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this annual report regarding our
financial position, business strategy and plans and objectives of management for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this annual
report, the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
"cautionary statements" reflect our current view with respect to future events
and are subject to risks, uncertainties and assumptions related to various
factors including, without limitation, those described below the heading
"Overview", those described starting on page 23 of this annual report and in our
registration statements and periodic reports filed with the Securities and
Exchange Commission under the Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this annual report as anticipated, believed,
estimated, expected or intended.
Overview
Internet Commerce Corporation, a leader in the e-commerce
business-to-business communication services market, provides complete electronic
commerce ("EC") infrastructure solutions.
Our business operates in three segments. These three segments are:
o ICC.NET (formerly named CommerceSense(R)) - Our ICC.NET
service, the Company's global Internet-based value added
network or VAN, uses the Internet and our proprietary
technology to deliver our customers' documents and data files
to members of their trading communities, many of which may
have incompatible systems, by translating the documents and
data files into any format required by the receiver. We
believe that our ICC.NET service has significant advantages
over traditional VANs, and email-based and other
Internet-based systems, because our service has a lower cost,
greater transmission speed and more features. ICC.NET provides
the following services:
o Traditional VAN services -- our ICC.NET service
provides the full suite of traditional VAN services,
but uses the Internet to provide cost savings and
increased capabilities for our customers;
o Electronic data interchange ("EDI") for web-based
retailers -- our ICC.NET service provides an
electronic document and data file delivery link
between web-based retailers and their vendors that
require that documents and data files be transmitted
using EDI format;
o EDI-to-fax service -- our ICC.NET service can
translate electronic documents into fax format and
send the documents by fax to our customers' trading
partners that cannot receive electronically
transmitted documents; and
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o Large-scale electronic document management and
delivery -- our ICC.NET service can transmit
large-scale non-EDI electronic documents and data
files and provide real-time delivery, archiving,
security, authentication and audit services.
o Professional Services - Our professional services segment
facilitates the development and operation of comprehensive
business-to-business e-commerce solutions. We provide the
following professional services:
o EC infrastructure solutions by providing mission
critical e-commerce consulting, software, outsourced
services, translation/mapping and technical resource
management;
o On-site and off-site data mapping services to
maximize productivity and efficiency in managing
inter-company and intra-company data transaction
requirements;
o HIPAA (Health Insurance Portability and
Accountability Act) impact and data gap analysis for
health care providers and payers. We can design,
build, test and rollout systems to ensure compliance
with Federally mandated standards for health care
data; and
o A series of product-independent EDI seminars for
e-commerce users. The seminars are hosted by leading
universities and training facilities in the United
States. We also develop in-house EDI training
programs and offer public seminars for understanding
and implementing HIPAA regulations.
o Service Bureau - Our service bureau manages and translates the
data of small and mid-sized companies that exchange EDI data
with large companies and provides the following services:
o Receives electronic purchase orders from large
retailers and converts the purchase orders into hard
copies or other alternative formats and delivers
those documents to their suppliers that are our
customers;
o Converts paper or other alternatively formatted
invoices from our customers into EDI format that is
transmitted to their trading partners;
o Provides UPC (Universal Product Code ) services for
ASN (Advanced Ship Notice) Casing & UCC (Uniform Code
Council) 128 labels; and
o Maintains UPC catalogs allowing our customers to
generate the UPC numbers and tickets for the items in
the UPC catalogs.
We are subject to various risk factors which are described starting on
page 21 of this annual report.
Corporate background
The Company was incorporated under the name Infosafe Systems, Inc. in
November 1991 in the State of Delaware. Our principal executive offices are
located at 805 Third Avenue, New York, NY 10022. Our telephone number at that
address is (212) 271-7640. References in this annual report to the "Company",
"ICC", "we" or "us" mean Internet Commerce Corporation, a Delaware corporation,
and its subsidiary on a consolidated basis, unless the context otherwise
requires.
Industry Background
We believe that although the Internet has become an important new sales
channel, its primary value will be in achieving business efficiencies and cost
savings by expanding global business-to-business connectivity.
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In an increasingly global economy, we believe that improvements in
speed and efficiency in the supply chain between businesses are important and
improvements in the capacity of a business to buy and sell goods and services or
raw materials within its business community become an important factor in its
ability to compete. Thus, for example, in a just-in-time economy, timeliness,
and not price, may be the most important component in creating a competitive
advantage.
The speed and efficiency of the supply chain are hindered by
incompatibilities in technologies and methodologies used to communicate business
information among trading communities, which slow down the flow of information
and create bottlenecks. These incompatibilities stem from the diversity of
trading partners, which may range from members of the Fortune 1000 to sole
proprietors providing niche products. Trading partners may therefore have
different communications capabilities and requirements. Some trading partners
may rely on paper or fax to communicate, others exchange data in proprietary
file formats through direct dial-up connections or over the Internet, while the
largest trading partners use electronic methods such as EDI over VANs.
Development of our business
Through July 2000, our business was entirely focused on our ICC.NET
service. Our ICC.NET service is currently in use by our customers for the secure
exchange of business-to-business electronic forms and data files.
In addition to our continued development and enhancements of our
ICC.NET service, we made two acquisitions during fiscal 2001, which enable us to
offer a more complete range of services to allow our customers to expand their
EC trading communities and bridge their legacy systems to the internet.
In August 2000, we acquired Intercoastal Data Corporation, referred to
as IDC, through which we acquired our service bureau segment. IDC is engaged in
the development, marketing, sale and other exploitation of business-to-business
EDI standards-based applications for standard-based EDI exchange over
value-added networks, private networks, exchanges, extranets and the Internet.
In November 2000, we completed the acquisition of Research Triangle
Commerce, Inc., referred to as RTCI, through which we acquired our professional
services segment. RTCI is an EC infrastructure solutions company serving the
business-to-business e-commerce market. RTCI helps its clients conduct business
electronically through a continuum of services, including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking. RTCI has developed a
business model that offers remote service delivery, fixed and value-based
pricing and reusable solutions. Subsequent to the acquisition, due to a
reduction of the workforce of RTCI, a steep decline in the value of companies
similar to RTCI, continued operating losses and a significant reduction in the
forecasted operating profits of our professional services segment, management
determined that triggering events had occurred related to certain acquired
intangible assets. Projected cash flow analysis related to those assets
determined that the assets had been impaired. These intangible assets were
written down to fair value based on the related discounted expected future cash
flows. During the year ended July 31, 2001, the Company recorded an impairment
charge of $16,708,479 related to the intangibles acquired from RTCI.
Business Strategy
We believe that our ICC.NET service provides a platform with many
applications that will allow our customers to fulfill a substantial portion of
their electronic document and data delivery requirements with significantly less
administrative effort and cost. We believe that ICC.NET will allow our customers
to send us the majority of their important documents and data files which we
will then be able to transmit to each of the intended recipients in any form
requested by the recipient. Our customers will thus be able to integrate a
substantial portion of their document and data file delivery methods into a
single, seamless process.
A large company that uses EDI to communicate with its vendors is
referred to as a hub; its trading partners, vendors or customers, are referred
to as spokes. We intend to continue to market ICC.NET as a one-stop electronic
document and data delivery service to the 2,500 largest hub companies in the
United States. Due to the cost to the spoke companies of implementing EDI and
using VANs and other electronic document delivery methods, large hub companies
are currently connected electronically to only a small percentage of their
potential spoke companies.
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We intend to continue to market ICC.NET to new customers with an
increasing focus on industries in which ICC.NET has enjoyed significant
penetration and revenues. Those industries include book retailing and
publishing, pharmaceutical manufacturing, footwear manufacturing, office
supplies and transportation logistics.
We believe that a significant number of these hub companies intend to
expand the use of electronic commerce to more of their spoke companies. Small
spoke companies using our ICC.NET service require only an Internet connection
and a web browser to receive and transmit documents electronically and, we
believe, will also be able to receive electronic documents using our ICC.NET fax
service. As a result, large hub companies may now be able to request or
encourage electronic commerce with their small spoke companies. In turn, many of
these spoke companies may become the hub companies for their suppliers, which
should further broaden the reach of our ICC.NET service.
Additionally, we will focus on marketing ICC.NET to other members of
the trading communities of our existing customers and we will pursue
opportunities to cross-sell our services to the customers of our several
business segments.
Our current customers conduct their business internationally, and we
are servicing these customers and pursuing new international customers in Europe
and other places outside the United States. See "International" below.
We intend to encourage the use of our ICC.NET service through
exceptional customer service. We currently offer technical support to our
customers twenty-four hours a day, seven days a week. Due to the multiple
redundancies of all of our systems and the stability of the Securities Industry
Automation Corporation, or SIAC, which is the location of our data center, our
ICC.NET service has been fully operational more than 99% of the time. SIAC runs
all computing operations for the New York Stock Exchange and the American Stock
Exchange.
We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that period-to-period
comparisons of our operating results for any particular period will not
necessarily indicate our future performance.
Services and products
ICC.NET, our global Internet-based value added network, or VAN,
provides complete supply chain connectivity solutions for electronic data
interchange, or EDI, and e-commerce and offers users a sophisticated vehicle to
send and receive files of any format and size securely. We also offer a broad
range of consulting services, including XML technologies, data transformations,
custom application development, comprehensive e-commerce education and an EDI
service bureau. The following summarizes the principal services and products
offered by our three operating segments, namely our ICC.NET service,
professional services and service bureau.
ICC.NET Service
We believe that our ICC.NET service provides a solution to the
communication difficulties caused by the differences in data formats, networks
and communications methods used by the members of trading communities, and thus
bridges the incompatibility gap and enables seamless electronic business
communication. Our ICC.NET service can translate incompatible files into a
format any user is capable of receiving and uses the Internet to transmit the
data file by EDI, fax or other format. We believe that users of our ICC.NET
service can thus improve their productivity and reduce their costs by enabling
electronic business-to-business transactions between parties with different
systems.
We believe that our ICC.NET service improves the basic infrastructure
of business-to-business electronic communications by providing intelligent
messaging and routing using the Internet, which, we believe, improves the
security, reliability, ease of use and acceptability of using the Internet for
business-to-business electronic commerce. ICC.NET performs these functions
without requiring that the user purchase software and at prices that in our
belief, are significantly less than the prices currently charged by traditional
VANs.
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We designed our ICC.NET service to avoid what we believe are
inefficiencies in traditional VAN services, software products and phone and
manual fax processes, which we believe are more expensive, slower and more
difficult to use than our ICC.NET service. ICC.NET incorporates proprietary
technology and is immediately accessible using a standard Internet connection
and a web browser.
Our ICC.NET service uses the Internet to deliver more features than
traditional VANs, including the following:
o Documents are delivered up to 100 times faster, depending upon
the speed of the customer's Internet connections;
o Our customers may more effectively track, monitor and process
business documents and other data files using our real-time
document management java-applet screen displays;
o Our ICC.NET service allows us consistently to provide
confirmed delivery of documents and other data files;
o Documents can be delivered either in real-time or retrieved
when convenient for the customer. Real-time delivery reduces
the potential for document corruption, bottlenecks and other
problems associated with batch delivery modes, which are
traditionally store-and-forward and in some cases can take
several hours to be delivered;
o Our ICC.NET service can handle data transmissions other than
standard business documents, such as images, engineering
drawings, architectural blueprints, audio and some types of
video; and
o Our customers enjoy flexibility in creating different document
types and formats for various business applications. For
example, our customers can add their business logo to their
documents and can use their own format for each document type.
In addition, we believe our ICC.NET service offers advantages over
e-mail and other Internet-based electronic commerce systems, such as a full
range of VAN services, translation of a wide variety of data into
customer-specified formats, management of business documents or data files of
virtually any size and of a wide variety, including purchase orders, invoices,
statements, inventory tracking and shipping documents, images, engineering
drawings, architectural blueprints, audio and some types of video. Our ICC.NET
service also provides a complete audit trail of content delivery and customer
selection from a variety of security methods.
We believe that ICC.NET is one of the only Internet-based data
transmission services that is approved to interconnect with approximately fifty
traditional VANs, private networks and exchanges that currently provide EDI
services for approximately 90% of companies we estimate are capable of using
EDI. As a result, we can handle EDI traffic between our customers and any of
their trading partners that choose to continue to use a traditional VAN and a
customer that uses a traditional VAN and its trading partners that do not. The
ability to interconnect provides our customers with the possibility of maximum
penetration into their trading partner community.
EDI for web-based retailers. We provide an electronic document and data
file delivery link between web-based retailers and their vendors. We believe
that many larger vendors require that product orders and other documents be
transmitted using EDI. Web retailers can use our ICC.NET service to comply with
this requirement and thus can reduce their costs and improve their ability to
locate, order, track and deliver products. Our ICC.NET service can process
purchase orders, invoices, order status reports and other files transmitted
between web-based shopping portals of electronic retailers and their vendors,
distributors and manufacturers and can also manage critical logistics delivery
files. Due to the special requirements and rapid growth of these new web-based
retail companies, we have a dedicated web retailer sales and support team that
offers these retail companies the option to outsource to us all of their
electronic document and data file delivery requirements.
EDI for the health care industry. We offer services for the
implementation of EDI healthcare transactions mandated by the administrative
simplification regulations of the Health Insurance Portability and
Accountability Act (HIPAA). Standards developed by ANSI (American National
Standards Institute) apply to Health Plans,
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Clearinghouses and Healthcare Providers who transmit information electronically.
By combining our expertise in traditional EDI and HIPAA requirements with the
client company's knowledge of its operations and systems, we form partnerships
aimed at HIPAA compliance. Our ICC.NET service facilitates the exchange of
healthcare eligibility and enrollment forms, care review, patient information,
claims and claim status and payments.
Large-scale electronic document management and delivery. Our ICC.NET
service can electronically transmit large-scale non-EDI electronic documents and
other large files, which may include catalogs, engineering drawings, graphics
and some types of video. ICC.NET allows customers to manage and distribute large
files in real-time and provides archiving, security, authentication and audit
services. ICC.NET will support both a publish/subscribe configuration, in which
a customer can publish any number of files for subscribers authorized by the
customer to view and/or download, and a point-to-point-delivery configuration
that operates like our ICC.NET VAN service.
EDI to fax service. Traditional EDI users can convert electronic
documents into a faxable format and fax the documents manually to their trading
partners that cannot receive electronically transmitted documents in EDI. Our
ICC.NET IP-based world-wide fax service allows our customers to send a document
electronically, which we then electronically convert and fax to any of our
customer's trading partners that cannot receive electronically transmitted
documents and that specify they want to receive the document by fax.
Professional Services
Our professional services facilitate the development and operations of
comprehensive business-to-business electronic commerce solutions. We specialize
in EC solutions involving EDI and EAI (Enterprise Application Integration) by
providing mission critical EC consulting, EC software, outsourced EC services
and technical resource management.
EDI Mapping Factory(R). We are a first-class provider of EDI mapping
services. Our EDI Mapping Factory(R) experts provide off-site mapping using a
variety of translators on a variety of platforms. Our experience includes
mapping for ANSI ASC X12 Transaction Sets, UN/EDIFACT messages, HL7, XML and
many other standards, including the use of SAP IDOCs. We can also provide data
transformation services for database conversions, client specified files and
other tasks involving the care and movement of data. Our systems and technicians
can handle virtually any environment necessary, including Windows, NT, UNIX,
AS/400 and mid-range systems.
Custom Solutions. Our Custom Solutions group provides programming
solutions designed to fit our customers specific needs. We can build web-based
applications for both customer end users and servers. We provide a comprehensive
and integrated design or redesign of our customers entire internal EC/EDI
environment.
Consulting Services. Our Consulting Services group brings industry
specific experience and high-level expertise to our customers. We have the EC
consulting expertise to support our customers information technology functions.
Our professionals work as a member of our customer's staff and under their
control, while our management team visits regularly to ensure their
satisfaction. We have also initiated a special focus on the Healthcare industry
involving the analysis, design and construction of solutions that address HIPAA
compliance.
Education. We offer EC and EDI education and training resources through
a series of product-independent one-day seminars hosted by leading universities
around the United States. These seminars address the basic components of EDI,
software, networks, standards, trading partner issues, business management
issues and specific industry-related issues. Special classes are arranged for
our customers at their locations. We also offer public and private two-day
seminars that focus on Healthcare EDI and HIPAA requirements. Building on our
core education program, these seminars emphasize the use of EDI within the
healthcare industry by addressing standards and using exercises to upgrade
student knowledge of claim processing and remittance transactions.
XML Services. Our significant experience in the use of XML for
conducting EDI helps our customers move into the use of XML for
interoperability. We can assist our customers with all phases from the basic
system concept to mapping our customers' legacy data into the new forms needed
for XML. We have been active in the
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development of the draft and experimental standards for the use of XML for
messaging systems, and continue on the forefront of this technology as it moves
to greater use and acceptance.
The Service Bureau
Our EDI and UPC service bureau allows vendors to continue using paper
transactions while providing trading partners with the EDI compliance they
demand. Since IDC's per-document fees are only a fraction of the processing
charges imposed by most retailers, vendors can save money while testing the
benefits of EDI for themselves.
Retail Supply Chain Documents. We can receive, translate and print
purchase orders, invoices, product activity data and other data from most major
retailers. In addition, we can send or receive a receipt acknowledgement for
each document to the retailer. We also offer a manual purchase order service.
UPC Label, Ship Notices, UCC 128 Service. With our Calculated Casing
Solution, using our proprietary algorithm, our customers don't need to own
expensive hardware to create the required bar coded UCC 128 carton labels. We
also generate UPC numbers for our customer's products, load and maintain UPC
information on the network UPC catalogs, and print UPC tickets for our
customer's products.
Our UPC Service Bureau provides our customers with smooth loading and
maintenance of their UPC information into the ICC Catalog and other electronic
UPC catalogs.
Our service bureau also offers an assortment of software products. Our
principal software products are:
o EZ-EDI(TM) translator package receives electronic purchase
orders via the major networks, prints purchase orders, holds
the orders in an open orders file for possible changes and
sends electronic invoices back to the retailer. It allows our
customers to manage their orders with ease - changing
quantities and prices as needed, adding manual orders,
backordering and deleting orders which can not be filled.
o UPC Manager(TM)allows our customers to create an 832 EDI
document (sales catalog) and provides an automatic link to
network UPC catalogs. UPC Manager(TM)allows our customers to
add, change and delete information in their in-house UPC
catalogs, the local repository of their UPC product
information. UPC Manager(TM)automatically generates proper UPC
numbers for products that do not have UPC numbers assigned and
accepts current UPC numbers for products with them. Tracking
active, inactive and dead UPC numbers for the appropriate time
intervals, UPC Manager(TM)also provides extensive error
checking on in-house catalog data to ensure that information
sent to the networks is valid.
o ScanPak Plus(TM) lets our customers scan merchandise and
automatically create a bar code label for each case as it is
packed at one or several locations. Keyboard use at packing
stations can be virtually eliminated. ScanPak Plus(TM)
interfaces with EZ-EDI(TM) software or any other third party
EDI software which meets its interface file specifications. It
electronically verifies the contents of each case against
purchase orders. From the casing information created by
ScanPak Plus(TM) our customers can generate and transmit
accurate EDI ship notices to retailers, using EZ-EDI(TM) or
third party EDI software.
Software sales have not been a significant source of revenue during
2001.
In September 2001, we completed a web-based product catalog ("ICC
Catalog") for use in the retailer-vendor business community. The ICC Catalog
enables vendors that supply goods to retailers to create, store and maintain a
web-based online database of their product information. The vendor's retail
customers can access electronically and selectively download the product
information. Both the retailer and the vendor can access the ICC Catalog
worldwide using the Internet on a continuous basis. The ICC Catalog has been
developed as a web-based application with the capability for online immediate
update of product information by the vendor as well as the
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traditional use of an EDI 832 Price/Sales Catalog document for updating the
vendor's catalog.
The ICC Catalog is a feature-rich product designed to help increase the
profitability of both the retailer and the vendor by ease of use, global
multilingual access, rapid availability of information and competitive pricing.
Financial information about our business segments can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and in Note 15 of the notes to our consolidated
financial statements included elsewhere in this annual report. Our revenue by
geographic region is set forth in Note 14 of the notes to our consolidated
financial statements.
International
In August 2001, Triaton GmbH ("Triaton"), a member of the ThyssenKrupp
Information Services Group GmbH, launched our Internet based VAN service in
Europe and has begun actively marketing the ICC VAN service to its existing
customers. Triaton will soon begin a broader outreach with its dedicated sales
force of electronic commerce professionals supporting the new co-branded service
offering.
In addition, ICC and Triaton intend to establish an ICC.NET data
platform for operation by Triaton in Europe which will be connected with ICC's
network. Triaton will initially focus its sales and marketing efforts on the
major continental European markets and will provide international language
support, initially German with French and other primary European languages to
follow.
Our five-year agreement with Triaton provides Triaton with principal
partner status in the form of European hosting rights for ICC services. The
agreement, as amended in July 2001, requires minimum payments of $8 million to
be paid to ICC over the period ending in July 2003. We have already received $1
million under this agreement. Triaton has also advanced $250,000 for services
and reimbursable expenses expected to be provided by ICC to Triaton in addition
to those required under the original agreement.
We also have an agreement with Cable & Wireless to resell our services
in the United States and Europe. No significant sales have been realized through
our relationship with Cable & Wireless through July 31, 2001.
Competition
Our principal competitors include: Peregrine Systems, Inc., GE Global
eXchange Services, a subsidiary of GE Information Services, Inc., International
Business Machines Corporation Global Services, Sterling Commerce, Inc., a
subsidiary of SBC Communications Inc., EasyLink Corp. and WorldCom, Inc. Each of
these competitors has an established VAN that has provided EDI for at least
several years and has long-established relationships with the users of EDI,
including many of our prospective customers.
Our market is characterized by rapidly-changing technology, customer
demands and intense competition. The Internet's recent growth and the intense
competition in our industry require us to continue to develop strategic business
and Internet solutions that enhance and improve the customer service features,
functions and responsiveness of our ICC.NET VAN and other proposed services and
that keep pace with continuing changes in information technology and customer
requirements. If we are not successful in developing and marketing enhancements
to our ICC.NET VAN service or other proposed services that respond to
technological change or customer demands, or otherwise are not able to compete
effectively against our current and future competitors, we may lose customers,
may need to lower our prices, may experience reductions in gross margins,
increases in marketing costs or losses in market share, or may experience a
combination of these problems and, as a result, our business will suffer.
Many of our current and potential competitors have significant existing
customer relationships and vastly larger financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
respond more quickly to changing technology and changes in customer requirements
or be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
customers and employees, or be able to devote greater resources to the
development, promotion and sale of their services than we can. As a result, we
may not be successful in competing against competitors.
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Furthermore, we rely on many of our competitors to interconnect with
our service at reasonable cost. In September 2001, one of our competitors
terminated an existing interconnect agreement and we made alternative
arrangements to serve these customers.
If we are successful in utilizing our ICC.NET platform to provide new
services, we may enter into different markets and may face the same or
additional competitors, most of which will have substantially greater financial
and other resources than we do.
Patents and Trademarks
Patents
On August 26, 1997, ICC was granted patent No. 5,661,799, entitled
Apparatus and Storage Medium for Decrypting Information. The essential
components of this patent include 1) the decryption of encrypted information
without requiring that decryption keys be transmitted from one place to another,
2) the decryption of encrypted information which employs different keys for
different segments of information and 3) the disabling of a system for the
decryption of encrypted information if a user is no longer authorized to
retrieve information.
On January 7, 1997, ICC was granted patent No. 5,592,549, entitled
Method and Apparatus for Retrieving Selected Information from a Secure
Information Source. The important components to this "Branding Patent" are: 1)
decryption of an electronic item or product, such as a document or software, 2)
the attachment of an identifying serial number and 3) the logging of the item
number and serial number. By attaching a "brand" at the time the document is
decrypted from a secure data source, an "audit trail" of the decrypted
information can be maintained.
In December 1995, ICC was granted patent No. 5,473,687, entitled Method
for Retrieving Secure Information from a Database, covering its technology for
providing a secure method for the commercial distribution and use of digital
information on a rental basis using a technique to discourage long-term use
without endangering the computer or the operating system.
In February 1995, ICC was granted patent No. 5,394,469, entitled Method
and Apparatus for Retrieving Secure Information From Mass Storage Media, for its
system to retrieve and monitor the use of protected information from various
digital media.
We rely upon this encryption and authentication technology to provide
secure transmission of confidential information. If our security measures do not
prevent security breaches, we could suffer operating losses, damage to our
reputation, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
that render current encryption technology outdated may result in a breach of our
encryption and authentication technology and could enable an outside party to
steal proprietary information or interrupt our operations.
Uncertain Patent Protection
Although ICC has obtained the patent rights described above, we believe
that the protection of our rights in our ICC.NET service will depend primarily
on our proprietary software and messaging techniques which constitute "trade
secrets." ICC has made no determination as to the patentability of these trade
secrets. ICC will continue to evaluate, on a case-by-case basis, whether
applying for additional patents in the future is in our best interest. There can
be no assurance that our technology will remain a secret or that others will not
develop similar technology and use such technology to compete with us.
In addition, there can be no assurance that any issued patents owned by
ICC or our trade secrets will afford us adequate protection or not be
challenged, invalidated, infringed or circumvented, or that patent applications
relating to our products or technologies that we may file or license in the
future, including any patent as to which a notice of allowance was issued, will
result in patents being issued, or that any rights granted thereunder will
provide competitive advantages to ICC. Although we believe that our technology
does not infringe upon the proprietary hardware or software of others, it is
possible that others may have or be granted patents claiming products or
9
processes that are necessary for or useful to the development of our ICC.NET
service and that legal actions could be brought against us claiming
infringement. In the event that we are unsuccessful against such a claim, we may
be required to obtain licenses in order to develop, manufacture or market our
products and services. There can be no assurance that we will be able to obtain
such licenses on commercially reasonable terms, if at all. If we are required to
and do not obtain such licenses, we will encounter delays in the development and
manufacturing of our products and technologies while we attempt to design around
such patents or other rights and there can be no assurance that such attempts
would be successful. Failure to obtain such licenses or to design around such
patents or other rights would have a material adverse effect on our business.
Trademarks
ICC's trademarks ICC.NET, INFOSAFE, PROTECTED BY INFOSAFE,
COMMERCESENSE, COPYSAFE, DESIGN PALETTE, EDI ASSISTANT and EDI MAPPING FACTORY
have been registered with the United States Patent and Trademark Office. The
applications to register AUDINET, B2B4B2C, B to B for B to C, E-COMMERCE MADE
EASY, KNOW WHER YOU'RE GOING, KNOW HOW TO GET THERE, XML ASSISTANT, XML MAGIC
and XML WIZARD have now been allowed as trademarks and await registration. We
intend to apply for additional name and logo marks in the United States and in
foreign jurisdictions. No assurance can be given that registrations will be
issued on the allowed applications or that interested third parties will not
petition the United States Patent and Trademark Office to cancel our
registration.
The validity, enforceability and scope of protection of some types of
proprietary rights in Internet-related businesses are uncertain and still
evolving. If unauthorized third parties try to copy our service or our business
model or use our confidential information to develop competing services, we may
lose customers and our business could suffer. We may not be able to effectively
police unauthorized use of our technology because policing is difficult and
expensive. In particular, the global nature of the Internet makes it difficult
to control the ultimate destination or security of software or other data
transmitted. The laws of other countries may not adequately protect our
intellectual property.
Sales and Marketing
We employ a variety of marketing initiatives, including print
advertising and trade show representation to enhance awareness of our ICC.NET
and other services and products in the electronic commerce community and to
increase our sales domestically and internationally.
Direct Marketing through Sales Force. Direct sales to large
corporations by our own sales force form the core of our sales strategy. ICC has
started a program to leverage and augment our sales force by developing reseller
and agent programs with major organizations. The most significant of these is
our relationship with Triaton. See "International" above for information about
our relationship with Triaton and Cable & Wireless. ICC's sales force currently
consists of 10 professional sales staff and support personnel that cross-sell
our services and products and is planned to be increased. Our sales force
consists of field sales representatives who provide direct assistance with sales
calls at customer sites and must meet target quotas. These representatives are
supported by technical personnel based in the field. All field sales personnel
report to our Vice President of Sales.
Indirect Marketing through Hub Companies. We believe that smaller spoke
companies comprise a significant potential market that may be reached without
any direct marketing on our part, because the low cost of our ICC.NET service
should allow these smaller spoke companies to consider using our service if
requested to do so by their hub companies.
Seminars and Tradeshows. We conduct seminar marketing, consisting of a
traveling road show providing targeted group demonstration and selling
activities to pre-qualified audiences invited to events in their own localities
by direct mail and advertising supported by telemarketing confirmation. ICC has
expanded its participation in industry tradeshows and has personnel which focus
solely on this area. We plan to staff national shows with sales, support and
executive personnel from our headquarters.
10
Web-based and Print Advertising. We use both web-based and traditional
print advertising. Our web site embodies a variety of promotional features. ICC
maintains a print advertising media campaign to generate sales leads and
increase brand recognition.
Strategic Relationships. We have relationships with general consulting
firms and others in which the firms recommend our products and services as part
of their project or product recommendations. In addition, we currently have
custom-designed interfaces in purchasing software packages, which commonly have
an EDI component. We continue to offer to create custom-designed interfaces to
the twenty largest companies that produce purchasing software. We believe that
an interface with our Internet-based electronic commerce system will appeal to
the software companies' desire to highlight the cutting-edge character of their
software. The software companies will not incur any costs by adding our
interface, since we are developing the interfaces to increase the number of
users of our ICC.NET service rather than to produce revenues by selling the
interfaces.
Technical Support
We provide technical support twenty-four hours a day, seven days a week
for all our ICC.Net customers. For new users of our ICC.NET service, we provide
education about the application and correctly configure the users' computer
systems. We also provide ongoing assistance for previously-installed users. Due
to the multiple redundancies of all of our systems and the stability of SIAC,
our ICC.NET service has been fully operational more than 99% of the time.
Customers
We currently provide services to approximately 1,000 customers.
Approximately half of these customers use our ICC.NET service and represent a
variety of industries including pharmaceutical, publishing, office supplies,
e-tailing, manufacturing and retail. Customers in these and other industries
include American Power Conversion Corporation, AOL Timer Warner, Barnes & Noble,
Inc., Bethlehem Steel, BMG Entertainment, Brother International Corporation, CIT
Group, Inc., Colgate-Palmolive, Hastings Entertainment, Inc., Linens n' Things,
Inc., Mack Trucks, Inc., The McGraw-Hill Companies, Inc., Pfizer Inc, Pier 1
Imports, Random House Inc., Revlon, Inc, Sector Communications, Inc., a SIAC
company, Simon & Schuster, Inc., TravelCenters of America, Inc. and Verizon
Wireless.
The customer base of our professional services segment changes
frequently due to the nature of service contracts. Current customers include
Preferred Care, Atlantic Tech Services and Boeing.
Our service bureau provides service to approximately 500 customers,
including Jacobson Stores Inc.
Triaton accounted for 11% of our consolidated revenues, or 22% of our
ICC.Net business segment, during the year ended July 31, 2001. No single
customer accounted for a material portion of our revenues during the years ended
July 31, 2000 or 1999.
Research and Development
Research and development costs related to the maintenance and
improvement of our ICC.NET service amounted to $931,000, $702,000 and $517,000
for the years ended July 31, 2001, 2000 and 1999, respectively.
Employees
At July 31, 2001, ICC had 135 full-time employees, of whom 52 worked
for our ICC.Net business segment, 55 worked for our professional services
business segment and 28 worked for our service bureau business segment.
11
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New
York 10022 under a lease that expires on December 31, 2004 and provides for
annual base rent of approximately $500,000. The lease covers approximately
12,300 square feet.
Our development and network administration groups and our technical
support call center are located in East Setauket, New York, under a lease that
expires on June 30, 2004 and provides for annual base rent of approximately
$180,000. The lease covers approximately 8,900 square feet.
Our service bureau is located in Carrollton, Georgia, under a lease
that expires on July 31, 2005 and provides for annual base rent of approximately
$80,000. The lease covers approximately 8,000 square feet.
Our professional services group is in Cary, North Carolina under a
lease that expires on October 31, 2004 and provides for annual base rent of
approximately $550,000. The lease covers approximately 27,000 square feet.
Our data center is located at SIAC under an agreement that expires in
December 2002. We have an option to renew the lease and to expand our usage of
the facility at the end of the current term.
We believe that these facilities should be adequate for our present
and reasonably foreseeable operating requirements.
Item 3. Legal Proceedings
In October 2000, Thomas Lipscomb, a former President and Chief
Executive Officer of the Company, commenced an action against Alan Alpern, a
former officer of the Company, and against Arthur Medici, a former officer and a
current director of the Company, in the Supreme Court of the State of New York,
County of New York. In the action, Mr. Lipscomb claims that Messrs. Alpern and
Medici tortuously interfered with his employment agreement with the Company. Mr.
Lipscomb seeks compensatory damages in the amount of $672,000 and punitive
damages in the amount of $1 million. Both Messrs. Alpern and Medici have
requested that the Company indemnify them pursuant to its by-laws, requests that
the Company is currently considering. It is the Company's understanding that
both Messrs. Alpern and Medici intend to defend the action vigorously. The
Company is unable to predict the ultimate outcome of this claim since this
action is in its preliminary stage.
Item 4. Submission of Matters to a Vote of Security Holders
No stockholder votes took place during the fourth quarter of the year
ended July 31, 2001.
12
PART II
Item 5. Market for Internet Commerce Corporation's Common Equity and Related
Stockholder Matters
(a) Market Information
Since September 20, 2000, ICC's class A common stock has been traded on
the Nasdaq National Market under the symbol ICCA. ICC's class A common stock was
previously traded on The Nasdaq SmallCap Market under the symbol ICCSA. ICC's
Units, each consisting of one share of class A common stock, one class A warrant
and one class B warrant, are traded in the over-the-counter market on the OTC
Bulletin Board under the symbols ICCSU, ICCSW and ICCSZ respectively. The
following table sets forth the high and low closing prices of ICC's securities
for the periods indicated. These quotations represent prices between dealers in
securities, do not include retail mark-ups, mark-downs or commissions and do not
necessarily represent actual transactions.
Fiscal Year Ended July 31:
2001 2000
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
--------------------
First Quarter $ 17.63 $ 4.50 $ 16.25 $ 9.94
Second Quarter $ 7.32 $ 2.50 $ 48.50 $ 14.13
Third Quarter $ 7.00 $ 2.00 $ 96.00 $ 12.13
Fourth Quarter $ 4.83 $ 2.50 $ 24.00 $ 8.25
Units
-----
First Quarter $ 21.00 $ 21.00 $ 14.00 $ 10.50
Second Quarter $ 9.00 $ 7.00 $ 10.50 $ 10.50
Third Quarter $ 7.63 $ 4.00 $ 10.50 $ 10.50
Fourth Quarter $ 6.25 $ 6.25 $ 23.00 $ 10.50
Class A Warrants
----------------
First Quarter $ 13.75 $ 3.75 $ 2.50 $ 0.25
Second Quarter $ 6.50 $ 1.13 $ 39.00 $ 2.00
Third Quarter $ 2.75 $ 1.15 $ 152.00 $ 10.50
Fourth Quarter $ 1.25 $ 0.51 $ 19.00 $ 5.00
Class B Warrants
----------------
First Quarter $ 5.75 $ 1.63 $ 0.69 $ 0.06
Second Quarter $ 2.50 $ 0.75 $ 12.50 $ 0.38
Third Quarter $ 1.50 $ 0.25 $ 80.00 $ 5.00
Fourth Quarter $ 0.25 $ 0.25 $ 8.50 $ 2.00
(b) Holders
As of July 31, 2001, there were approximately 231 record holders of our
class A common stock, 1 record holder of our class B common stock, approximately
22 record holders of our class A warrants and approximately 22 record holders of
our class B warrants. Many of our shares of class A common stock are held by
brokers and other institutions on behalf of stockholders, so we are unable to
estimate the number of stockholders represented by these record holders.
13
(c) Dividends
ICC has not paid any cash dividends on its common stock and does not
intend to declare or pay cash dividends on the common stock in the foreseeable
future. The holders of the outstanding shares of series A preferred stock are
entitled to a 4% annual dividend payable in cash or in shares of class A common
stock, at the option of ICC. These dividends are payable on each July 1. In July
2001, ICC issued 7,601 shares of class A common stock in payment of the dividend
due on July 1, 2001. In July 2000, ICC paid $181,772 in cash in payment of the
dividend due on July 1, 2000. The holders of the outstanding shares of series C
preferred stock are entitled to a 4% annual dividend payable in cash or in
shares of class A common stock, at the option of ICC. These dividends are
payable on each January 1. ICC issued 111,142 shares of class A common stock in
payment of the dividend due on January 1, 2001.
Recent sales of unregistered securities
In July 2001, ICC issued 7,601 shares of class A common stock in
payment of a dividend on the series A preferred stock. The issuance of these
securities was exempt from registration under section 3(a)(9) of the Securities
Act as an issuance to an existing stockholder of the Company without
consideration.
In April 2001, ICC issued 111,142 shares of class A common stock in
payment of a dividend on the series C preferred stock. The issuance of these
securities was exempt from registration under section 3(a)(9) of the Securities
Act as an issuance to an existing stockholder of the Company without
consideration.
14
Item 6. Selected Consolidated Financial Data
Our selected consolidated statement of operations data for each of the
years in the five year period ended July 31, 2001 is presented below. Our
selected balance sheet data is presented below as of July 31, 2001, 2000, 1999,
1998 and 1997. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with, our
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report.
Year Ended July 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- --------- --------- --------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 9,743 $ 1,303 $ 105 $ 19 $ 17
-------- -------- -------- -------- --------
Costs and expenses:
Cost of services 9,354 2,514 452 11 54
Product development and enhancement 931 702 517 576 713
Selling and marketing 5,384 3,273 420 -- --
General and administrative 9,683 4,814 3,581 2,307 1,901
Non-cash charges for stock-based
compensation, services and legal
settlements 991 5,161 3,267 -- --
Impairment of acquired intangibles 16,708 -- -- -- --
Impairment of assets -- -- -- 178 507
-------- -------- -------- -------- --------
Total costs and expenses (43,051) (16,464) (8,237) (3,072) (3,175)
-------- -------- -------- -------- --------
Operating loss (33,308) (15,161) (3,053) (3,158) (8,132)
-------- -------- -------- -------- --------
Other income (expense) 523 675 (1,490) 56 89
-------- -------- -------- -------- --------
Loss before income taxes (32,785) (14,486) (9,622) (2,997) (3,069)
Income tax benefit 1,930 -- -- -- --
-------- -------- -------- -------- --------
NET LOSS (30,855) (14,486) (9,622) (2,997) (3,069)
Dividends on preferred stock (420) (458) (191) -- --
Dividends to preferred stockholders for
beneficial conversion feature -- (4,549) (1,222) -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $(31,275) $(19,493) $(11,035) $ (2,997) $ (3,069)
======== ======== ======== ======== ========
Basic and diluted loss per common $ (3.57) $ (4.49) $ (7.62) $ (2.79) $ (3.61)
======== ======== ======== ======== ========
Weighted average shares used in per share
calculation - basic and diluted loss per share 8,768 4,337 1,447 1,076 850
======== ======== ======== ======== ========
July 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- -------- -----------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 2,223 $ 14,003 $ 114 $ 178 $ 393
Working capital (deficit) 646 17,831 3,119 (915) 2,535
Total assets 15,674 22,332 6,540 1,535 3,492
Capital lease obligations 255 231 358 197 --
Total liabilities 4,487 2,242 1,486 1,398 533
Stockholders' equity 11,187 20,090 5,055 132 2,960
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Specifically, all statements other than statements of
historical facts included in this Report regarding our financial position,
business strategy and plans and objectives of management for future operations
are forward-looking statements. These forward-looking statements are based on
the beliefs of management, as well as assumptions made by and information
currently available to management. When used in this Report, the words
"anticipate," "believe," "estimate," "expect," "may," "will," "continue" and
"intend," and words or phrases of similar import, as they relate to our
financial position, business strategy and plans, or objectives of management,
are intended to identify forward-looking statements. These "cautionary
statements" reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various factors
including, without limitation, those described below the heading "Overview",
those described starting on page 23 of this annual report and in our
registration statements and periodic reports filed with the SEC under the
Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot
assure you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Report as anticipated, believed,
estimated, expected or intended.
Overview
We are a leader in the e-commerce business-to-business communication
services market that provides complete e-commerce infrastructure solutions. Our
business operates in three segments: namely, our ICC.Net service, our
professional services and our service bureau.
Our ICC.NET service, the Company's global Internet-based value added
network or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, and email-based and
other Internet-based systems, because our service has a lower cost, greater
transmission speed and more features, authentication and audit services. Our
professional services segment facilitates the development and operations of
comprehensive business-to-business e-commerce solutions. Our service bureau
manages and translates the data of small and mid-sized companies that exchange
EDI data with large companies.
Through July 2000, our business was entirely focused on our ICC.NET
service. Our ICC.NET service is currently in use by our customers for the secure
exchange of business-to-business electronic forms and data files.
In addition to our continued development of our ICC.NET service, we
made two acquisitions during fiscal 2001, which enable us to offer a more
complete range of services to allow our customers to expand their e-commerce
trading communities and bridge their legacy systems to the Internet.
In August 2000, we acquired IDC through which we acquired our service
bureau. IDC is engaged in the development, marketing, sale and other
exploitation of business-to-business EDI standards-based applications for
standard-based EDI exchange over value-added networks, private networks,
exchanges, extranets and the Internet.
In November 2000, we completed the acquisition of RTCI, through
which we acquired our professional services segment. RTCI is an e-commerce
infrastructure solutions company serving the business-to-business e-commerce
market. RTCI helps its clients conduct business electronically through a
continuum of services including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI has developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Subsequent to the acquisition, due to a reduction of the workforce of RTCI, a
steep decline in value of companies similar to RTCI, continued operating losses
and a significant reduction in the forecasted future operating profits of our
professional services segment, management determined that triggering events had
occurred related to certain intangible assets. Projected cash flow analysis
related to those assets determined that the assets had been impaired. These
intangible assets were written down to fair value based on the related
discounted expected future cash flows.
16
Our revenues are derived from subscriptions to our ICC.NET service,
which include transaction, mailbox and fax transmission fees. The subscription
fees are comprised of both fixed and usage-based fees. Fixed subscription fees
are recognized on a pro-rata basis over the subscription period. Usage fees are
recognized in the period the services are rendered. The Company also derives
revenue through implementation fees and interconnection fees. Implementation
fees are recognized over the life of the subscription period, generally one
year. Interconnection fees are fees charged to connect to another VAN service
and are recognized when the data is transmitted to the connected service.
We also provides a broad range of professional services consisting of
EDI and e-commerce consulting, data mapping services and EDI education and
training at seminars hosted by leading universities around the United States.
Revenue from EDI and e-commerce consulting and education and training are
recognized when the services are provided. Revenue from data mapping services
are recognized when the map has been completed and delivered to the customer.
Revenues from fixed fee professional service contracts are recognized using
contract accounting based on the estimated percentage of completion.
We also derive revenue from our service bureau. Our service bureau
revenues are comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to- EDI, UPC
services, including UPC number generation and UPC catalog maintenance and UPC
label printing. Our service bureau also derives revenue from software licensing
and provides software maintenance and support. Revenues from our EDI services
and UPC services are recognized when the services are provided. Revenues from
software licenses are recognized when all of the following conditions are met: a
non-cancelable non-contingent license agreement has been signed, the software
product has been delivered, there are no material uncertainties regarding
customer acceptance and collection of the resulting receivable is probable.
Revenues from software maintenance and support contracts are recognized ratably
over the life of the contract. Our software license revenues were not
significant in any of the years presented.
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with contracts
for which amounts have been received in advance of services to be performed or
prior to the shipment of software.
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2001 Compared with Fiscal Year Ended July 31, 2000.
Our revenue was $9,743,000 in the fiscal year ended July 31, 2001
("2001") and $1,303,000 in the fiscal year ended July 31, 2000 ("2000"). Revenue
related to our ICC.NET service was $4,847,000, or 50% of 2001 revenue. Our
ICC.NET service revenue increased $3,544,000 in 2001 compared to 2000. This
increase includes $1,000,000 of fees from Triaton GmbH (formerly Hightech
International Services GmbH), a subsidiary of ThyssenKrupp Information Services
GmbH, under a Joint Services Agreement dated July 28, 2000. Service revenue from
our ICC.NET service also increased as a result of increased transaction fees
generated from a larger billable customer base and increased monthly flat fees
from the addition of flat fee paying customers in the total amount of
$2,161,000. RTCI, acquired in November 2000, accounted for $3,434,000, or
approximately 35% of 2001 revenue. Revenue generated by RTCI includes
professional services consisting of consulting, custom solutions and mapping
services. Revenue in the amount of $1,462,000, or 15% of 2001 revenue, was
generated from our service bureau. We acquired our service bureau through the
purchase of IDC in August 2001. The service bureau's revenue was primarily
generated from the services performed, customer support and licensing fees.
Cost of services increased to $9,354,000 in 2001 from $2,514,000 in
2000. Cost of services relating to our ICC.NET service was $3,889,000, or 80% of
revenues derived from the service in 2001, versus $2,514,000, or 193% of
revenues in 2000. Salaries and employee benefits related to the ICC.NET service
increased $734,000. Data lines and support increased $207,000, depreciation and
amortization decreased $37,000 and consulting fees increased $53,000. The
increases in salaries, employee benefits, data lines and support were due to the
increased use of our service, which resulted in the hiring of additional
employees for our customer and technical support functions. The decrease in
depreciation and amortization was the result of our data center being fully
depreciated prior to fiscal year
17
end 2001. We anticipate that our ICC.Net cost of services will continue to
decline as a percentage of revenues in future periods due to increased
utilization of our existing communications infrastructure as we expect the use
of our service to increase. Cost of services relating to RTCI were $4,832,000,
or 141% of revenues derived from professional services. Salaries and employee
benefits relating to our professional services were $2,518,000 and consulting
fees were $472,000. Other costs of revenues relating to our professional
services included amortization of acquired intangibles relating to the workforce
and proprietary technology in the amount of $1,225,000. Costs of services
relating to our service bureau totaled $669,000, or 46% of revenues derived from
the service bureau. Salaries and employee benefits relating to our service
bureau were $428,000.
Product development and enhancement costs related to the maintenance
and improvement of our products and services increased to $931,000 in 2001 from
$702,000 in 2000. In 2001 salaries and employee benefits related to our ICC.NET
service increased $562,000. This increase was offset by a $145,000 decrease in
consulting fees, which was the result of the addition of new employees. Product
development and enhancement costs incurred by our service bureau were $306,000,
which consisted of $254,000 in salaries and benefits and $52,000 of consulting
fees.
Selling and marketing expenses increased to $5,384,000 in 2001 from
$3,273,000 in 2000. The increase is attributable in part to the selling and
marketing expenses related to our professional services totaling $1,168,000,
which was comprised primarily of salaries and related expenses of $724,000,
travel and entertainment in the amount of $113,000 and trade shows and
advertising costs in the amount of $143,000. Selling and marketing expenses for
our ICC.Net service increased by $776,000, which is attributable to an increase
in salaries and benefits related to the selling and marketing increased
$221,000, an increase in trade shows and increased advertising in the amount of
$222,000 as we increased our marketing efforts and occupancy costs increased
$109,000 due to the lease of additional office space. Our new service bureau
incurred selling expenses in the amount of $105,000 which were primarily
comprised of salaries and benefits.
General and administrative costs increased to $9,683,000 in 2001 from
$4,814,000 in 2000. The amortization of goodwill resulting from our acquisition
of RTCI accounted for $886,000 of the increase. General and administrative
expenses supporting professional services accounted for $1,813,000 of the
overall increase. These expenses were comprised primarily of salaries and
benefits in the amount of $949,000, rent in the amount of $184,000 and
depreciation and amortization in the amount of $170,000. In addition, general
and administrative expenses include an increase in rent of $388,000 from the
lease of additional office space, of which $80,000 was due to the purchase of
IDC. We incurred expenses of $860,000 associated with the integration of the
information systems of acquired companies. Severance of $438,000 was recognized
due to the termination of an executive officer in 2001. Amortization of goodwill
relating to our purchase of IDC was $241,000.
Non-cash charges for compensation and services amounted to $991,000 in
2001 and $5,160,000 in 2000. In March 2000, ICC granted an option to purchase
100,000 shares of class A common stock pursuant to a consulting agreement with a
former executive officer and board member. The fair value of the option was
$6,318,850 and was to be amortized as consulting expense over the term of the
consulting agreement. On September 22, 2000, the former board member and Company
agreed to cancel the option. Non-cash charges for this option amounted to
$450,000 during 2001. In connection with our acquisition of RTCI, we assumed
unvested restricted shares issued to RTCI employees and recognized $731,000 of
deferred stock-based compensation in connection with these shares. During 2001,
we recognized $541,000 of stock-based compensation expenses. The non-cash
charges for 2000 of $3,311,000 resulted from the vesting of performance-based
options. Non-cash charges for the options to the former board member noted above
amounted to $1,186,000 during 2000. In June 2000, ICC recorded $663,000 in
non-cash charges for 10,000 shares of class A common stock valued at $176,000
and 50,000 stock options valued at $487,000 issued in connection with a
settlement of certain litigation.
Due to a reduction of the workforce of RTCI, a steep decline in the
value of companies similar to RTCI, continued operating losses and a significant
reduction in the forecasted future operating profits of our professional
services segment, management determined that triggering events had occurred
related to certain acquired intangible assets. Projected cash flow analysis
related to those assets determined that the assets had been impaired. These
intangible assets were written down to fair value based on the related
discounted expected future cash flows and other relevant factors. During 2001,
the Company recorded an impairment charge of $16,708,479 related to impaired
intangibles acquired from RTCI.
18
Income tax benefit of $1,929,887 in 2001 primarily resulted from the
decrease of our deferred tax liability associated with the amortization of
identifiable intangibles and from the offset of deferred tax liabilities against
post-acquisition net operating losses.
Fiscal Year Ended July 31, 2000 Compared with Fiscal Year Ended July 31, 1999
Our revenues were $1,303,000 and $105,000 during the fiscal years ended
July 31, 2000 ("2000") and July 31, 1999 ("1999"), respectively. Revenues were
generated from the sale of services related to our ICC.NET service and consisted
primarily of transaction fees, mailbox fees and consulting services.
Cost of services increased to $2,515,000 in 2000 from $452,000 in 1999.
The increase is primarily due to direct cost components. In 2000, expenses
primarily relating to customer and technical support increased $896,000. Service
costs related to an agreement with Sector, Inc. ("Sector") increased $120,000 in
2000. Sector is a wholly-owned subsidiary of SIAC (Securities Industry
Automation Corporation) which is a joint subsidiary of the New York and American
Stock Exchanges. Sector provides us with a computer room facility in the SIAC
Data Center. We use this facility to house our servers and communications
infrastructure. Salaries and related employee benefits increased $615,000 in
2000. In addition, amortization of capitalized software increased $238,000, data
lines and support increased $72,000 and consulting fees increased $65,000 in
2000. The remaining increase of $57,000 was primarily attributable to overhead
costs. Personnel related to cost of services increased to 21 at the end of 2000
from 6 at the end of 1999.
Product development and enhancement costs related to the maintenance
and improvement of our ICC.NET service increased to $702,000 in 2000 from
$517,000 in 1999 primarily due to increased salaries, employee benefits and
consulting fees. Personnel related to product development and enhancements
increased to 12 at the end of 2000 from 7 at the end of 1999.
Selling and marketing expenses increased to $3,273,000 in 2000 from
$420,000 in 1999. The increase reflects spending related to our expanded selling
and marketing efforts. Salaries and employee benefits increased $2,012,000 in
2000. Expenses related to travel, advertising and for consultants increased
$267,000, $195,000 and $197,000 respectively. The remaining increase of $182,000
was primarily attributable to overhead costs. Personnel related to selling and
marketing increased to 24 at the end of 2000 from 15 at the end of 1999.
General and administrative costs increased to $4,814,000 in 2000 from
$3,582,000 in 1999. The increase is attributable to an increase in recruitment
fees, salaries and employee benefits of $729,000 and an increase in professional
fees of $468,000. Personnel related to general and administrative functions
increased to 18 at the end of 2000 from 16 at the end of 1999
Non-cash charges in connection with compensation and services increased
to $5,160,000 in 2000 from $3,267,000 in 1999. The non-cash charges for 2000
consisted of charges related to stock options granted to certain officers of
ICC, which vested upon our class A common stock reaching a certain market price.
Employee stock options that vest in this manner require a charge to earnings for
the difference between the fair value of the stock and the exercise price
multiplied by the number of options vested on the date that the vesting
condition is met. 260,000 of these options became exercisable in 20% increments
when the class A common stock attained or exceeded each of the following per
share bid prices for twenty consecutive trading days: $7.50, $10.00, $12.50,
$15.00 and $17.50. ICC recorded a total of $3,311,000 in non-cash charges in
connection with these options in 2000 and will not be required to take any
additional charges in connection with these options in the future. In March
2000, ICC issued 100,000 options in connection with a consulting agreement with
a former executive officer and board member. The options were valued at
$6,318,850 and are being amortized as consulting expense over the term of the
consulting agreement. Non-cash charges for these options amounted to $1,186,000
during 2000. In June 2000, ICC recorded $663,000 in non-cash charges for 10,000
shares of class A common stock valued at $176,000 and 50,000 stock options
valued at $487,000 issued in connection with the settlement of certain
litigation.
The non-cash charges in 1999 relate to stock and warrants issued
throughout the year for services received in order to conserve our limited cash
resources. The non-cash charges consisted of (a) $862,000 for consulting
expense, which is comprised of the issuance of (i) 45 shares of series A
preferred stock valued at $45,000 and 500,000 warrants valued at $591,000, (ii)
18,000 warrants to a consultant valued at $138,000 and (iii) 63,000
19
warrants issued to another consultant valued at $88,000; (b) 20,000 shares of
class A common stock issued in connection with the termination of consulting
arrangements valued at $260,000; (c) $148,000 for stock issued to officers for
compensation; (d) $1,374,000 for options to certain officers and management of
ICC which vested upon our class A common stock reaching a certain market price;
and (e) $623,000 for the vesting of certain options due to a change of control
feature attached to such options.
We earned income from investments of $737,000 in 2000 and $88,000 in
1999. The increase in 2000 is due to higher average cash and marketable
securities balances in 2000 compared to 1999.
Interest expense decreased to $62,000 in 2000 from $1,578,000 in 1999.
The decrease was largely attributable to the conversion of our bridge notes into
series A preferred stock in April 1999. In 1999, debt discount and interest on
the bridge notes amounted to $1,348,000, of which $111,000 was interest expense,
and the amortization of debt issue costs amounted to $188,000. As a result of
the conversion of our bridge notes, there was no debt discount or interest on
the bridge notes and no amortization of debt issue cost in 2000. Interest
expense due to capital leases was $62,000 and $42,000 in 2000 and 1999,
respectively.
Liquidity and Capital Resources
Current assets decreased to $4,879,000 as of July 31, 2001 from
$19,842,000 as of July 31, 2000. The decrease was primarily due to a decrease in
cash and cash equivalents of $11,780,000 from continuing operating losses, an
increase in marketable securities acquired from IDC of $666,000, an increase in
accounts receivable of $959,000 due to increased business activity and our
acquisitions, a decrease of a note receivable in the amount of $5,000,000, which
was converted into equity of RTCI, and an increase in prepaid and other assets
of $192,000.
Total liabilities increased to $4,487,000 as of July 31, 2001 from
$2,242,000 as of July 31, 2000. The increase was primarily the result of an
increase in accounts payable and accrued expenses of $2,005,000 and an increase
in other liabilities of $142,000.
At July 31, 2001, working capital decreased to $646,000 from
$17,831,000 at July 31, 2000. The decrease was the result of continuing
operating losses.
We have financed our operations through private placements during
fiscal 1994, our initial public offering during fiscal 1995 (the "IPO"), a
private placement in March 1997, a private placement of bridge note units during
fiscal 1998 and 1999, a private placement of series A preferred stock in April
1999 and private placements of our class A common stock, series C preferred
stock and warrants in November 1999. We anticipate losses through fiscal 2002 as
we continue to expand the commercial markets for our ICC.NET service and service
bureau.
Our principal sources of liquidity, which consisted of cash and cash
equivalents and marketable securities, decreased to $2,889,000 as of July 31,
2001 from $14,003,000 as of July 31, 2000. Net cash used in operating activities
was $11,401,000 for 2001 compared to $8,861,000 for 2000. The increase in cash
used in operating activities was primarily the result of the operating losses of
RTCI incurred subsequent to its acquisition. Cash flows used in investing
activities were $334,000 in 2001 compared to $1,463,000 in 2000. The decrease in
cash used in investing activities was primarily due to the issuance of a $5
million note receivable during 2000, which was partially offset by sales of
marketable securities which provided gross proceeds of $3,987,000. No such loans
or significant sales of marketable securities occurred in 2001. The primary
reason for cash used in investing activities in the 2001 was to acquire property
and equipment and software development. Proceeds from the sale of marketable
securities and the redemption of certificates of deposit was $518,000. Net cash
used in financing activities was $45,000 in the 2001 compared to $24,213,000
provided by financing activities in 2000. The large amount of cash provided by
financing activities in 2000 was primarily the result of proceeds from various
private placements referred to above. No such transactions occurred in 2001.
In October 2001, we sold in a private placement 1,159,716 shares of
class A common stock and warrants to purchase 347,915 additional shares of class
A common stock for aggregate proceeds of $3,189,219. The warrants expire in
October 2006 and are exercisable at $3.58 per share, subject to adjustment
pursuant to customary antidilution adjustments for stock splits, dividends and
combinations. As of October 29, 2001, we had
20
cash and cash equivalents and marketable securities of approximately $4 million.
We believe these resources provide us with sufficient liquidity to continue in
operation for the next 12 months. However, if our cost reductions do not achieve
sufficient savings, if our expenses increase more than anticipated or if our
revenue does not increase as anticipated because of competitive or other
reasons, our cash resources may not be sufficient and we will require additional
financing. There can be no assurances that the terms of any financing will be
available or that the terms will be acceptable to us, or that any financing will
be consummated.
We have a net operating loss carryforward of approximately $70 million
to offset future taxable income for federal income tax purposes. The utilization
of the loss carryforward to reduce any such future income taxes will depend on
our ability to generate sufficient taxable income prior to the expiration of the
net operating loss carryforwards. The carryforward expires from 2007 to 2021.
The Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder contain provisions which limit the use of available net operating
loss carryforwards in any given year should significant changes (greater than
50%) in ownership interests occur. Due to the IPO, the net operating loss
carryover of approximately $1.9 million incurred prior to the IPO is subject to
an annual limitation of approximately $400,000 until that portion of the net
operating loss is utilized or expires. Due to the private placement of series A
preferred stock, the net operating loss carryover of approximately $18 million
incurred prior to the private placement is subject to an annual limitation of
approximately $1 million until that portion of the net operating loss is
utilized or expires. Also, due to a 100% ownership change of RTCI, the acquired
net operating loss of approximately $6.5 million incurred prior to the ownership
change is subject to an annual limitation of approximately $1.4 million until
that portion of the net operating loss is utilized or expires.
Factors that may affect our business, financial condition and future operating
results
Each of the following risk factors should be carefully considered in
addition to the other information contained in this annual report on form 10-K.
Any of the following risks could materially and adversely affect our business,
operating results, financial condition and the market price of our class A
common stock.
Risks Relating to ICC
We have a limited operating history and there is insufficient
historical information to determine whether we will successfully implement any
of our business strategies. We were founded in November 1991 under the name
Infosafe Systems, Inc. and from 1991 to 1997 we conducted limited operations and
developed certain products that we were unable to exploit commercially and
consequently discontinued. In 1997, we shifted our business emphasis to focus
exclusively on the development and marketing of our ICC.NET service, formerly
known as our CommerceSense(R) service, and changed our name to Internet Commerce
Corporation in September 1998 to reflect this shift. As a result, we have only a
limited operating history and there is little historical information on which to
evaluate our business and prospects. We may not be successful in implementing
any of our business strategies.
We have never earned a profit and expect to incur losses for the
foreseeable future, and cannot assure that we will be profitable in the future
on an operating basis or otherwise. We have incurred significant losses since we
were founded in 1991. We have never earned a profit in any fiscal quarter and,
as of July 31, 2001, we had an accumulated deficit of approximately $69.3
million. If we continue to incur losses, if our revenues decline or grow at a
slower rate, or if our expenses increase without commensurate increases in
revenues, our operating results will suffer.
Our revenue is primarily dependent on the number of customers who
subscribe to our ICC.NET VAN service and the volume of the data, documents or
other information they send or retrieve utilizing this service. The success of
our ICC.NET VAN service and our other services depends to a large extent on the
future of business-to-business electronic commerce using the Internet, which is
uncertain. In addition, we expect our expenses to increase in the areas of sales
and marketing. As a result, we expect to incur additional losses in the future.
If we experience a shortfall in our estimated revenue, we may be unable to
adjust spending in a timely manner and may not achieve profitability.
21
We currently depend primarily on our ICC.NET service and may not be
able to continue to expand into new business areas. We are primarily focusing on
our ICC.NET service and as a result, our expected revenue growth for the
foreseeable future is almost entirely dependent on the success of this service,
including, but not limited to, the number of customers who subscribe to the
service and the volume (in kilocharacters) of the data, documents or other
information they send or retrieve utilizing our service, and revenue derived
from our acquisitions of RTCI and IDC. We will need to generate significant
additional revenue to achieve and maintain profitability. If we do not increase
our revenue significantly, we will continue to be unprofitable.
If we are unable to obtain necessary future capital, our business will
suffer. As of October 29, 2001, we had unrestricted cash and marketable
securities in the amount of approximately $4 million. We may need to raise
additional funds if competitive pressures or technological changes are greater
than anticipated and we are unable to increase revenue at anticipated rates or
if our expenses increase significantly. We cannot assure you that any additional
financing will be available on reasonable terms or at all.
Raising additional funds in the future by issuing securities could
adversely affect our stockholders and negatively impact our operating results.
If we raise additional funds through the issuance of debt securities, the
holders of the debt securities will have a claim to our assets that will have
priority over any claim of our stockholders. The interest on these debt
securities would increase our costs and negatively impact our operating results.
If we raise additional funds through the issuance of class A common stock or
securities convertible into or exchangeable for class A common stock, the
percentage ownership of our then-existing stockholders will decrease and they
may experience additional dilution. In addition, any convertible or exchangeable
securities may have rights, preferences and privileges more favorable to the
holders than those of the class A common stock.
If we lose our $70 million net operating loss carryforward, our
financial results will suffer. Section 382 of the Internal Revenue Code contains
rules designed to discourage persons from buying and selling the net operating
losses of companies. These rules generally operate by focusing on ownership
changes among stockholders owning directly or indirectly 5% or more of the
common stock of a company or any change in ownership arising from a new issuance
of stock by a company. In general, the rules limit the ability of a company to
utilize net operating losses after a change of ownership of more than 50% of its
common stock over a three-year period. Purchases of our class A common stock in
amounts greater than specified levels could inadvertently create a limitation on
our ability to utilize our net operating losses for tax purposes in the future.
We are currently subject to a limitation on the utilization of our net operating
loss carryforward.
If we are unable to manage our growth, our financial results will
suffer. Our ability to implement our business plan successfully in a new and
rapidly-evolving market requires effective planning and growth management. If we
cannot manage our anticipated growth effectively, our business and financial
results will suffer. We expect that we will need to continue to manage and to
expand multiple relationships with customers, Internet service providers and
other third parties. We also expect that we will need to continue to improve our
financial systems, procedures and controls and will need to expand, train and
manage our workforce, particularly our information technology staff.
We may face capacity constraints which impede our revenue growth and
business profitability. The satisfactory performance, reliability and
availability of our network infrastructure, customer support and document
delivery systems and our web site are critical to our reputation and our ability
to attract customers and maintain adequate customer service levels. Any
significant or prolonged capacity constraints could prevent customers from
sending or gaining access to their documents or other data or accessing our
customer support services for extended periods of time. This would decrease our
ability to acquire and retain customers and prevent us from achieving the
necessary growth in revenue to achieve profitability. If the amount of traffic
increases substantially and we experience capacity constraints, we will need to
expand further and upgrade our technology and network infrastructure. We may be
unable to predict the rate or timing of increases in the use of our services to
enable us to upgrade our operating systems in a timely manner.
22
If we do not keep pace with rapid technological changes, customer
demands and intense competition, we will not be successful. Our market is
characterized by rapidly changing technology, customer demands and intense
competition. If we cannot keep pace with these changes, our ICC.NET service
could become uncompetitive and our business will suffer. The Internet's recent
growth and the intense competition in our industry require us to continue to
develop strategic business and Internet solutions that enhance and improve the
customer service features, functions and responsiveness of our ICC.NET VAN and
other proposed services and that keep pace with continuing changes in
information technology and customer requirements. If we are not successful in
developing and marketing enhancements to our ICC.NET VAN service or other
proposed services that respond to technological change or customer demands, our
business will suffer.
We may not be able to compete effectively in the business-to-business
electronic commerce market, which could limit our market share and harm our
financial performance. Our principal competitors include: Peregrine Systems,
Inc., GE Global eXchange Services, a subsidiary of GE Information Services,
Inc., International Business Machines Corporation Global Services, Sterling
Commerce, Inc., a subsidiary of SBC Communications Inc., EasyLink Corp. and
WorldCom, Inc. Each of these competitors has an established VAN that has
provided EDI for at least several years and has long-established relationships
with the users of EDI, including many of our prospective customers.
Our market is characterized by rapidly-changing technology, customer
demands and intense competition. The Internet's recent growth and the intense
competition in our industry require us to continue to develop strategic business
and Internet solutions that enhance and improve the customer service features,
functions and responsiveness of our ICC.NET VAN and other proposed services and
that keep pace with continuing changes in information technology and customer
requirements. If we are not successful in developing and marketing enhancements
to our ICC.NET VAN service or other proposed services that respond to
technological change or customer demands, or otherwise not able to compete
effectively against our current and future competitors, we may lose customers,
may need to lower our prices, may experience reductions in gross margins,
increases in marketing costs or losses in market share, or may experience a
combination of these problems and, as a result, our business will suffer.
Many of our current and potential competitors have significant existing
customer relationships and vastly larger financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
respond more quickly to changing technology and changes in customer requirements
or be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to potential
customers and employees, or be able to devote greater resources to the
development, promotion and sale of their services than we can. As a result, we
may not be successful in competing against competitors.
Furthermore, we rely on many of our competitors to interconnect at
reasonable cost with our service. In September 2001, one of our competitors
terminated an existing interconnect agreement and we made alternative
arrangements to serve these customers.
If we are successful in utilizing our ICC.NET platform to provide new
services, we may enter into different markets and may face the same or
additional competitors, most of which will have substantially greater financial
and other resources than we do.
If we cannot successfully expand our business outside of the United
States, our revenues and operating results will be adversely affected. Our
current and future customers are conducting their businesses internationally. As
a result, an important component of our business strategy is to expand our
international marketing and sales efforts and if we do not successfully expand
our business in this way, we may lose current and future customers. Although we
have established alliances with Cable & Wireless and Triaton to sell our service
in certain foreign markets, we cannot predict their success. In addition, our
potential new service offerings may involve delivery of data and use of the
Internet in other countries which currently have or may enact laws or
regulations that restrict our ability to deliver data or use the Internet or
that impose significant taxes for doing so. Loss of customers and restrictions
on delivery of data and use of the Internet will adversely affect our business,
operating results and financial condition.
23
If we cannot hire and retain highly qualified employees, our business
and financial results will suffer. We are substantially dependent on the
continued services and performance of our executive officers and other key
employees. Competition for employees in our industry is intense. If we are
unable to attract, assimilate and retain highly qualified employees, our
management may not be able to effectively manage our business, exploit
opportunities and respond to competitive challenges and our business and
financial results will suffer. Many of our competitors may be able to offer more
lucrative compensation packages which include stock options and other
stock-based compensation and higher-profile employment opportunities than we
can.
We depend on our intellectual property, which may be difficult and
costly to protect. If we fail to adequately protect our proprietary rights,
competitors could offer similar products relying on technologies we developed,
potentially harming our competitive position and decreasing our revenues. We
attempt to protect our intellectual property rights by limiting access to the
distribution of our software, documentation, and other proprietary information
and by relying on a combination of patent, copyright, trademark, and trade
secret laws. In addition, we enter into confidentiality agreements with our
employees and certain customers, vendors, and strategic partners. In some
circumstances, however, we may, if required by a business relationship, provide
our licensees with access to our data model and other proprietary information
underlying our licensed applications.
Despite precautions that we take, it may be possible for unauthorized
third parties to copy aspects of our current or future products or to obtain and
use information that we regard as proprietary. Policing unauthorized use of
software is difficult, and some foreign laws do not protect proprietary rights
to the same extent as United States laws. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, or to determine the validity and scope of the proprietary rights of
others, any of which could adversely affect our revenues and operating results.
Intellectual property infringement claims against us could harm our
business. Our business activities and our ICC.NET service may infringe upon the
proprietary rights of others and other parties may assert infringement claims
against us. Any such claims and any resulting litigation could subject us to
significant liability for damages and could result in invalidation of our
proprietary rights. We could be required to enter into costly and burdensome
royalty and licensing agreements, which may not be available on terms acceptable
to us, or may not be available at all.
We may suffer systems failures and business interruptions which would
harm our business. Our success depends in part on the efficient and
uninterrupted operation of our service that is required to accommodate a high
volume of traffic. Almost all of our network operating systems are located at
the Securities Industry Automation Corporation, or SIAC. SIAC runs all computing
operations for the New York Stock Exchange and the American Stock Exchange. Our
systems are vulnerable to events such as damage from fire, power loss,
telecommunications failures, break-ins and earthquakes. This could lead to
interruptions or delays in our service, loss of data or the inability to accept,
transmit and confirm customer documents and data. Our business may suffer if our
service is interrupted. Although we have implemented network security measures,
our servers may be vulnerable to computer viruses, electronic break-ins,
attempts by third parties deliberately to exceed the capacity of our systems and
similar disruptions.
Risks Relating to the Internet and Online Commerce Aspects of Our Business
If Internet usage does not continue to grow or its infrastructure
fails, our business will suffer. If the Internet does not gain increased
acceptance for business-to-business electronic commerce, our business will not
grow or become profitable. We cannot be certain that the infrastructure or
complementary services necessary to maintain the Internet as a useful and easy
means of transferring documents and data will continue to develop. The Internet
infrastructure may not support the demands that growth may place on it and the
performance and reliability of the Internet may decline.
24
Privacy concerns may prevent customers from using our services.
Concerns about the security of online transactions and the privacy of users may
inhibit the growth of the Internet as a means of delivering business documents
and data. We may need to incur significant expenses and use significant
resources to protect against the threat of security breaches or to alleviate
problems caused by security breaches. We rely upon encryption and authentication
technology to provide secure transmission of confidential information. If our
security measures do not prevent security breaches, we could suffer operating
losses, damage to our reputation, litigation and possible liability. Advances in
computer capabilities, new discoveries in the field of cryptography or other
developments that render current encryption technology outdated may result in a
breach of our encryption and authentication technology and could enable an
outside party to steal proprietary information or interrupt our operations.
Failure of our third-party providers to provide adequate Internet and
telecommunications service could result in significant losses of revenue. Our
operations depend upon third parties for Internet access and telecommunications
service. Frequent or prolonged interruptions of these services could result in
significant losses of revenues. Each of them has experienced outages in the past
and could experience outages, delays and other difficulties due to system
failures unrelated to our on-line architecture. These types of occurrences could
also cause users to perceive our services as not functioning properly and
therefore cause them to use other methods to deliver and receive information. We
have limited control over these third parties and cannot assure you that we will
be able to maintain satisfactory relationships with any of them on acceptable
commercial terms or that the quality of services that they provide will remain
at the levels needed to enable us to conduct our business effectively.
Government regulation and legal uncertainties relating to the Internet
could harm our business. Changes in the regulatory environment in the United
States and other countries could decrease our revenues and increase our costs.
The Internet is largely unregulated and the laws governing the Internet remain
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy and taxation apply to the Internet. In addition,
because of increasing popularity and use of the Internet, any number of laws and
regulations may be adopted in the United States and other countries relating to
the Internet or other online services covering issues such as:
o user privacy;
o security;
o pricing and taxation;
o content; and
o distribution.
Costs of transmitting documents and data could increase, which would
harm our business and operating results. The cost of transmitting documents and
data over the Internet could increase. We may not be able to increase our prices
to cover these rising costs. Also, foreign and state laws and regulations
relating to the provision of services over the Internet are still developing. If
individual states or foreign countries impose taxes or laws that negatively
impact services provided over the Internet, our cost of providing our ICC.NET
and other services may increase.
25
Risks Relating to our Class A Common Stock
Shares eligible for future sale by our existing stockholders may
adversely affect our stock price and may render it difficult to sell class A
common stock. The average weekly trading volume of our class A common stock on
the Nasdaq National Market was, approximately, 436,785 shares for the period
from August 1, 2000 to January 31, 2001. The average weekly trading volume of
our class A common stock on the Nasdaq National Market was, approximately,
238,840 shares for the period from January 1, 2001 to July 31, 2001. On October
18, 1999, our registration statement on form S-3 became effective. This
registration statement covers the sale of up to 5,476,280 shares of class A
common stock by holders of our class A common stock and holders of our series A
preferred stock, class B common stock and warrants that may be converted into or
exchanged for class A common stock, of which approximately 800,000 shares have
not been sold as of September 30, 2001. On March 1, 2000, another registration
statement on form S-3 became effective. This registration statement covers the
sale of up to 955,289 shares of class A common stock by holders of our class A
common stock and by holders of our series A preferred stock and warrants that
may be converted into or exchanged for class A common stock, of which
approximately 200,000 shares have not been sold as of September 30, 2001. In
connection with our acquisition of IDC, we filed a registration statement on
form S-3, which became effective on December 7, 2000, covering the resale of up
to 238,579 shares of our class A common stock, of which approximately 200,000
have not been sold as of September 30, 2001. In connection with our acquisition
of RTCI, we filed a registration statement on form S-3, which became effective
on June 25, 2001, covering the resale of up to 2,590,386 shares of our class A
common stock, of which approximately 2,590,000 have not been sold as of
September 30, 2001. The market price of our class A common stock could be
materially and adversely affected by sales of even a small percentage of these
shares or the perception that these sales could occur.
Our stock price may be extremely volatile and this volatility could
affect your ability to sell your shares of class A common stock at a favorable
price. From August 1, 2000 through July 31, 2001, the price of our class A
common stock has fluctuated from a low of $1.86 to a high of $18.00. The market
price of our class A common stock is likely to fluctuate substantially in the
future. In the past, companies that have experienced volatility in the market
price of their stock have been subject to securities class action litigation. If
we were subject to a securities class action lawsuit, it could result in
substantial costs and a significant diversion of resources, including management
time and attention.
The market for our class A common stock may be illiquid, which would
restrict your ability to sell your shares of class A common stock. Our class A
common stock is currently trading on the Nasdaq National Market. It is possible
that the trading market for the class A common stock in the future will be thin
and illiquid, which could result in increased volatility in the trading prices
for our class A common stock. The price at which our class A common stock will
trade in the future cannot be predicted and will be determined by the market.
The price may be influenced by investors' perceptions of our business, financial
condition and prospects, the use of the Internet for business purposes and
general economic and market conditions.
Our board of directors can issue preferred stock with rights adverse to
the holders of class A common stock. Our board of directors is authorized,
without further stockholder approval, to determine the provisions of and to
issue up to 4,979,825 shares of preferred stock. Issuance of preferred shares
with rights to dividends and other distributions, voting rights or other rights
superior to the class A common stock could be adverse to the holders of class A
common stock.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this Item is set forth in this annual
report under the section entitled "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" above.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
annual report.
26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On July 19, 2000, the accounting firm of Deloitte & Touche LLP was
selected as the independent accountants for Internet Commerce Corporation for
the fiscal year ending July 31, 2000 to replace the accounting firm of Richard
A. Eisner & Company, LLP ("Eisner"). Eisner was notified of this decision on
July 19, 2000. The decision to change auditors was approved by the Board of
Directors.
During the two fiscal years ended July 31, 1999 and subsequent
interim periods, there were no disagreements with the former accountants on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements (if not resolved to the
satisfaction of the former accountants) would have caused them to make reference
in connection with their report to the subject matter of the disagreements. The
accountants' report on the consolidated financial statements of the Company for
each of the past two years ended July 31, 1999 did not contain any adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty or audit scope or accounting principles.
During the two fiscal years ended July 31, 1999 and the subsequent
interim periods, neither the Company, nor anyone on the Company's behalf,
consulted the newly engaged accountants regarding either the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's
consolidated financial statements and neither a written report nor oral advice
was provided to the Company that Eisner concluded was an important factor
considered by the Company in reaching a decision as to an accounting, auditing
or financial reporting issue during the Company's two fiscal years ended July
31, 1999 or any subsequent interim period prior to engaging Deloitte & Touche
LLP.
27
PART III
Item 10. Directors and Executive Officers of Internet Commerce Corporation
The directors and executive officers of ICC, along with their
respective ages and positions with ICC as of July 31, 2001, are as follows:
Name Age Position
------------------------------- ----- ---------------------------------------------------------------------
G. Michael Cassidy 49 President and Chief Executive Officer, Director
Anthony D'Angelo 39 Senior Vice President, Electronic Commerce Network Services
David Hubbard 45 Chief Technology Officer, Senior Vice President
Walter M. Psztur 42 Chief Financial Officer, Secretary
Jeffrey W. LeRose1 57 Chairman of the Board, President and Chief Executive Officer of RTCI
Richard J. Berman 59 Director
Kim Cooke 46 Director
Charles C. Johnston 66 Director
Arthur R. Medici 52 Director
Sarah Byrne-Quinn 38 Director
Peter J. Boni 55 Nominee for Director
Spencer I. Browne 51 Nominee for Director
G. Michael Cassidy has been President and Chief Executive Officer since
March 2001. From July 1999 to March 2001 he served as Executive Vice President -
Sales of ICC. He is the developer of our business model and a co-founder of
Internet Commerce Corporation. From August 1993 to October 1996, Mr. Cassidy was
President and Chief Executive Officer of Greentree Software, a software
development company specializing in supply chain management software solutions
for Fortune 1000 companies. He began his sales career at International Business
Machines Corporation and later managed strategic alliances for Coopers &
Lybrand, certified public accountants.
Anthony J. D'Angelo joined ICC in April 1997. Mr. D'Angelo served as
our Director of Electronic Commerce services until December 1998, when he was
named our Vice President of Electronic Commerce services. In July 1999, Mr.
D'Angelo was named our Senior Vice President, Electronic Commerce Network
Services. Prior to joining ICC, Mr. D'Angelo was with Standard Motor Products
from October 1985 to March 1997. Most recently he was corporate IS manager for
Standard Motor Products where he oversaw IT issues for its Canadian subsidiary,
mid-western division, and sales force, and developed and managed corporate
electronic commerce & EDI systems. Mr. D'Angelo holds a B.S. degree in computer
science from the State University of New York.
David Hubbard has been the Chief Technology Officer of ICC since April
1997. He has more than 20 years of large systems design experience. Prior to
joining ICC, Mr. Hubbard was the Chief Technology Officer of Track Data Corp., a
real-time market data vendor. During his 14 years at Track Data he directed
engineering for their real-time market ticker feeds and data analysis systems,
handling most of the world's stock, options and commodity exchanges, as well as
most major national and international news services.
Walter M. Psztur served as Corporate Controller of ICC from September
1997 until September 1998 when he was named Vice President of Finance and
Administration and assumed the duties of our principal financial officer. Mr.
Psztur was named our Chief Financial Officer in July 1999. From 1993 until
September 1997, Mr. Psztur was the Assistant Corporate Controller of Standard
Motor Products, an automotive manufacturer and distributor with annual revenues
of approximately $700 million. His responsibilities included corporate financial
---------------------
1 Mr. LeRose resigned as an officer and director in September 2001.
28
consolidation and reporting, financial operations and financial systems,
acquisition analysis and corporate policies and procedures for accounting and
financial controls.
Jeffrey W. LeRose was Chairman and Chief Executive Officer of RTCI from
1991 until we acquired RTCI in November 2000.
Richard J. Berman joined ICC in September 1998 as Chairman and Chief
Executive Officer and served as our Chief Executive Officer until June 1999. For
more than 15 years prior to September 1998, Mr. Berman, through American
Acquisition Company, acted as principal in venture capital and real estate, as
an advisor in mergers and acquisitions, and as a source of funding for small
growth companies. Currently, Mr. Berman serves as Chairman of Knowledge Cube, a
venture capital firm, and as Vice Chairman of Achievement Tec, Inc., an
assessment technology company offering human resource services. He was also the
Chairman of Prestolite Battery Company, the largest battery producer in Canada,
which merged with Exide Corporation in 1993. Mr Berman holds an MBA and BS from
New York University and a JD from Boston College.
Kim Cooke is a founding partner and has been a managing director of
Blue Water Capital, a private venture capital firm, since 1995. Mr. Cooke serves
on the boards of directors of Tech Enterprises Inc. (Techbook), Network 1
Financial and Skyway Communications, Inc. (t/a ePhones). He is a transactional
lawyer and private equity investor with extensive business and legal experience.
Mr. Cooke also serves as a director of several no-for-profit organizations. He
received a master of law degree, with highest honors, from American University.
Charles C. Johnston has been a Director of ICC since October 1996 and
was appointed Chairman of the Board of Directors in October 2001. Mr. Johnston
is presently an active private investor. From 1990 to 1992, Mr. Johnston was
chairman of Teleglobe Inc., a computer services company. Since January 1990, Mr.
Johnston has been a member of the Board of Directors of Teleglobe Inc. From 1969
to 1989, he was Chairman and Chief Executive Officer of ICI Systems Inc., a
computer services company.
Arthur R. Medici has been a director of ICC since November 1996. Since
September 2000, he has been President and CEO of SmartSoft, a software company
which develops innovative approaches for teaching reading and assessing
vocational aptitude. He has also been acting as an advisor to management of a
variety of companies in the Internet and telecommunications businesses. From
February 1999 until June 2000 he was the Senior Vice President of Marketing of
Cable & Wireless USA, Inc., the United States subsidiary of a global
telecommunications company. He was President of ICC from November 1996 to
February 1999. From November 1996 to September 1998 he also served as the Chief
Executive Officer of ICC. Prior to that he held various senior executive roles
with such companies as The Thomson Corporation, Autographix and NEC Information
Systems and IBM.
Sarah Byrne-Quinn leads the Strategy and Business Development
activities at Cable & Wireless on a global basis. Sarah joined Cable & Wireless
in September 2000. Prior to Cable & Wireless, Sarah held the position of Vice
President Strategy and Business Development at Ameritech Corporation. Sarah was
at Ameritech from 1994-1999. From 1988 through to 1994, Sarah worked in
corporate finance and in investment banking in London and Chicago with Robert
Flemings and Merrill Lynch. Sarah received a MIM (Master of International
Management) in 1987 from American Graduate School of International Management,
Phoenix, AZ. Her education also includes a Bachelors degree in Economics with
Business and Spanish Minors from the University of Arizona, Tucson, AZ.
Peter J. Boni currently serves as Managing Principal of Vested
Interest LLC, a high technology board, advisory and M&A practice. In 1999 Mr.
Boni served as Chief Executive Officer, President and Director of Prime
Response, which later merged with Chordiant Software. Prior to joining Prime
Response, Mr. Boni held executive management positions at several companies,
including President and Chief Executive Officer of Cayenne Software from August
1993 to January 1998, President of the Software and Information Services Group
of Paramount Communications Inc. from April 1990 to July 1993 and President of
On-line Software International from March 1989 to March 1990. Mr. Boni had
previously been chief executive officer at Summa Four, Inc., a provider of
telecommunications equipment, and held executive positions at Data General
Corporation.
29
Spencer I. Browne is a principal of Strategic Asset Management, LLC, a
privately owned investment firm, which he founded in November 1996. He also
currently serves as a director of Annaly Mortgage Management and ThermoGenesis
Corp. Mr. Browne has held various executive and management positions with
several publicly traded companies engaged in businesses related to the
residential and commercial mortgage loan industry. From August 1988 until
September 1996, Mr. Browne served as President, Chief Executive Officer and a
director of Asset Investors Corporation (AIC), a company he co-founded in 1986.
He also served as President, Chief Executive Officer and a director of
Commercial Assets, Inc., an affiliate of AIC, from its formation in October 1993
until September 1996. In addition, from June 1990 until March 1996, Mr. Browne
served as President and a director of M.D.C. Holdings, Inc., the parent company
of a major homebuilder in Colorado. Mr. Browne also has served as a director of
Altiva Financial Corporation since November 1996 and Convergent Communications,
Inc. since December 1999.
During 2001, Geoffrey Carroll, James Ortenzio and Matthew Wolk resigned
from the board of directors. ICC has three classes of directors, subject to a
maximum of ten directors. Each class of directors consists of a number of
directors as nearly as possible equal to the number of directors in the other
classes. The classes of directors serve staggered three-year terms. At each
annual meeting of stockholders, the class of directors whose term expires at
such annual meeting will be elected for a three-year term. Officers serve at the
discretion of the Board of Directors, subject to rights, if any, under contracts
of employment.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors,
and stockholders owning more than ten percent of a registered class of our
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. Executive officers, directors and such stockholders are
required by SEC regulations to furnish us with copies of all forms they file
pursuant to these requirements. Based solely on our review of the copies of such
forms that we have received, or written representations from reporting persons,
we believe that during the fiscal year ending July 31, 2001, all executive
officers, directors and such stockholders complied with all applicable filing
requirements on a timely basis except that Mr. Berman, Mr. Cassidy, Mr. Cooke,
Mr. D'Angelo, Mr. Hubbard, Mr. Johnston, Mr. LeRose, Mr. Medici and Mr. Psztur
were late in filing a Statement of Changes of Beneficial Ownership for May 2001.
30
Item 11. Executive Compensation
The following table sets forth the compensation paid or earned for
services rendered during the three fiscal years ended July 31, 2001 to our
former chief executive officer, our current chief executive officer and the four
most highly compensated other executive officers whose compensation in the year
ended July 31, 2001 was more than $100,000.
Summary Compensation Table
Long Term
Compensation Awards
------------------------
-----------------------
Fiscal Annual Compensation Securities Underlying All other
-----------------------
Name and Principal Position Year Salary Bonus Options (#) Compensation
----------------------------------- -------- ---------- --------- ------------------------ ---------------
Current Executive Officers
G. Michael Cassidy................. 2001 $250,000 -- 75,000 --
President and Chief Executive 2000 197,917 $1,200 150,000 --
Officer 1999 106,250 -- -- --
Walter M. Psztur.................... 2001 $190,000 -- 50,000 --
Senior Vice President, Chief 2000 160,833 $1,200 100,000 --
Financial Officer and Secretary 1999 105,000 10,000 63,652 --
David Hubbard...................... 2001 $175,000 -- 50,000 --
Senior Vice President, Chief 2000 161,417 $1,200 100,000 --
Technology Officer 1999 140,000 -- 16,606 --
Jeffrey W. LeRose.................. 2001 $116,250 -- 75,000 --
President and Chief Executive 2000 -- -- -- --
Officer, RTCI 1999 -- -- -- --
Anthony D'Angelo.................. 2001 $175,000 -- 50,000 --
Senior Vice President, 2000 147,917 $600 100,000 --
Electronic Commerce Network 1999 102,500 -- 62,203 --
Services
Former Chief Executive Officer
Dr. Geoffrey S. Carroll(1).......... 2001 $262,500 -- -- $437,500(2)
President and 2000 312,500 -- 500,000 --
Chief Executive Officer 1999 16,667 -- 150,000 --
----------------------
(1) Mr. Carroll resigned as president and chief executive officer in May
2001.
(2) Amount is for severance of which $350,000 was unpaid as of July 31,
2001.
31
Option Grants in Fiscal Year 2001
The following table sets forth the options that were granted during the fiscal
year ended July 31, 2001.
Potential Realizable
Values
At Assumed Annual Rates
Number of Percent of Of Stock Price
Securities Total Options Appreciation
Underlying Granted to Exercise For Options Term
Options Employees in Price Expiration -------------------------
Name Granted Fiscal 2001 Per Share Date 5% 10%
-------------------------- -- ----------- ------------- ----------- --------------- ----------- ----------
G. Michael Cassidy 75,000 6.55% $2.57 May 30, 2011 $121,219 $307,194
Walter M. Psztur 50,000 4.37% 2.57 May 30, 2011 80,813 204,796
David Hubbard 50,000 4.37% 2.57 May 30, 2011 80,813 204,796
Jeffrey W. LeRose 75,000 6.55% 2.83 May 30, 2006 33,753 98,176
Anthony D'Angelo 50,000 4.37% 2.57 May 30, 2011 80,813 204,796
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table provides information relating to option exercises
by the executive officers identified in the summary compensation table during
the fiscal year ended July 31, 2001. In addition, the table indicates the number
and value of vested and unvested options held by these executive officers as of
July 31, 2001.
The "Value Realized" on option exercises is equal to the difference
between the fair market value of our class A common stock on the date of
exercise less the exercise price. The "Value of Unexercised In-the-Money Options
at July 31, 2001" is based on $3.80 per share, the closing sales price of our
class A common stock on the Nasdaq National Market on July 31, 2001, less the
exercise price, multiplied by the aggregate number of shares subject to
outstanding options.
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares July 31, 2001 July 31, 2001
Acquired Value --------------------------------- ---------------------------
Name on Exercise Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
----------------------- ----------- ---------- -------------- --------------- ----------- ------------
G. Michael Cassidy -- -- 316,021 150,000 $869,614 $61,500
Walter M. Psztur -- -- 112,999 100,001 102,399 41,001
David Hubbard -- -- 179,999 100,001 442,985 41,001
Jeffrey W. LeRose -- -- 25,000 50,000 24,250 48,500
Anthony D'Angelo -- -- 124,999 100,001 146,606 41,001
Employment Agreements
We have entered into employment agreements with each of G. Michael
Cassidy, Walter M. Psztur, David Hubbard and Anthony D'Angelo. The employment
agreements are each for a term of three years ending on July 31, 2003. Under
their employment agreements, Mr. Cassidy, Mr. Psztur, Mr. Hubbard and Mr.
D'Angelo receive base salaries at the annual rates of $250,000, $190,000,
$175,000 and $175,000, respectively. Each of these contracts contain a provision
that in the event the employee's employment is terminated by ICC without cause,
ICC shall continue to pay the employee's base salary until the earlier of one
year after such termination or the end of the term of the contract.
Director Compensation
Directors of ICC do not receive any fixed compensation for serving on
the Board. Board members are reimbursed for all reasonable expenses incurred by
them in connection with serving as directors of ICC.
32
In May 2001, we granted to each of Mr. Medici, Mr. Cooke and Mr.
Johnston an option to acquire 25,000 shares of our class A common stock under
our amended and restated stock option plan. We also granted Mr. Berman an option
to purchase 50,000 shares of our class A common stock under our amended and
restated stock option plan. The exercise price per share for these grants was
$2.57, the fair market value of the class A common stock on the date of grant.
One-third of these options are immediately exercisable with the balance
exercisable in equal annual installments on the first and second anniversaries
of the grant. These options expire June 2011.
Also in May 2001, we granted to Mr. LeRose an option to acquire 75,000
shares of our class A common stock under our amended and restated stock option
plan. The exercise price for this option grant was $2.83. One-third of these
options are immediately exercisable with the balance exercisable in equal annual
installments on the first and second anniversaries of the grant. These options
expire June 2006.
In April 2000, we granted to each of Mr. Johnston and Mr. Medici an
option to acquire 50,000 shares of our class A common stock under our amended
and restated stock option plan. The exercise price per share for these option
grants was $19.00. These options are immediately exercisable. These options
expire April 2010.
Compensation Committee Interlocks and Insider Participation
The compensation committee has the power and authority to grant options
under and to administer ICC's Amended and Restated Stock Option Plan and review
and to approve the compensation of the executive officers of ICC and such other
employees of ICC as are assigned thereto by the Board of Directors and to make
recommendations to the Board of Directors with respect to standards for setting
compensation levels. Prior to March 2001, the compensation committee consisted
of Mr. Ortenzio and Mr. Johnston. Mr. Ortenzio resigned from the Board of
Directors in March 2001 and Mr. Berman and Mr. Cooke were added to the
compensation committee effective March 2001. No interlocking relationship exists
between any member of Board of Directors or compensation committee and any other
company's board of directors or compensation committee.
Board Compensation Committee Report on Executive Compensation
The Company has compensated its executive officers in accordance with
the provisions of their employment agreements which were approved by the Board
of Directors prior to the execution and delivery of these agreements. No bonuses
were paid in fiscal year 2001. See the sections above entitled "Executive
Compensation", "Employment Agreements" and "Option Grants in Fiscal 2001" for
more information.
Richard J. Berman
Kim Cooke
Charles C. Johnston
33
Stock Price Performance Graph
The following graph illustrates a comparison of the five-year
cumulative total stockholder return (change in stock price plus reinvested
dividends) of the class A common stock of Internet Commerce Corporation with the
CRSP Total Return Index for the Nasdaq National Market (U.S. and Foreign) (the
"Nasdaq Market Index") and the Media General Financial Services Internet
Software & Services Index ("MG Group Index"). The comparisons in the graph are
required by the SEC and are not intended to forecast or be indicative of
possible future performance of the Company's class A common stock. Data for the
Nasdaq Market Index and the MG Group Index assume reinvestment of dividends. We
have never paid dividends on our common stock and have no present plans to do
so.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG INTERNET COMMERCE CORPORATION,
NASDAQ MARKET INDEX AND MG GROUP INDEX
Internet
Commerce MG Nasdaq
Corporation Group Index Market Index
----------- ----------- ------------
08/01/96 100.00 100.00 100.00
07/31/97 57.14 85.70 147.00
07/31/98 8.93 146.21 176.24
07/31/99 78.57 356.73 248.99
01/31/00 100.00 439.32 131.56
07/31/01 21.71 131.56 199.30
----------
Assumes $100 invested on August 1, 1996 in our class A common stock, the
securities comprising the Nasdaq Market Index and the MG Group Index.
A copy of the list of companies which comprise the MG Group Index may be
obtained upon request by contacting us at 805 Third Avenue, 9th Floor, New
York, New York 10022.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of our class A common stock as of October 29, 2001 by:
o each person that is known by us to beneficially own more than 5% of our
class A common stock;
o each of our directors;
o each of our executive officers named in the summary compensation table on
page 31; and
o all our directors and executive officers as a group.
Under the rules of the Securities and Exchange Commission, beneficial
ownership includes voting or investment power with respect to securities and
includes the shares issuable under stock options that are exercisable within
sixty (60) days of October 29, 2001. Those shares issuable under stock options
are deemed outstanding for computing the percentage of each person holding
options but are not deemed outstanding for computing the percentage of any other
person. The percentage of beneficial ownership schedule is based upon 9,778,106
shares outstanding as of October 29, 2001. The address for those individuals for
which an address is not otherwise provided is c/o Internet Commerce Corporation,
805 Third Avenue, New York, NY 10022. To our knowledge, except as indicated in
the footnotes to this table and pursuant applicable community property laws, the
persons named in the table have sole voting power and investment power with
respect to all shares of class A common stock listed as owned by them.
Class A Common Shares
Beneficially Owned
-----------------------------------
Name and Address Number Percent
--------------------------------------- --------------- --------------
Principal Stockholders
Jeffrey W. LeRose (1) 1,779,675 18.2%
109 Lochview Drive
Cary, NC 27511
Cable & Wireless PLC (2) 958,770 9.0%
124 Theobalds Road
London WCIX 8RX
Blue Water Venture Fund II, L.L.C. 763,637 7.8%
1420 Beverly Road, Suite 300
McLean, Virginia 22101
Executive Officers and Directors
Richard J. Berman (3) 478,826 4.7%
Peter J. Boni -- *
Spencer I. Browne -- *
G. Michael Cassidy (4) 328,521 3.3%
Kim D. Cooke (5) 8,333 *
Anthony J. D'Angelo (6) 125,999 1.3%
David Hubbard (7) 188,999 1.9%
Charles C. Johnston (8) 128,333 1.3%
Arthur R. Medici (9) 182,737 1.8%
Walter M. Psztur (10) 117,999 1.2%
Sarah Byrne-Quinn (11) -- *
All directors and executive officers
as a group (9 persons) (12) 1,559,747 15.5%
---------------------
* Less than 1%
(1) Includes 25,000 shares of class A common stock issuable upon the exercise
of options.
(2) Includes 447,628 shares of class A common stock issuable upon conversion of
shares of series C preferred stock and 400,000 shares of class A common
stock issuable upon the exercise of 400,000 warrants
(3) Includes 399,999 shares of class A common stock issuable upon the exercise
of options. Does not include 5,000 shares of class A common stock owned by
Mr. Berman's wife, in which shares Mr. Berman disclaims any beneficial
interest.
35
(4) Includes 326,021 shares of class A common stock issuable upon the exercise
of options.
(5) Includes 8,333 shares of class A common stock issuable upon the exercise of
options. Does not include 763,637 shares of class A common stock owned by
Blue Water Venture Fund II, L.L.C., of which Mr. Cooke is a managing
director, in which shares Mr. Cooke disclaims any beneficial interest.
(6) Includes 124,999 shares of class A common stock issuable upon the exercise
of options.
(7) Includes 179,999 shares of class A common stock issuable upon the exercise
of options.
(8) Includes 58,333 shares of class A common stock issuable upon the exercise
of options.
(9) Includes 182,737 shares of class A common stock issuable upon the exercise
of options. Does not include 136,251 shares of class A common stock owned
by Mr. Medici's wife and class A common stock held by his wife as custodian
for his daughters, in all of which shares Mr. Medici disclaims any
beneficial interest.
(10) Includes 112,999 shares of class A common stock issuable upon the exercise
of options.
(11) Does not include 111,142 shares of class A common stock, 447,628 shares of
class A common stock issuable upon conversion of shares of series C
preferred stock and 400,000 shares of class A common stock issuable upon
the exercise of 400,000 warrants owned by Cable & Wireless, of which Ms.
Byrne-Quinn is an employee, in which securities Ms. Byrne-Quinn disclaims
beneficial interest.
(12) See footnotes (3) through and including (11) above.
Item 13. Certain Relationships and Related Transactions
Since August 1, 2000, we have been billed approximately $180,000 by
Cable & Wireless for tele-communication services and we have billed Cable &
Wireless approximately $24,000 for use of our ICC.Net service. We have not been
a party to any other transaction or series of transactions involving $60,000 or
more and in which any director, executive officer or holder of more than 5% of
our capital stock had a material interest.
36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of documents filed as part of the report
1. Consolidated Financial Statements
See index to Consolidated Financial Statements and Schedule on page F-1
2. Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page F-1
3. Exhibits
The following documents are filed as exhibits to this form 10-K,
including those exhibits incorporated in this form 10-K by reference to a prior
filing of ICC under the Securities Act or the Exchange Act as indicated in
parenthesis:
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among ICC, ICC Acquisition
Corporation, Inc., a wholly-owned subsidiary of ICC,
Research Triangle Commerce, Inc., or RTCI, and the selling
shareholders of RTCI (12)
2.2 Agreement and Plan of Merger among ICC, IDC, and the selling
shareholders of IDC (13)
3(i).1 Amended and Restated Certificate of Incorporation (1)
3(i).2 Certificate of Merger merging Infosafe Systems, Inc. and
Internet Commerce Corporation (1)
3(i).3 Certificate of Amendment to the Amended and Restated
Articles of Incorporation (2)
3(i).4 Certificate of Designations-- Series A Convertible
Redeemable Preferred Stock (1)
3(i).5 Certificate of Designations-- Series S Preferred Stock (1)
3(i).6 Certificate of Designations-- Series C Preferred Stock (9)
3(ii).1 By-laws (7)
4.1 Specimen Certificate for Class A Common Stock (3)
4.2 Form of Revised Subscription Agreement, dated March 31,
1999, relating to the shares of Series A Convertible
Redeemable Preferred Stock sold in the 1999 private
placement (1)
4.3 Form of Underwriter's Option (3)
4.4 Form of Warrant Agreement (3)
4.5 Escrow agreement, as amended (3)
4.6 Form of warrant expiring February 18, 2002 (3)
4.7 Warrant Agreement, dated February 10, 1997, by and among
ICC, American Stock Transfer and Trust Company as warrant
agent and D.H. Blair Investment Banking Corp. (4)
4.8 Amendment Agreement, dated February 10, 1997, to Warrant
Agreement dated January 25, 1995 by and among ICC, American
Stock Transfer and Trust Company as warrant agent and D.H.
Blair Investment Banking Corp. (4)
37
4.9 Form of Unit Purchase Option for D.H. Blair Investment
Banking Corp. dated February 18, 1997 (4)
4.10 Agreement, dated February 18, 1997, between ICC and D. H.
Blair Investment Banking Corp. to extend an agreement dated
January 25, 1995 regarding mergers, acquisitions and similar
transactions (4)
4.11 Form of Class A Bridge Warrant issued in the 1998 bridge
financing (1)
4.12 Warrant Agreement dated January 12, 2000, by and among ICC
and Cable and Wireless USA, Inc. (9)
4.13 Form of Registration Rights Agreement dated as of October
29, 2001 by and among ICC and the purchasers identified
therein (15)
4.14 Registration Rights Agreement dated as of October 29, 2001,
by and between ICC and Amaranth Trading LLC (15)
4.15 Form of Class A Common Stock Warrant issued in the October
2001 private placement (15)
10.1 1994 Stock Option Plan (3)
10.2 Lease Agreement between 805 Third Ave. Co. and ICC relating
to the rental of ICC's current principal executive office
(5)
10.3 Lease Agreement, dated as of May 21, 1999, between JB
Squared LLC and ICC relating to the rental of approximately
4,000 square feet at the Lakeview Executive Center, 45
Research Way, East Setauket, New York, 11733 (6)
10.4 Employment Agreement for Anthony D'Angelo dated as of April
16, 2000 (15)
10.5 Employment Agreement for G. Michael Cassidy dated as of
April 16, 2000 (14)
10.6 Employment Agreement for David Hubbard dated as of April 16,
2000 (14)
10.7 Employment Agreement for Walter M. Psztur dated as of April
16, 2000 (14)
10.8 Master Agreement between Cable & Wireless PLC and ICC
executed on November 24, 1999 (8)
10.9 Consulting Agreement, dated as of March 15, 2000, between
Michele Golden and ICC (10)
10.10 Amended and restated stock option plan (11)
10.11 First Amendment to Lease Agreement, dated as of January,
2000, by and between JB Squared LLC and ICC relating to the
rental of an additional approximately 4,800 square feet at
the Lakeview Executive Center, 45 Research Way, East
Setauket, New York, 11733 (14)
10.12 First Amendment of Lease Agreement between Madison Third
Building Companies LLC and ICC relating to the rental of
additional office space at 805 Third Avenue, New York, New
York 10022 (14)
10.13 Lease Agreement, dated as of August 2, 2000, by and between
IDC Realty, LLC as landlord and ICC as tenant relating to
the rental of an approximately 8,000 square feet facility
used by ICC's service bureau division (14)
10.14 Lease Agreement, dated as of November 1, 1999, by and
between Shannon Oaks Partnership as landlord and RTCI as
tenant relating to the rental of an approximately 8,000
square feet facility used by ICC's professional services
division (15)
10.15 Joint Services Agreement, between ICC and Hightech
International Services GmbH (a wholly-owned subsidiary of
ThyssenKrupp Services GmbH) executed on July 28, 2000 (15)
38
10.16 Letter agreement dated July 25, 2001 between ICC and Triaton
GmbH (f/k/a HighTech International Services, a wholly-owned
subsidiary of ThyssenKrupp Services GmbH) amending Joint
Services Agreement (15)
10.17 Subscription Agreement dated as of October 29, 2001 by and
between ICC and Amaranth Trading LLC (15)
10.18 Form of Subscription Agreement dated as of October 29, 2001
by and among ICC and the purchasers identified therein (15)
23(i) Consent of Deloitte & Touche LLP (15)
23(ii) Consent of Richard A. Eisner LLP (15)
-------------------
(1) Incorporated by reference to ICC's registration statement on form S-3
(File no. 333-80043)
(2) Incorporated by reference to ICC's annual report on form 10-KSB for
the year ended July 31, 1998
(3) Incorporated by reference to ICC's registration statement on form SB-2
(File no. 33-83940)
(4) Incorporated by reference to ICC's report on form 10-QSB dated January
31, 1997
(5) Incorporated by reference to ICC's report on form 10-QSB dated October
31, 1997
(6) Incorporated by reference to amendment no. 3 to ICC's registration
statement on form S-3 (File no. 333-80043)
(7) Incorporated by reference to ICC's current report on form 8-K filed
with the SEC on July 31, 1999
(8) Incorporated by reference to ICC's current report on form 8-K dated
December 1, 1999
(9) Incorporated by reference to amendment no. 1 to ICC's registration
statement on form S-3 (File no. 333-93301)
(10) Incorporated by reference to ICC's current report on form 8-K dated
March 28, 2000
(11) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999.
(12) Incorporated by reference to ICC's current report on form 8-K dated
June 15, 2000
(13) Incorporated by reference to ICC's current report on form 8-K dated
August 11, 2000
(14) Incorporated by reference to ICC's report on form 10-KSB dated July
31, 2000
(15) Filed herewith
(b) Reports on Form 8-K
No Current Reports on form 8-K were filed during the last fiscal
quarter covered by this report.
(c) Exhibits
See index to exhibits on page 37.
(d) Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page
F-1.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: October 29, 2001
INTERNET COMMERCE CORPORATION
by: /s/ G. Michael Cassidy
------------------------------------
G. Michael Cassidy
President and Chief Executive Officer
by: /s/ Walter M. Psztur
------------------------------------
Walter M. Psztur
Senior Vice President and Chief
Financial Officer
40
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ G. Michael Cassidy President, Chief Executive October 29, 2001
--------------------------- Officer and Director
G. Michael Cassidy (Principal Executive
Officer)
/s/ Walter M. Psztur Chief Financial Officer October 29, 2001
--------------------------- (Principal Financial
Walter M. Psztur and Accounting Officer)
/s/ R.J. Berman Director October 29, 2001
---------------------------
Richard J. Berman
/s/ Kim D. Cooke Director October 29, 2001
---------------------------
Kim D. Cooke
/s/ Charles C. Johnston Director October 29, 2001
---------------------------
Charles C. Johnston
/s/ Arthur Medici Director October 29, 2001
---------------------------
Arthur R. Medici
/s/ Sarah Byrne-Quinn Director October 29, 2001
---------------------------
Sarah Byrne-Quinn
41
INTERNET COMMERCE CORPORATION
Index to Consolidated Financial Statements and Schedule
Page
----
Independent auditors' report F-2
Predecessor independent auditors' report F-3
Consolidated balance sheets F-4
Consolidated statements of operations F-5
Consolidated statements of changes in stockholders' equity
and other comprehensive income F-6
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-9
Schedule II. Valuation and Qualifying Accounts F-30
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Internet Commerce Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of Internet
Commerce Corporation (the "Company") as of July 31, 2001 and 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and other comprehensive income, and cash flows for the years then ended. Our
audits also included the financial statement schedule for the years ended July
31, 2001 and 2000 listed in the Index at Item 14. These financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Internet Commerce Corporation as of
July 31, 2001 and 2000, and the results of its operations and its cash flows for
the years then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial
statement schedule for the years ended July 31, 2001 and 2000, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
October 29, 2001
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Internet Commerce Corporation
New York, New York
We have audited the accompanying statements of operations, changes in
stockholders' equity and other comprehensive income, and cash flows for the year
ended July 31, 1999 of Internet Commerce Corporation (formerly Infosafe Systems,
Inc. and subsidiary). Our audit also included the financial statement schedule
for the year ended July 31, 1999 listed in the index at Item 14. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the results of operations of Internet Commerce Corporation
and its cash flows for the year ended July 31, 1999, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Richard A. Eisner & Company, LLP
New York, New York
September 30, 1999
F-3
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
July 31,
----------------------------------
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,223,487 $ 14,003,329
Marketable securities 665,552 --
Accounts receivable, net of allowance for doubtful accounts
of $224,022 and $74,388, respectively 1,588,242 629,087
Note receivable -- 5,000,000
Prepaid expenses and other current assets 401,334 209,112
------------ ------------
Total current assets 4,878,615 19,841,528
Restricted cash 276,635 523,863
Prepaid acquisition costs -- 369,486
Property and equipment, net 1,920,662 925,596
Software development costs, net 425,471 474,592
Goodwill, net 2,194,067 182,927
Other intangible assets, net 5,917,854 --
Other assets 60,794 14,237
------------ ------------
Total assets $ 15,674,098 $ 22,332,229
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 713,670 639,196
Accrued expenses 2,381,788 451,663
Accrued dividends - preferred stock 273,289 275,763
Deferred revenue 306,764 250,000
Capital lease obligation 328,480 307,677
Other liabilities 228,189 86,237
------------ ------------
Total current liabilities 4,232,180 2,010,536
Capital lease obligation - less current portion 255,009 231,457
------------ ------------
Total liabilities 4,487,189 2,241,993
Commitments and contingencies
Stockholders' Equity:
Preferred stock - 5,000,000 shares authorized, including 10,000 shares series A,
10,000 shares series C and 175 shares series S:
Series A preferred stock - par value $.01 per share, 225 and 668 shares issued
and outstanding, respectively (liquidation value of $226,157) 2 7
Series C preferred stock - par value $.01 per share, 44.76 votes per share;
10,000 shares issued and outstanding (liquidation value of $10,272,131) 100 100
Common stock:
Class A - par value $ .01 per share, 40,000,000 shares
authorized, one vote per share; 9,770,180 and 6,388,445 shares issued
and outstanding, respectively 97,702 63,884
Class B - par value $ .01 per share, 2,000,000 shares authorized, six
votes per share; 1,930 and 2,574 shares issued and outstanding, respectively 19 26
Additional paid-in capital 80,750,153 58,432,187
Accumulated deficit (69,261,320) (38,405,968)
Accumulated other comprehensive loss (209,728) --
Deferred compensation - restricted stock (190,019) --
------------ ------------
Total stockholders' equity 11,186,909 20,090,236
------------ ------------
Total liabilities and stockholders' equity $ 15,674,098 $ 22,332,229
============ ============
See notes to consolidated financial statements
F-4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations
Years Ended July 31,
----------------------------------------------------
2001 2000 1999
------------- ------------ -------------
Revenues:
Services $ 9,742,518 $ 1,303,441 $ 105,243
------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of
$325,834 and $1,241 in 2001 and 1999, respectively) 9,354,354 2,514,282 452,306
Product development and enhancement (excluding non-cash
compensation of $97,809 and $93,610 in 2000 and 1999,
respectively) 931,028 702,218 516,608
Selling and marketing (excluding non-cash compensation
of $94,294, $767,639 and $304,828 in 2001, 2000 and 1999,
respectively) 5,383,583 3,273,294 419,714
General and administrative (excluding non-cash compensation
of $570,920, $4,294,897 and $2,866,841 in 2001, 2000 and
1999, respectively) 9,682,586 4,814,160 3,581,511
Non-cash charges for stock-based compensation, services
and legal settlements 991,048 5,160,345 3,266,520
Impairment of acquired intangibles 16,708,479 -- --
------------ ------------ ------------
43,051,078 16,464,299 8,236,659
------------ ------------ ------------
Operating loss (33,308,560) (15,160,858) (8,131,416)
------------ ------------ ------------
Other income and expense:
Interest and investment income 545,031 737,442 88,143
Interest expense (73,569) (62,211) (1,577,667)
Other income, net 51,859 -- --
------------ ------------ ------------
523,321 675,231 (1,489,524)
------------ ------------ ------------
Loss before income taxes (32,785,239) (14,485,627) (9,620,940)
Income tax benefit 1,929,887 -- --
------------ ------------ ------------
Net loss
(30,855,352) (14,485,627) (9,620,940)
Dividends on preferred stock (420,309) (457,535) (190,645)
Dividends to preferred stockholders for beneficial
conversion feature -- (4,549,535) (1,222,072)
------------ ------------ ------------
Loss attributable to common stockholders $(31,275,661) $(19,492,697) $(11,033,657)
============ ------------ ============
Basic and diluted loss per common share $ (3.57) (4.49) (7.62)
============ ============ ============
Weighted average number of common
shares outstanding - basic
and diluted loss per share 8,767,752 4,336,698 1,447,091
============ ============ ============
See notes to consolidated financial statements
F-5
INTERNET COMMERCE CORPORATION
Consolidated Statements of changes in
Stockholders' Equity and Other Comprehensive Income
Preferred Stock Common Stock
-----------------------------------------------------------------------------
Series A Series C Series S Class A
-----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------
Balance - August 1, 1998 - $ - - $ - - $ - 947,951 $ 9,480
-----------------------------------------------------------------------------
Issuance of common stock for purchase
of minority interest 334,495 3,345
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 175 2 79,934 799
Issuance of common stock in exchange
for warrants and unit purchase options 316,651 3,166
Issuance of preferred stock for services 45 1
Proceeds from private placement, net 7,000 70
Issuance of warrants for services
Issuance of warrants in connection with debt
Exchange of common stock 78,807 788
Payment of subscription note receivable
Conversion of bridge loans into preferred stock 2,595 26
Conversion of preferred stock (50) (1) 10,000 100
Proceeds from exercise of warrants 15,000 150
Redemption of redeemable stock
Redemption of preferred stock (175) (2) 13,462 135
Preferred stock dividend 14,641 146
Charge on price-based stock options and for
change of control
Net loss
Unrealized loss on marketable securities
Total comprehensive income
-----------------------------------------------------------------------------
Balance - July 31, 1999 9,590 $ 96 - $ - - $ - 1,810,941 $ 18,109
Conversion of series A preferred stock (8,922) (89) 1,788,400 17,884
Exchange of common stock 113,016 1,130
Proceeds from exercise of warrants 1,360,139 13,601
Proceeds from exercise of employee stock options 849,765 8,498
Proceeds from private placement of preferred stock 10,000 100
Proceeds from private placement of common stock 434,184 4,342
Issuance of common stock for settlement 32,000 320
Charge on price-based stock options
Issuance of options for services
Preferred stock dividends - cash
Net loss
Unrealized gain - marketable securities
Total comprehensive income
-----------------------------------------------------------------------------
Balance - July 31, 2000 668 $ 7 10,000 $ 100 - $ - 6,388,445 $ 63,884
Common Stock Accumulated
--------------------- --------------------------
Class B Additional Other
--------------------- Paid-In Note Comprehensive
Shares Amount Capital Receivable Deficit Income
--------------------------------------------------------------------------------
Balance - August 1, 1998 194,397 $ 1,944 $ 14,532,208 $ (112,500) $(14,299,401) $ -
--------------------------------------------------------------------------------
Issuance of common stock for purchase
of minority interest 467,039
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 682,518
Issuance of common stock in exchange
for warrants and unit purchase options (3,166)
Issuance of preferred stock for services 44,999
Proceeds from private placement, net 6,414,930
Issuance of warrants for services 816,672
Issuance of warrants in connection with debt 2,043,304
Exchange of common stock (78,807) (788)
Payment of subscription note receivable 112,500
Conversion of bridge loans into preferred stock 1,952,744
Conversion of preferred stock (99)
Proceeds from exercise of warrants 37,350
Redemption of redeemable stock 5,478
Redemption of preferred stock (133)
Preferred stock dividend (458)
Charge on price-based stock options and for
change of control 1,996,503
Net loss (9,620,940)
Unrealized loss on marketable securities (34,000)
Total comprehensive income
-------------------------------------------------------------------------------
Balance - July 31, 1999 115,590 $ 1,156 $ 28,989,889 $ - $(23,920,341) $(34,000)
Conversion of series A preferred stock (17,795)
Exchange of common stock (113,016) (1,130)
Proceeds from exercise of warrants 4,226,172
Proceeds from exercise of employee stock options 859,997
Proceeds from private placement of preferred stock 9,999,900
Proceeds from private placement of common stock 9,495,434
Issuance of common stock for settlement 839,003
Charge on price-based stock options 3,311,257
Issuance of options for services 1,185,865
Preferred stock dividends - cash (457,535)
Net loss (14,485,627)
Unrealized gain - marketable securities 34,000
Total comprehensive income
-------------------------------------------------------------------------------
Balance - July 31, 2000 2,574 $ 26 $ 58,432,187 $ - $(38,405,968) $ -
Deferred
Compensation Total
Restricted Stockholders
Stock Equity
---------------------------------------
Balance - August 1, 1998 $ - $ 131,731
---------------------------------------
Issuance of common stock for purchase
of minority interest 470,384
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 683,319
Issuance of common stock in exchange
for warrants and unit purchase options
Issuance of preferred stock for services 45,000
Proceeds from private placement, net 6,415,000
Issuance of warrants for services 816,672
Issuance of warrants in connection with debt 2,043,304
Exchange of common stock
Payment of subscription note receivable 112,500
Conversion of bridge loans into preferred stock 1,952,770
Conversion of preferred stock
Proceeds from exercise of warrants 37,500
Redemption of redeemable stock 5,478
Redemption of preferred stock
Preferred stock dividend (312)
Charge on price-based stock options and for
change of control 1,996,503
Net loss (9,620,940)
Unrealized loss on marketable securities (34,000)
----------
Total comprehensive income (9,654,940)
---------------------------------------
Balance - July 31, 1999 $ - $ 5,054,909
Conversion of series A preferred stock
Exchange of common stock
Proceeds from exercise of warrants 4,239,773
Proceeds from exercise of employee stock options 868,495
Proceeds from private placement of preferred stock 10,000,000
Proceeds from private placement of common stock 9,499,776
Issuance of common stock for settlement 839,323
Charge on price-based stock options 3,311,257
Issuance of options for services 1,185,865
Preferred stock dividends - cash (457,535)
Net loss (14,485,627)
Unrealized gain - marketable securities (34,000)
----------
Total comprehensive income (14,451,627)
---------------------------------------
Balance - July 31, 2000 $ - $ 20,090,236
See notes to consolidated financial statements
F-6
INTERNET COMMERCE CORPORATION
Consolidated Statements of changes in
Stockholders' Equity and Other Comprehensive Income (continued)
Preferred Stock Common Stock
--------------------------------------------------------------------------------
Series A Series C Series S Class A
--------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------
Balance - July 31, 2000 668 $ 7 10,000 $ 100 - $ - 6,388,445 $ 63,884
Conversion of series A preferred stock (443) (5) 135,584 1,356
Exchange of common stock 644 7
Proceeds from exercise of employee stock options 169,280 1,693
Charge for options for services
Common stock issued for acquisitions 2,957,484 29,575
Options and warrants issued for acquisitions
Unearned restricted stock issued to RTCI employees
Amortization of unearned restricted stock
Preferred stock dividends
Stock issued as payment for dividends
on preferred stock 118,743 1,187
Net loss
Unrealized loss - marketable securities
Total comprehensive income
--------------------------------------------------------------------------------
Balance - July 31, 2001 225 $ 2 10,000 $ 100 - $ - 9,770,180 $ 97,702
================================================================================
Common Stock Accumulated
--------------------- --------------------------
Class B Additional Other
--------------------- Paid-In Note Comprehensive
Shares Amount Capital Receivable Deficit Income
--------------------------------------------------------------------------------
Balance - July 31, 2000 2,574 $ 26 $ 58,432,187 $ - $(38,405,968) $ -
Conversion of series A preferred stock (1,351)
Exchange of common stock (644) (7)
Proceeds from exercise of employee stock options 371,986
Charge for options for services 450,110
Common stock issued for acquisitions 19,828,610
Options and warrants issued for acquisitions 1,667,323
Unearned restricted stock issued to RTCI employees
Amortization of unearned restricted stock
Preferred stock dividends (420,309)
Stock issued as payment for dividends
on preferred stock 421,597
Net loss (30,855,352)
Unrealized loss - marketable securities (209,728)
Total comprehensive income
-------------------------------------------------------------------------------
Balance - July 31, 2001 1,930 $ 19 $ 80,750,153 $(69,261,320) $(209,728)
===============================================================================
Deferred
Compensation Total
Restricted Stockholders
Stock Equity
-------------------------------------
Balance - July 31, 2000 $ - $ 20,090,236
Conversion of series A preferred stock
Exchange of common stock
Proceeds from exercise of employee stock options 373,679
Charge for options for services 450,110
Common stock issued for acquisitions 19,858,185
Options and warrants issued for acquisitions 1,667,323
Unearned restricted stock issued to RTCI employees (730,957) (730,957)
Amortization of unearned restricted stock 540,938 540,938
Preferred stock dividends (420,309)
Stock issued as payment for dividends
on preferred stock 422,784
Net loss (30,855,352)
Unrealized loss - marketable securities (209,728) (209,728)
-------------
Total comprehensive income (31,065,080)
-------------------------------------
Balance - July 31, 2001 $ (190,019) $ 11,186,909
=====================================
See notes to consolidated financial statements
F-7
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows
Years Ended July 31,
---------------------------------------------------
2001 2000 1999
--------------- ------------- ------------
Cash flows from operating activities:
Net loss $(30,855,352) $(14,485,627) $ (9,620,940)
Adjustments to reconcile net loss to net cash used in operating
activities:
Impairment of intangible assets 16,708,479 -- --
Depreciation and amortization 3,693,664 831,900 423,872
Amortization of debt discount -- -- 1,237,357
Allowance for doubtful accounts 261,640 -- --
Loss on disposal of fixed assets 6,370 32,915
Gain (loss) on sale of marketable securities (116,599) 14,937 7,611
Non-cash charges for equity instruments issued for
compensation, services, change of control and legal settlement 991,048 5,160,445 3,266,520
Deferred taxes (1,929,887) -- --
Changes in:
Accounts receivable (485,326) (579,663) (42,193)
Prepaid expenses and other assets 253,854 (467,164) 164,593
Accounts payable (300,042) 271,818 67,348
Accrued expenses 497,875 73,126 244,944
Deferred revenue (201,990) 250,000 --
Other liabilities 74,989 69,418 16,819
------------ ------------ ------------
Net cash used in operating activities (11,401,277) (8,860,810) (4,201,154)
------------ ------------ ------------
Cash flows from investing activities:
Payment for purchase of acquisitions, net of cash acquired (22,055) -- --
Capitalization of software development costs (188,175) -- --
Notes receivable -- (5,000,000) --
Purchases of property and equipment (641,671) (362,048) (191,417)
Purchases of marketable securities -- -- (5,012,142)
Purchase of certificate of deposits -- (88,199) (435,664)
Proceeds from sales of marketable securities 270,720 3,987,126 999,876
Proceeds from maturity of certificate of deposits 247,228 -- --
------------ ------------ ------------
Net cash used in investing activities (333,953) (1,463,121) (4,639,347)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 10,000,000 6,415,000
Proceeds from issuance of common stock -- 9,499,776 --
Proceeds from bridge loan -- -- 2,300,000
Proceeds from issuance of warrants -- -- 38,925
Proceeds from exercise of warrants -- 4,239,773 37,500
Proceeds from subscription receivable -- -- 112,500
Proceeds from exercise of employee stock options 373,678 868,495 --
Payment for redemption of redeemable common stock -- -- (277)
Payment of dividends -- (181,772) (312)
Payments of capital lease obligations (418,290) (213,270) (126,864)
------------ ------------ ------------
Net cash (used in) provided by financing activities (44,612) 24,213,002 8,776,472
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (11,779,842) 13,889,071 (64,029)
Cash and cash equivalents, beginning of period 14,003,329 114,258 178,287
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,223,487 $ 14,003,329 $ 114,258
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 73,569 $ 62,211 $ 111,283
See notes to consolidated financial statements
F-8
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
1. ORGANIZATION AND NATURE OF BUSINESS
Internet Commerce Corporation ("ICC" or the "Company") was incorporated
under the name Infosafe Systems, Inc. in November 1991 in the State of
Delaware.
ICC provides Internet-based services for the e-commerce
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain
connectivity solutions for electronic data interchange, or EDI, and
e-commerce and offers users a vehicle to securely send and receive
files of any format and size.
The ICC.NET system uses the Internet and proprietary technology to
deliver the Company's customers' documents and data files to members of
their trading communities, many of which have incompatible systems, by
translating the documents and data files into any format required by
the receiver. The system can be accessed using a standard Web browser
or virtually any other communications protocol.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on
November 6, 2000, provides the Company with the capability to
facilitate the development and operations of comprehensive
business-to-business electronic commerce solutions. RTCI specializes in
electronic commerce solutions involving EDI and EAI (Enterprise
Application Integration) by providing mission critical electronic
commerce consulting, electronic commerce software, outsourced
electronic commerce services and technical resource management.
Through the acquisition of Intercoastal Data Corporation ("IDC") on
August 3, 2000, ICC expanded its capabilities to include an EDI service
bureau, which provides EDI services to small and mid-sized companies.
IDC's services include the conversion of electronic forms into hard
copies and the conversion of hard copies to an EDI format. IDC also
provides Universal Product Code ("UPC") services and maintains UPC
catalogs for its customers.
In October 2001, we sold in a private placement 1,159,716 shares of
class A common stock and warrants to purchase 347,915 additional shares
of class A common stock for aggregate proceeds of $3,189,219.
Management believes these proceeds, combined with the Company's
existing cash, cash equivalents and marketable securities, provide the
Company with sufficient liquidity to continue in operation for the next
twelve months. However, if our cost reductions do not achieve
sufficient savings, if our expenses increase more than anticipated or
if our revenue does not increase as anticipated because of competitive
or other reasons, our cash resources will not be sufficient and we may
require additional financing. There can be no assurances that any
financing will be available or that the terms will be acceptable to us,
or that any financing will be consummated. See Note 17.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and it's wholly-owned subsidiary. All significant intercompany
transactions have been eliminated in consolidation.
Revenue recognition:
The Company derives its revenue from subscriptions to its ICC.NET
service, which include transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees.
Fixed subscription fees are recognized on a pro-rata basis over the
subscription period. Usage fees are recognized in the period the
services are rendered. The Company also derives revenue through
implementation fees and interconnection fees. Implementation fees are
recognized over the life of the subscription period, generally one
year. Interconnection fees are fees charged to connect to another VAN
service and are recognized when the data is transmitted to the
connected service.
F-9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
The Company also provides a broad range of professional services
consisting of EDI and e-commerce consulting, data mapping services and
EDI education and training at seminars hosted by leading universities
around the United States. Revenue from EDI and e-commerce consulting
and education and training are recognized when the services are
provided. Revenue from data mapping services are recognized when the
map has been completed and delivered to the customer. Revenues from
fixed fee professional service contracts are recognized using contract
accounting based on the estimated percentage of completion.
The Company also derives revenue from its service bureau. Service
bureau revenues are comprised of EDI services, including data
translation services, purchase order and invoice processing from EDI to
print and print to EDI, UPC services, including UPC number generation
and UPC catalog maintenance and UPC label printing. The service bureau
also derives revenue from software licensing and provides software
maintenance and support. Revenues from the EDI services and UPC
services are recognized when the services are provided. The Company
accounts for its EDI software license sales in accordance with the
American Institute of Certified Public Accountants' Statement of
Position 97-2, "Software Revenue Recognition". Revenues from software
licenses are recognized when all of the following conditions are met: a
non-cancelable non-contingent license agreement has been signed, the
software product has been delivered, there are no material
uncertainties regarding customer acceptance and collection of the
resulting receivable is probable. Revenues from software maintenance
and support contracts are recognized ratably over the life of the
contract. The Company's software license revenues were not significant
in any of the years presented.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with
contracts for which amounts have been received in advance of services
to be performed or prior to the shipment of software.
Depreciation and amortization:
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the related
assets, generally three to seven years. Leasehold improvements are
amortized using the straight-line method over the shorter of the term
of the lease or the estimated useful life of the asset.
Loss per share of common stock:
The Company calculates its loss per share under the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 requires dual presentation of "basic" and
"diluted" loss per share on the face of the statement of operations. In
accordance with SFAS 128, basic loss per common share is computed by
dividing the net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during
each period. Diluted loss per share is calculated by dividing net loss
attributable to common stockholders by the weighted average of shares
of common stock outstanding and all dilutive potential common shares
that were outstanding during the period. The per share effects of
potential common shares such as warrants, options and convertible
preferred stock have been excluded from the calculation of diluted loss
per share, as their effect would be antidilutive in all periods
presented.
F-10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Software development costs:
The Company capitalizes software development costs under the provisions
of either Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1")
or Statement of Financial Accounting Standards No. 86, "Computer
Software to be Sold, Leased, or Otherwise Marketed" ("SFAS 86"), based
on the intended use of the software.
The Company capitalizes the costs of acquiring, developing and testing
software to meet the Company's internal needs. Under the provisions of
SOP 98-1, the Company capitalizes costs associated with software
developed or obtained for internal use when both the preliminary
project stage is completed and management has authorized further
funding for the project which it deems probable will be completed and
used to perform the function intended. Capitalized costs include only
(1) external direct costs of materials and services consumed in
developing or obtaining internal-use software, (2) payroll and
payroll-related costs for employees who are directly associated with
and devote time to the internal-use software project and (3) interest
costs incurred while developing internal-use software. Capitalization
of such costs ceases no later than the point at which the project is
substantially complete and ready for its intended use. Software
development costs are amortized using a straight-line method over a
three-year period. Amortization of software development costs for
internal use software amounted to $237,296, $237,296 and $2,485 for the
years ended July 31, 2001, 2000 and 1999, respectively. Costs
associated with the development of software for internal use have been
capitalized in the amount of $108,148 during the fiscal year ended July
31, 2001. No amounts were capitalized in fiscal 2000 or 1999.
The Company capitalizes the costs of computer software to be sold or
otherwise marketed in accordance with the provisions of SFAS 86. Costs
related to the conceptual formulation and design of software are
expensed as product and development. Costs incurred subsequent to the
establishment technological feasibility are capitalized. Capitalization
of costs ceases when the product is available for general release to
customers. Capitalized software costs are amortized over three years or
the expected life of the product. Development costs in the amount of
$80,027 were capitalized under the provisions of SFAS 86 during the
fiscal year ended July 31, 2001. No amounts were capitalized in fiscal
years ended July 31, 2000 and 1999.
Income taxes:
Deferred income taxes are determined by applying enacted statutory
rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in
the consolidated financial statements. A valuation allowance is
provided based on the weight of available evidence, if it is considered
more likely than not that some portion, or all, of the deferred tax
assets will not be realized.
Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported
amounts of revenue and expense during the reporting period. Actual
results could differ from those estimates.
F-11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Impairment of long-lived assets:
Long-lived assets of the Company are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Management also reevaluates the
periods of amortization of long-lived assets to determine whether
events and circumstances warrant revised estimates of useful lives. The
Company evaluates the carrying value of its long-lived assets in
relation to the operating performance and future undiscounted cash
flows of the underlying business when indications of impairment are
present. If it is determined that an impairment in value has occurred,
the excess of the purchase price over the net assets acquired and
intangible assets will be written down to the present value of the
expected future operating cash flows to be generated by the acquired
businesses. See Note 4.
Stock-based compensation:
The Company accounts for its stock-based compensation arrangements with
its employees in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 established a
fair-value-based method of accounting for stock-based compensation
plans. Stock-based awards to nonemployees are accounted for at fair
value in accordance with the provisions of SFAS 123.
Intangible assets and goodwill:
Intangible assets and goodwill are carried at cost less accumulated
amortization, which is being amortized on a straight-line basis over
their expected lives, generally three to ten years. Goodwill consists
of the excess purchase price over the fair value of identifiable net
assets of businesses acquired. Amortization of goodwill was $1,283,638,
$156,795 and $130,662 for the years ended July 31, 2001, 2000 and 1999,
respectively. Amortization of identifiable acquired intangibles was
$1,285,530 for the year ended July 31, 2001. There were no identifiable
intangibles amortized during the years ended July 31, 2000 and 1999.
See Note 3 and Note 4.
Marketable securities:
Marketable securities are classified as available-for-sale securities.
Unrealized holding gains and losses are recorded as other comprehensive
income, net of any related tax effect. The amortized cost of debt
securities in this category is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included
in investment income. See Note 5.
Reclassifications:
Certain prior-year amounts have been reclassified to conform with
their 2001 presentation.
Recent Accounting Pronouncements:
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 retains the
requirements of SFAS No. 121 to recognize an impairment loss only if
the carrying value of a long-lived asset is not recoverable from its
estimated undiscounted cash flows and to measure an impairment loss as
the difference between the carrying value and fair value of the asset,
but it establishes new standards for long-lived assets to be disposed
of. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001. Management believes that the adoption of this standard will
not have a significant impact on the Company's financial position or
results of operations.
F-12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations subsequent to June 30, 2001, be
accounted for under the purchase method of accounting. The
pooling-of-interests method is no longer allowed. SFAS No. 142 requires
that upon adoption, amortization of goodwill will cease and instead,
the carrying value of goodwill will be evaluated for impairment on at
least an annual basis. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001; however, the Company has elected to
adopt this standard as of the beginning of its 2002 fiscal year (August
1, 2001). As required by this standard, management is in the process of
determining if the Company's goodwill is impaired as of August 1, 2001,
based on provisions in the standard, and management is required to
determine the amount of such impairment, if any, no later than January
31, 2002. Should management determine that goodwill is impaired, the
impairment will be reflected as a cumulative effect of a change in
accounting principle. Management believes that the adoption of this
standard will not have a significant impact on the Company's financial
position or results of operations.
In June 2000, the Financial Accounting Standards Board ("FASB") issued
statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities, An Amendment of FASB Statement No. 133".
SFAS No. 133, as amended, is effective for fiscal periods beginning
after June 15, 2000 and establishes accounting and reporting standards
for derivative instruments and hedging activities. The Company adopted
this standard on August 1, 2000. The adoption of SFAS No. 133, as
amended by SFAS No. 138, by the Company did not have a material impact
on the company's financial position, results of operations or cash
flows since the Company does not currently engage in any hedging
activities or hold any derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101. "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain areas of the Staff's views in
applying generally accepted accounting principles to revenue
recognition in financial statements. The adoption of SAB 101 did not
have a material impact on the Company's financial statements.
3. ACQUISITIONS
Acquisition of IDC
On August 3, 2000, ICC consummated a merger with IDC (the "IDC
Merger"). All issued and outstanding shares of IDC common stock were
converted into an aggregate of 190,861 shares of ICC class A common
stock. The former stockholders of IDC received 47,540 additional shares
of ICC class A common stock in December 2000. The issuance of the
additional shares was pursuant to the merger agreement and based on the
change in ICC's class A common stock price from the date of the closing
to December 5, 2000, the date the registration statement ICC filed
covering the resale of the shares issued in the merger became effective
under the Securities Act of 1933, as amended (the "Securities Act").
It is the opinion of management that the IDC merger qualifies as a
tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986.
The IDC merger was accounted for under the purchase method of
accounting and, accordingly, the acquired assets and liabilities of IDC
were recorded based on their fair values at the date of acquisition.
The results of operations of IDC have been included in the consolidated
financial statements subsequent to its date of acquisition.
F-13
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
3. ACQUISITIONS (CONTINUED)
The allocation of the purchase price is summarized below:
Purchase Price:
Value of class A common stock issued $ 3,308,754
Transaction costs 256,972
------------
Total purchase price 3,565,726
Fair value of assets acquired and liabilities
assumed:
Cash 347,133
Marketable securities 1,029,400
Fixed assets 79,931
Other assets 161,738
Liabilities (461,292)
------------
Fair value of net assets acquired 1,156,910
------------
Cost in excess of net assets acquired $ 2,408,816
============
The cost in excess of net assets acquired is being amortized on a
straight-line basis over a period of ten years. Amortization charges
are included in general and administrative expenses in the consolidated
statement of operations.
Acquisition of RTCI
On November 6, 2000, ICC completed the acquisition of RTCI pursuant to
an Agreement and Plan of Merger dated June 14, 2000 (the "Merger
Agreement").
Under the terms of the Merger Agreement, RTCI's outstanding shares of
common stock were converted into $2,214,009 of cash and 2,719,083
shares of ICC class A common stock. Issued and outstanding options and
warrants to purchase RTCI common stock were converted into options and
warrants of ICC providing the holders the right to receive, upon
exercise, an aggregate of 394,905 shares of ICC class A common stock
and $343,456 of cash. The fair value of the vested portion of
restricted stock and options have been included in the purchase price.
The cash portion of the purchase price was funded from cash acquired
from RTCI.
In August 2000, the Company converted a note receivable and accrued
interest on the note in the amount of $5,063,698 into shares of RTCI
common stock. Such amount has been included as a component of the
purchase price consideration. See Note 6.
It is the opinion of management that the acquisition of RTCI qualifies
as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986.
The acquisition of RTCI was accounted for under the purchase method of
accounting and accordingly, the acquired assets and liabilities of RTCI
were recorded based on their fair values at the date of acquisition.
The results of operations of RTCI have been included in the
consolidated financial statements subsequent to its date of
acquisition.
F-14
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
3. ACQUISITIONS (CONTINUED)
The allocation of the purchase price is summarized below:
Purchase Price:
Value of class A common stock and options issued $ 17,488,885
Cash distributed to shareholders 2,214,009
Cash to be distributed to option and warrant
holders upon exercise 343,456
Note receivable and accrued interest 5,063,698
Transaction costs 1,624,484
------------
Total purchase price 26,734,532
Fair value of assets acquired and liabilities assumed:
Cash 2,770,488
Fixed assets 1,220,166
Other assets 968,288
Identifiable intangibles 9,996,000
Liabilities (1,441,459)
------------
Fair value of net assets acquired 13,513,483
------------
Cost in excess of net assets acquired 13,221,049
Income tax liabilities 1,580,776
------------
Recorded goodwill $ 14,801,825
============
Goodwill related to the RTCI acquisition is being amortized on a
straight-line basis over a period of ten years. Amortization charges
are included in general and administrative expenses in the statement of
operations. During the year it was determined that the goodwill
recorded from the RTCI acquisition was impaired and an impairment
charge was recognized. See Note 4.
The intangible assets acquired from RTCI were its workforce, valued at
$4,000,000, certain proprietary technology valued at $4,780,000, and
its customer list valued at $1,216,000. The value of these intangibles
is being amortized on a straight-line basis over periods of five to ten
years. During the year it was determined that the workforce and
customer list recorded from the RTCI acquisition were impaired and an
impairment charge was recognized. See Note 4.
Pro Forma Financial Information
The following unaudited pro forma summary financial information
presents the consolidated results of operations of the Company as if
the acquisitions of IDC and RTCI had occurred on August 1, 1999. The
pro forma results are shown for illustrative purposes only and do not
purport to be indicative of the results that would have been reported
if the business combinations had occurred on the date indicated or
indicative of results which may occur in the future. The pro forma
results for the year ended July 31, 2001 include the impact of the
impairment charges related to RTCI discussed in Note 4.
July 31, 2001 July 31, 2000
------------- -------------
Revenues $ 11,235,000 $ 10,002,000
Net loss $(33,307,000) $(22,781,000)
Basic and diluted loss per
common share $ (3.50) $ (3.12)
F-15
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
4. IMPAIRMENT OF ACQUIRED INTANGIBLES
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable based on expected
undiscounted cash flows and other relevant factors attributable to that
asset
Due to a reduction of the workforce of RTCI, a steep decline in the
value of companies similar to RTCI, continued operating losses and a
significant reduction in the forecasted future operating profits of our
professional services segment, management determined that triggering
events had occurred related to the certain acquired intangible assets,
namely the assembled workforce, the customer list and goodwill.
Projected cash flow analysis related to those assets determined that
the assets had been impaired. These intangible assets were written down
to fair value based on the related discounted expected future cash
flows from the intangible assets over their remaining estimated useful
lives. During the year ended July 31, 2001, the Company recorded an
impairment charge of $16,708,479 related to the intangibles acquired
from RTCI.
5. MARKETABLE SECURITIES
The following is a summary of available for sale securities as of
July 31, 2001:
Gross Unrealized
-------------------------------
Cost Gains Losses Fair Value
---------- --------- ----------- ------------
Equity investments $ 875,280 $ 82,217 $ ( 291,945) $ 665,552
========= ========= =========== =========
There were no investments in marketable securities at July 31, 2000.
Equity investments which consist of investments in publicly traded
companies for which the Company does not have the ability to exercise
significant influence, are classified as available-for-sale and stated
at fair value based on quoted market rates. Adjustments to the fair
value of available-for-sale investments are recorded as a component of
other comprehensive income, net of any related tax effect.
6. NOTE RECEIVABLE
On June 14, 2000, the Company loaned $5 million to RTCI in exchange for
a promissory note (the "Note"). The Note bears interest at a rate of
7.5% per annum.
On August 15, 2000, the $5,000,000 Note and unpaid accrued interest, in
the amount of $63,698, was automatically converted into common stock of
RTCI. See Note 3.
7. PREPAID ACQUISITION COSTS
Prepaid acquisition costs at July 31, 2000 were comprised of costs
incurred for the acquisition of Intercoastal Data Corporation ("IDC")
which was completed in August 2000 and the acquisition of RTCI which
was completed in November 2000. Acquisition costs were allocated to the
purchase price upon consummation of such acquisitions.
F-16
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
July 31,
Estimated ----------------------------
Useful Lives (Years) 2001 2000
--------------------- ------------- ------------
Computers and office equipment 3 $ 2,964,013 $ 1,311,524
Furniture and fixtures 7 372,073 162,265
Purchased software 3 984,138 336,030
Leasehold improvements 158,556 64,072
------------ ------------
4,478,780 1,873,891
Less accumulated depreciation and amortization 2,558,118 948,295
------------ ------------
$ 1,920,662 $ 925,596
============ ============
Depreciation and amortization expense related to property and equipment
was $887,200, $435,218 and $290,800 for the years ended July 31, 2001,
2000 and 1999, respectively. At July 31, 2001, property and equipment
acquired under capital leases had a cost basis of $1,244,283.
9. ACCRUED EXPENSES
Accrued expenses consist of the following:
July 31,
--------------------------
2001 2000
---------- ----------
Acquisition related liabilities $ 937,789 --
Vacation 353,549 261,870
Employee compensation and severance 544,907 101,986
Consulting fees 202,400 --
Professional Fees 34,692 --
Other 308,451 87,807
---------- -----------
$2,381,788 $ 451,663
========== ===========
10. JOINT SERVICES AGREEMENT
In July 2000, the Company entered into an agreement with Triaton GmbH
("Triaton"), a member of the ThyssenKrupp Information Services Group
GmbH, whereby Triaton will host and market the Company's ICC.Net
services in Europe on a semi-exclusive basis. Triaton is entitled to
market and provide the Company's ICC.Net services on a non-exclusive
basis worldwide. Pursuant to the agreement, ICC will receive usage
based fees. The agreement, as amended in July 2001, provides that the
Company shall receive aggregate minimum fees payable in specified
quarterly installments aggregating $8,000,000 from Triaton by July
2003.
As of July 31, 2001, the Company has received $1 million under the
agreement. At July 31, 2001, Triaton has also advanced the Company
$250,000 for services and reimbursable expenses expected to be provided
by the Company to Triaton in addition to those required under the
original agreement. At July 31, 2001, $181,500 of the advance is
included in deferred revenue.
The agreement has a five year initial term. If the Company does not
extend the agreement, the Company will be required to pay Triaton an
amount equal to five times 80% of Triaton's revenues from the ICC.Net
services for the twelve calendar months immediately preceding the date
of termination.
F-17
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY
Reverse stock split:
Effective September 25, 1998, the Company completed a one-for-five
reverse stock split of its outstanding shares of common stock. The
accompanying consolidated financial statements have been retroactively
adjusted to reflect the reverse stock split.
Class A common stock:
Holders of class A common stock are entitled to one vote per share on
all matters to be voted on by common stockholders. Subject to the
preferences of the preferred stock, the holders of class A common stock
are entitled to a proportional distribution of any dividends that may
be declared by the board of directors, provided that if any
distributions are made to holders of class A common stock, identical
per-share distributions must be made to the holders of class B common
stock, even if the distributions are in class A common stock. In the
event of liquidation, dissolution or winding up of ICC, the holders of
class A common stock are entitled to share equally with holders of
class B common stock in all assets remaining after liabilities and
amounts due to holders of preferred stock have been paid in full or set
aside. Class A common stock has no preemptive, redemption or conversion
rights. The rights of holders of common stock are subject to, and may
be adversely affected by, the rights of the holders of series A
preferred stock or any other series of preferred stock the Company may
designate in the future.
Class B common stock:
Class B common stock is convertible into class A common stock on a
one-for-one basis both upon the request of the holder of the class B
common stock or automatically upon transfer of the class B common stock
to a stockholder that did not hold any class B common stock before the
transfer. Class B common stock is entitled to six votes per share, but
in all other respects each share of class B common stock is identical
to a share of class A common stock.
Series A preferred stock:
Series A preferred stock is convertible, at the option of the holder,
into class A common stock. Each share of series A preferred stock is
convertible into a number of shares of class A common stock determined
by dividing the issuance price per share ($1,000) by 75% of the average
market price of the class A common stock for the ten trading days
before the conversion date. Each share of series A is convertible into
a maximum of 333 shares and a minimum of 200 shares of class A common
stock
Series A preferred stock is redeemable, in whole or in part, by the
Company at the option of the Company, commencing on the third
anniversary of the date of issuance. The redemption price for each
share of series A preferred stock is $1,000, plus unpaid dividends.
Notice of redemption must be given 30 days prior to the redemption
date.
Subject to the rights of stockholders holding any series of the
Company's preferred stock that is senior to the series A preferred
stock, upon a liquidation, dissolution or winding up of the Company,
the holders of series A preferred stock are entitled to receive an
amount equal to $1,000 per share of series A preferred stock before any
distribution is made to holders of common stock. The total liquidation
value of the series A preferred stock was $225,000 plus accrued
dividends on the series A preferred stock of $1,157 at July 31, 2001.
The holders of the outstanding shares of series A preferred stock are
entitled to a 4% annual non-cumulative dividend payable, at the option
of the Company, in cash or in shares of class A common stock. Dividends
are payable on each July 1.
Series A preferred stock has no voting rights.
F-18
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY (CONTINUED)
On July 1, 2001, the Company issued 7,601 shares of class A common
stock to series A preferred stockholders in payment of accrued
dividends. On July 1, 2000, the Company paid cash dividends of $181,772
to series A preferred stockholders. On July 1, 1999, the Company issued
14,641 shares of class A common stock and $312 for payment of the
annual dividend to series A preferred stockholders.
At July 31, 2001 and 2000, the Company had accrued dividends on its
series A preferred stock of $1,157 and $2,538, respectively.
Series C Preferred Stock:
During the year ended July 31, 2000, the Company issued 10,000 shares
of series C preferred stock and 400,000 warrants to Cable & Wireless,
PLC ("C&W") for total consideration of $10,000,000. A beneficial
conversion feature resulted from the allocation of the proceeds between
the fair value of the series C preferred stock and the fair value of
the warrants, which resulted in a discount on the preferred stock in
the amount of $4,549,535. The discount was immediately accreted as all
of the series C preferred stock was eligible for conversion upon
issuance.
Series C preferred stock is convertible, at the option of the holder,
into 447,628 shares of class A common stock.
Series C preferred stock is redeemable, in whole or part, by the
Company at the option of the Company, at any time after January 1,
2005. The redemption price for each share of series C preferred stock
is $1,000 plus unpaid dividends. Notice of redemption must be given 45
days prior to the redemption date.
Series C preferred shall be preferred as to assets over all other
classes or series of preferred stock of the Company in the event of any
liquidation, dissolution or winding up of the Company. The holders of
series C preferred are entitled to receive an amount in cash equal to
$1,000 per share plus any unpaid or accrued dividends before any
distribution is made to holders of common shares.
The holders of the outstanding shares of series C preferred stock are
entitled to receive a 4% per share annual cumulative dividend payable
in cash or shares of common stock. Each share of series C preferred is
deemed to have a value of $1,000 and each share of common stock to be
paid as a dividend shall be valued at the average of the Market Price
(as defined by series C convertible preferred stock) for ten
consecutive trading days ending two days prior to the payment date.
Dividends are payable on January 1 of each year. Dividends accrue and
are cumulative on a daily basis, whether or not earned or declared.
Series C preferred stock is entitled to the number of votes per share
equal to the number of whole shares of class A common stock into which
each share of series C preferred is convertible.
On January 1, 2001, the Company issued 111,142 shares of class A common
stock in payment of the dividends on the series C preferred stock. At
July 31, 2001 and 2000, the Company had accrued $272,131 and $273,224
for dividends payable, respectively.
The total liquidation value of series C preferred stock was $10,000,000
plus accrued dividends of $272,131 at July 31, 2001.
F-19
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY (CONTINUED)
Warrants:
As of July 31, 2001, the Company had the following common stock
warrants outstanding:
Number of Exercise Expiration
Shares Price Date
------ ----- ----
Class A warrants 234,140 (a) (c) $29.16 February 18, 2002
Class B warrants 263,835 (b) (c) $39.23 February 18, 2002
Bridge warrants 116,000 (d) $2.50 January 22, 2002 to July 4, 2002
Bridge commission warrants 8,910 (e) $2.50 January 5, 2002
Private placement commission
warrants 43,350 (f) $5.00 April 29, 2002
Consulting warrants 18,000 (b) $9.94 March 31, 2004
C & W Warrants 400,000 (g) $22.21 January 12, 2005
Assumed RTCI warrants 45,760 (h) $5.77 January 22, 2003
(a) Upon exercise of each warrant, holder is entitled to 1.36891
shares of class A common stock and one class B warrant.
(b) Upon exercise of each warrant, holder is entitled to 1.36891
shares of class A common stock.
(c) Redeemable by the Company at $.25 per warrant under certain
conditions.
(d) Investors who provided the Company with bridge financing in
1998 purchased 10% notes with warrants attached. For each $1.00
of bridge note principal, a purchaser was entitled to 0.3
warrant and ICC issued a total of 778,500 warrants in this
transaction. Each of these warrants entitles the holder upon
exercise to purchase one share of class A common stock. Under
certain circumstances the Company may accelerate the expiration
date.
(e) Issued to placement agents in connection with the 1998 bridge
financing. Terms are substantially the same as the bridge
warrants.
(f) Issued to NASD registered broker/dealers in connection with the
April 1999 private placement of series A preferred stock. Upon
exercise, holder is entitled to one share of class A common
stock.
(g) Issued to C&W in private placement. Upon exercise, holder is
entitled to one share of class A common stock. See Note 11.
(h) Issued to warrant holders of RTCI upon acquisition of RTCI.
Upon exercise, holder is entitled to one share of class A
common stock in exchange for each warrant.
The fair market value of warrants issued for compensation and services
have been recognized as an expense in the period the respective
services were performed.
F-20
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY (CONTINUED)
Stock options:
The Company's Amended and Restated Stock Option Plan, (the "Plan"),
provides for the grant of options to purchase up to an aggregate of
7,000,000 shares of class A common stock to employees, officers,
directors and consultants or advisors. The options granted may be
either incentive stock options or nonqualified options.
Incentive stock options granted to employees have an exercise price
equal to the fair market value of the underlying shares at the date of
grant. The Board of Directors determines the exercise price of
nonqualified options granted to employees and consultants. The term of
all options granted may not exceed 10 years. Options vest as determined
by the Board, but generally vesting occurs over a period of three to
four years. Generally, vested options must be exercised within 90 days
of termination of the optionee's employment or other relationship with
the Company. If termination of employment is for cause, the option will
expire immediately.
The Company granted 390,000 price-vested options under the Plan from
September 1998 through December 1998. Price-vested options require
variable accounting which requires the Company to take a non-cash
charge to earnings for the difference between the exercise price and
the fair market value of the stock multiplied by the number of vested
options on the date each price requirement is met. The number of
options immediately exercisable were 130,000. The remaining 260,000
became exercisable, in 20% increments, when the Company's class A
common stock attained or exceeded the following per share bid prices
for twenty consecutive trading days: $7.50, $10.00, $12.50, $15.00 and
$17.50. The Company recognized $3,311,257 and $1,374,069 in non-cash
compensation expense in connection with these price-vested options
during the years ended July 31, 2000 and 1999, respectively, and will
not be required to take any charges in connection with these options in
the future. All options were fully vested as of July 31, 2000.
In November 1998, the Company recorded a non-cash charge of $622,434
for certain options which vested due to a change of control feature.
In March 2000, the Company granted an option to purchase 100,000 shares
of class A common stock in connection with a consulting agreement with
a former board member. The fair value of the option, in the amount of
$6,318,850, was to be amortized as consulting expense during the term
of the consulting agreement. Non-cash charges for these options
amounted to $1,185,865 during the year ended July 31, 2000. On
September 22, 2000, the former board member and the Company mutually
agreed to cancel and terminate the option. Compensation charges in
connection with this option ceased being recorded as of this date and
the total non-cash charge recognized for this option during the year
ended July 31, 2001 amounted to $450,110.
In June 2000, the Company recognized $663,222 in non-cash charges for
10,000 shares of class A common stock valued at $176,150 and stock
options to purchase 50,000 shares of class A common stock with a fair
value of $487,072 which were issued in connection with a settlement of
certain litigation.
In November 2000, the Company assumed the Employee Stock Option Plan of
RTCI and issued vested stock options to purchase 349,145 shares of
class A common stock for the outstanding options of RTCI. These options
were not granted under the Plan. The fair value of such options has
been included in the purchase price of RTCI.
F-21
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY (CONTINUED)
The Company applies APB Opinion 25 and related interpretations in
accounting for equity instruments issued to employees. Accordingly, no
compensation cost has been recognized for its employee stock option
grants other than non-cash charges for the vesting of price-vested
options. Had the compensation cost for the Company's stock options
grants been determined based on the fair value at the grant dates for
awards consistent with the method of SFAS 123, the Company's net loss
attributable to common stockholders and basic and diluted loss per
common share would have changed to the pro forma amounts indicated
below:
For the Years ended July 31,
------------------------------------------------------
2001 2000 1999
-------------- ---------------- -------------
Pro forma net loss:
As reported $ (30,855,352) $ (14,485,627) $ (9,620,940)
Pro forma effect of SFAS No. 123 (14,959,286) (2,419,185) 687,221
-------------- -------------- -------------
Pro forma after giving effect to SFAS
No. 123 (45,814,638) $ (16,904,812) $ (8,933,719)
============== ============== =============
Basic and diluted loss per common share:
As reported $ (3.57) $ (4.49) $ (7.62)
Pro forma effect of SFAS No. 123 (1.66) (0.56) 0.47
-------------- -------------- -------------
Pro forma after giving effect to SFAS
No. 123 $ (5.23) $ (5.05) $ (7.15)
============== ============== =============
The weighted-average fair value at date of grant for options granted
during the years ended July 31, 2001, 2000 and 1999 was $3.81, $16.87
and $1.51 per share, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes
option-pricing model using the following weighted-average assumptions:
Year ended July 31,
-------------------------------
2001 2000 1999
------- -------- --------
Risk-free interest rate 4.73% 6.12% 4.53%
Expected lives 3 3 3
Expected volatility 150% 156% 113%
Expected dividend yield 0% 0% 0%
The following table summarizes the Company's stock options at July 31,
2001, 2000 and 1999, as well as changes during the years then ended:
Years ended July 31,
------------------------------------------------------------------------------------
(Shares in thousands) 2001 2000 1999
--------------------------- -------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- --------------- -------- --------------- -------- ---------------
Options outstanding at beginning
of year 4,088.6 $ 18.39 1,947.7 $ 1.42 156.6 $ 19.65
Granted 1,145.0 $ 4.62 3,069.0 $ 24.46 1,897.0 $ 1.41
Acquisitions 349.1 $ 6.53 -- -- -- --
Forfeited (895.8) $ 26.79 (78.3) $ 22.50 (105.9) $ 12.03
Exercised (169.2) $ 2.08 (849.8) $ 1.02 -- --
------ ------- ------
Options outstanding at end of year 4,517.7 $ 12.93 4,088.6 $ 18.39 1,947.7 $ 1.42
====== ======= ======
Options exercisable at end of year 2,966.0 $ 11.39 2,113.6 $ 11.16 1,749.0 $ 1.20
====== ======= ======
F-22
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents information relating to stock options
outstanding as of July 31, 2001:
(Shares in thousands)
Options Outstanding Options Exercisable
-------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life Price Shares Price
-------------------------------- ---------- ----------- ----------- -------- ----------
$ 0.26 - $ 0.34 367.2 5.8 $ 0.30 367.2 $ 0.30
$ 1.41 - $ 2.13 94.7 4.5 $ 1.50 94.7 $ 1.50
$ 2.50 - $ 4.77 1,164.5 6.5 $ 2.83 834.5 $ 2.92
$ 5.13 - $ 7.16 523.4 9.5 $ 5.25 176.6 $ 5.49
$ 11.50 - $ 17.00 969.4 7.8 $ 12.36 850.2 $ 12.27
$ 19.00 - $ 23.38 1,002.0 8.7 $ 19.20 439.3 $ 19.19
$ 34.50 - $ 45.69 206.5 8.3 $ 37.96 92.2 $ 38.48
$ 60.00 - $ 80.00 190.0 8.0 $ 68.74 111.3 $ 69.19
-------- ----- -------- ------- --------
4,517.7 7.7 $ 12.93 2,966.0 $ 11.39
======== =======
The Company had 1,977,660 options reserved for future issuance under
the Plan as of July 31, 2001.
Restricted stock:
ICC issued 172,907 shares of class A common stock to employees of RTCI
in exchange for outstanding shares of restricted stock of RTCI at the
consummation of the merger. Deferred stock-based compensation of the
restricted stock of $730,957 was recorded at the time of the merger.
Non-cash compensation in connection with the restricted stock during
the year ended July 31, 2001 was $540,938. At July 31, 2001, there were
32,390 shares of unvested restricted stock outstanding and deferred
stock-based compensation was $190,019. The remaining outstanding shares
of restricted stock vest on January 1, 2002.
12. INCOME TAXES
The income tax benefit, in the amount of $1,929,887, recognized during
the year ended July 31, 2001 is attributable to the reduction of the
deferred tax liability related to book and tax basis differences on
certain identifiable intangibles under purchase accounting as well as
those related to unrealized gains from certain marketable securities.
The Company's effective tax rate varied from the statutory federal
income tax rate as follows:
For the year ended July 31,
2001 2000 1999
---------- ----------- ----------
Expected tax rate (benefit) (34.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Non-deductible amortization and write-off of intangibles 15.7 % -- --
Permanent differences from exercise of stock options -- (40.0)% 3.7 %
Other permanent differences 1.9 % 5.8 % --
State and local income tax (benefit), net of federal effect (4.5)% (21.2)% --
Increase in valuation allowance 15.0 % 89.4 % 30.3 %
--------- --------- ---------
Effective tax rate (5.9)% 0 % 0 %
========= ========= =========
F-23
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax assets,
liabilities and the valuation allowance at July 31, 2001 and 2000 are
as follows:
July 31,
------------------------------
2001 2000
------------- -------------
Deferred tax assets:
Accrued expenses $ 203,378 $ 161,486
Deferred revenues 157,573 -
Deferred rent 76,310 -
Property and equipment 38,300 4,680
Federal, state and local net operating loss carryforwards 29,971,667 22,343,640
------------- -------------
30,447,228 22,509,806
Deferred tax liability:
Purchased intangibles (2,544,677) -
Marketable securities (286,187) -
Capitalized software development costs (182,953) (213,566)
Deferred rent - (37,893)
------------- -------------
(3,013,817) (251,459)
Net deferred tax asset before valuation allowance 27,433,411 22,258,347
Valuation allowance (27,433,411) (22,258,347)
------------ -------------
Net deferred tax asset $ 0 $ 0
============ =============
The Company has provided a valuation allowance of 100% of its net
deferred tax asset due to the uncertainty of generating future profits
that would allow for the realization of such deferred tax asset. The
net increase in the total valuation allowance for the year ended July
31, 2001 was $5,175,064.
The deferred tax asset of approximately $5.8 million associated with
the exercise of employee stock options in fiscal year 2000 has been
fully offset by a valuation allowance and will be credited to
additional paid-in capital when realized.
The Company has a net operating loss carryforward for tax purposes of
approximately $70 million as of July 31, 2001. This carryforward
expires from 2007 to 2021.
The Internal Revenue Code and Income Tax Regulations contain provisions
which limit the use of available net operating loss carryforwards in
any given year should significant changes (greater than 50%) in
ownership interests occur. Due to the initial public offering in 1995,
the net operating loss carryover of approximately $1.9 million incurred
prior to the initial public offering is subject to an annual limitation
of approximately $400,000 until that portion of the net operating loss
is utilized or expires. Due to the private placement of series A
preferred stock, the net operating loss carryover of approximately $18
million incurred prior to the private placement is subject to an annual
limitation of approximately $1 million until that portion of the net
operating loss is utilized or expires. Also, due to a 100% ownership
change of RTCI, the acquired net operating loss of approximately $6.5
million incurred prior to the ownership change is subject to an annual
limitation of approximately $1.4 million until that portion of the net
operating loss is utilized or expires.
F-24
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
13. COMMITMENTS AND CONTINGENCIES
Employment agreements:
The Company has employment agreements with certain of its officers and
key employees which expire on various dates from July 2002 through July
2003. The agreements require aggregate annual payments of $1,165,000
per year. During fiscal 2000, the Company entered into a two-year
consulting agreement with a former member of the Company's Board of
Directors. The agreement requires payments of $250,000 per year payable
in quarterly installments beginning March 15, 2000. At July 31, 2001,
the Company accrued the remaining payments to be made under the
contract, in the amount of $125,000, as the Company no longer intends
to utilize the services of the former board member.
Profit sharing plan:
The Company has a Profit Sharing Plan under which an amount equal to
3.5% of the pretax profit of the Company for each fiscal year is set
aside for the benefit of such employees as are determined by the Board
of Directors. No funding has been provided under this plan through July
31, 2001 as the Company has incurred losses since the inception of the
plan.
Obligations under operating leases:
The Company has non-cancelable operating lease commitments for office
space expiring on various dates through July 2005. Rent expense under
these leases was approximately $1,379,000, $362,000 and $207,000 for
the years ended July 31, 2001, 2000 and 1999, respectively. Certain
leases contain escalation clauses for operating expenses.
At July 31, 2001, minimum future rental payments due under
non-cancelable operating leases are as follows:
2002 $1,288,959
2003 1,317,992
2004 1,348,842
2005 381,342
----------
$4,337,135
==========
Obligations under capital leases:
The Company has various non-cancelable capital leases for computers,
equipment and software. At July 31, 2001, minimum future lease payments
under non-cancelable capital leases were as follows:
2002 $ 377,381
2003 161,340
2004 114,586
2005 33,186
----------
686,493
Amount representing imputed interest 103,004
----------
Present value of future minimum lease payments 583,489
Less current portion (328,480)
----------
Capital lease obligation - less current portion $ 255,009
==========
F-25
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Letters of credit:
The Company has provided cash collateral for letters of credit in the
aggregate amount of $276,635 and $523,863, at July 31, 2001 and 2000,
respectively, which serve as security deposits for certain lease
agreements. These amounts have been recorded as restricted cash in the
Company's consolidated balance sheet.
Contingency:
In October 2000, Thomas Lipscomb, a former President and Chief
Executive Officer of the Company, commenced an action against Alan
Alpern, a former officer of the Company, and against Arthur Medici, a
former officer and a current director of the Company, in the Supreme
Court of the State of New York, County of New York. In the action, Mr.
Lipscomb claims that Messrs. Alpern and Medici tortuously interfered
with his employment agreement with the Company. Mr. Lipscomb seeks
compensatory damages of $672,000 and punitive damages of $1 million.
Both Messrs. Alpern and Medici have requested that the Company
indemnify them pursuant to its by-laws, requests that the Company is
currently considering. It is the Company's understanding that both
Messrs. Alpern and Medici intend to defend the action vigorously. The
Company is unable to predict the ultimate outcome of this claim since
this action is in its preliminary stage.
Separation agreement:
In March 2001, ICC entered into a Separation Agreement with its former
President and Chief Executive Officer which requires the Company to pay
$437,500, payable in equal monthly installments of $29,167 commencing
on May 1, 2000. However, if the Company completes an equity financing
that provides net proceeds of at least $5,000,000, the payments are
accelerated. As of July 31, 2001, $350,000 was unpaid under this
agreement.
14. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and accounts
receivable. The Company places its excess cash in money-market
instruments with institutions of high credit-quality. All accounts
receivable are unsecured. The Company believes that any credit risk
associated with receivables is minimal due to the volume and credit
worthiness of its customers. Receivables are stated at estimated net
realizable value, which approximates fair value.
For the year ended July 31, 2001, the Company had one customer that
accounted for 10.9% of revenue. No single customer accounted for
greater than 10% of revenues for the years ended July 31, 2000 and
1999.
No single customer accounted for more than 10% of accounts receivable
at each of the years ended July 31, 2001 and 2000.
Revenue by geographic region, based on customer location is as follows:
North
Year ended July 31, America Europe Asia Total
----------------------- ------------ ------------- ----------- ------------
2001 $8,665,395 $1,072,860 $ 4,263 $9,742,518
2000 1,297,168 2,831 3,442 1,303,441
1999 105,243 - - 105,243
F-26
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
15. BUSINESS SEGMENT INFORMATION
As a result of the acquisitions of IDC and RTCI, the Company has three
operating segments. Prior to these acquisitions the Company had one
operating segment. These three operating segments are:
o ICC.NET service - the Company's global Internet-based value
added network or VAN, uses the Internet and proprietary
technology to deliver customers' documents and data files to
members of their trading communities, many of which may have
incompatible systems, by translating the documents and data
files into any format required by the receiver.
o Service Bureau - the service bureau manages and translates the
data of small and mid-sized companies that exchange EDI data
with large companies and provides various EDI and UPC
(universal product code) services. The service bureau also
licenses EDI software.
o Professional Services - this segment facilitates the
development and operation of comprehensive
business-to-business e-commerce solutions. This segment also
conducts a series of product-independent one-day EDI seminars
for e-commerce users.
The table below summarizes information about operations and long-lived
assets as of and for the year ended July 31, 2001:
Service Professional
ICC.NET Bureau services (A) Total
------- ------ ------------ -----
Year Ended - July 31, 2001
Revenues from external customers $ 4,846,691 $ 1,462,088 $ 3,433,739 $ 9,742,518
============ ============ ============ ============
Operating loss $(10,617,766) $ (150,167) $(22,540,627) $(33,308,560)
Other income, net 490,064 -- 33,257 523,321
Income tax benefit -- 349,110 1,580,777 1,929,887
------------ ------------ ------------ ------------
$ (0,127,702) 198,943 $(20,926,593) $(30,855,352)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 955,367 $ 260,605 $ 2,477,692 $ 3,693,664
Impairment of acquired intangibles -- -- 16,708,479 16,708,479
Non-cash charges for stock-based
compensation and services $ 450,110 -- $ 40,938 $ 91,048
As of July 31, 2001
Property and Equipment, net $ 1,009,626 $ 59,948 $ 851,088 $ 1,920,662
Capitalized software, net 237,296 188,175 -- 425,471
Acquired identified intangibles,
net -- -- 5,917,854 5,917,854
Goodwill, net 26,132 2,167,935 -- 2,194,067
------------ ------------ ------------ ------------
Long lived assets, net $ 1,273,054 $ 2,416,058 $ 6,768,942 $ 10,458,054
============ ============ ============ ============
(A) - Subsequent to RTCI's acquisition on November 6, 2000.
F-27
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
16. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash investing and financing
activities:
Year ended July 31,
2001 2000 1999
------------- ------------- -------------
Debt discount in connection with bridge loan $ -- $ -- $ 1,816,197
Issuance of warrants in connection with bridge financing -- -- 188,182
Equipment acquired under capital leases 44,945 205,634 392,241
Issuance of common stock for dividends on preferred stock 422,784 -- --
Issuance of common stock for purchase of minority interest
of subsidiary -- -- 470,384
Conversion of indebtedness into preferred stock -- -- 1,952,770
Amounts related to business combinations:
Fair value of assets acquired, net of cash acquired 29,085,388 -- --
Less:
Liabilities assumed 1,902,751 -- --
Fair value of equity instruments issued 20,797,639 -- --
Cash to be distributed to option and warrant holders
upon exercise 343,456 -- --
Note receivable and accrued interest 5,000,000 -- --
Transaction costs paid in prior period 369,487 -- --
Transaction costs accrued 650,000 -- --
------------- ------------- -------------
29,063,333 -- --
------------- ------------- -------------
Payment for purchase of acquisitions, net of cash acquired 22,055 -- --
17. SUBSEQUENT EVENTS
Private placement:
On October 29, 2001, the Company sold 1,159,716 shares of class A
common stock and warrants to purchase 347,915 shares of class A common
stock for total proceeds of $3,189,219. The warrants are immediately
exercisable and have an exercise price of $3.58 per share. The warrants
are exercisable for a five year period. The Company may redeem the
warrants, at its option, at any time beginning 180 calendar days after
the sale if the closing bid price of the class A common stock exceeds
200% of the exercise price for a period of thirty consecutive days. The
redemption price is ten cents per warrant. The Company is required to
file a registration statement on Form S-3, within 75 days of the
closing, covering the resale of these shares of class A common stock,
including the shares of class A common stock issuable upon exercise of
these warrants.
F-28
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
18. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly financial information (in thousands,
except for per share data) includes, in our opinion, all normal and
recurring adjustments necessary to fairly state our consolidated
results of operations and related information for the periods
presented.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- ------------ ------------ -------------
Fiscal 2001
Revenues, net $ 1,316 $ 2,582 $ 3,041 $ 2,804
Total costs and expenses (4,798) (7,396) (8,870) (21,987)
-------- -------- -------- --------
Operating loss (3,482) (4,814) (5,829) (19,183)
Interest and investment income, net 202 137 67 117
Income tax benefit -- -- 1,605 325
-------- -------- -------- --------
Net loss $ (3,280) $ (4,677) $ (4,157) $(18,741)
======== ======== ======== ========
Basic and diluted loss per common share $ (.51) $ (.52) $ (.45) $ (2.09)
======== ======== ======== ========
Fiscal 2000
Revenues, net $ 140 $ 203 $ 426 $ 534
Total costs and expenses (1,918) (5,546) (3,496) (5,504)
-------- -------- -------- --------
Operating loss (1,778) (5,343) (3,070) (4,970)
Interest and investment income, net 3 99 271 302
Income tax benefit -- -- -- --
-------- -------- -------- --------
Net loss $ (1,775) (5,244) (2,799) (4,668)
======== ======== ======== ========
Basic and diluted loss per common share $ (.96) $ (1.73) $ (.58) $ (1.22)
======== ======== ======== ========
F-29
INTERNET COMMERCE CORPORATION
Schedule II. Valuation and Qualifying Accounts
Balance at Additions Balance at
Beginning Charged to Additions End of
of Period Expense Acquired Deductions Period
------------- ------------- ------------ -------------- -------------
Year ended July 31, 2001
Allowance for doubtful accounts $ 74,388 $ 261,640 $ 23,949 $ (135,955) 224,022
Allowance on deferred tax asset $ 22,258,347 $ 5,175,064 $ 0 $ 0 $ 27,433,411
Year ended July 31, 2000
Allowance for doubtful accounts $ 0 $ 88,802 $ 0 $ (14,414) $ 74,388
Allowance on deferred tax asset $ 9,477,727 $ 12,780,620 $ 0 $ 0 $ 22,258,347
Year ended July 31, 1999
Allowance for doubtful accounts $ 0 $ 102 $ 0 $ (102) $ 0
Allowance on deferred tax asset $ 6,795,135 $ 2,682,592 $ 0 $ 0 $ 9,477,727
F-30
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger among ICC, ICC Acquisition
Corporation, Inc., a wholly-owned subsidiary of ICC,
Research Triangle Commerce, Inc., or RTCI, and the selling
shareholders of RTCI (12)
2.2 Agreement and Plan of Merger among ICC, IDC, and the selling
shareholders of IDC (13)
3(i).1 Amended and Restated Certificate of Incorporation (1)
3(i).2 Certificate of Merger merging Infosafe Systems, Inc. and
Internet Commerce Corporation (1)
3(i).3 Certificate of Amendment to the Amended and Restated
Articles of Incorporation (2)
3(i).4 Certificate of Designations-- Series A Convertible
Redeemable Preferred Stock (1)
3(i).5 Certificate of Designations-- Series S Preferred Stock (1)
3(i).6 Certificate of Designations-- Series C Preferred Stock (9)
3(ii).1 By-laws (7)
4.1 Specimen Certificate for Class A Common Stock (3)
4.2 Form of Revised Subscription Agreement, dated March 31,
1999, relating to the shares of Series A Convertible
Redeemable Preferred Stock sold in the 1999 private
placement (1)
4.3 Form of Underwriter's Option (3)
4.4 Form of Warrant Agreement (3)
4.5 Escrow agreement, as amended (3)
4.6 Form of warrant expiring February 18, 2002 (3)
4.7 Warrant Agreement, dated February 10, 1997, by and among
ICC, American Stock Transfer and Trust Company as warrant
agent and D.H. Blair Investment Banking Corp. (4)
4.8 Amendment Agreement, dated February 10, 1997, to Warrant
Agreement dated January 25, 1995 by and among ICC, American
Stock Transfer and Trust Company as warrant agent and D.H.
Blair Investment Banking Corp. (4)
4.9 Form of Unit Purchase Option for D.H. Blair Investment
Banking Corp. dated February 18, 1997 (4)
4.10 Agreement, dated February 18, 1997, between ICC and D. H.
Blair Investment Banking Corp. to extend an agreement dated
January 25, 1995 regarding mergers, acquisitions and similar
transactions (4)
4.11 Form of Class A Bridge Warrant issued in the 1998 bridge
financing (1)
4.12 Warrant Agreement dated January 12, 2000, by and among ICC
and Cable and Wireless USA, Inc. (9)
4.13 Form of Registration Rights Agreement dated as of October
29, 2001 by and among ICC and the purchasers identified
therein (15)
4.14 Registration Rights Agreement dated as of October 29, 2001,
by and between ICC and Amaranth Trading LLC (15)
4.15 Form of Class A Common Stock Warrant issued in the October
2001 private placement (15)
10.1 1994 Stock Option Plan (3)
10.2 Lease Agreement between 805 Third Ave. Co. and ICC relating
to the rental of ICC's current principal executive office
(5)
10.3 Lease Agreement, dated as of May 21, 1999, between JB
Squared LLC and ICC relating to the rental of approximately
4,000 square feet at the Lakeview Executive Center, 45
Research Way, East Setauket, New York, 11733 (6)
10.4 Employment Agreement for Anthony D'Angelo dated as of April
16, 2000 (15)
10.5 Employment Agreement for G. Michael Cassidy dated as of
April 16, 2000 (14)
10.6 Employment Agreement for David Hubbard dated as of April 16,
2000 (14)
10.7 Employment Agreement for Walter M. Psztur dated as of April
16, 2000 (14)
10.8 Master Agreement between Cable & Wireless PLC and ICC
executed on November 24, 1999 (8)
10.9 Consulting Agreement, dated as of March 15, 2000, between
Michele Golden and ICC (10)
10.10 Amended and restated stock option plan (11)
10.11 First Amendment to Lease Agreement, dated as of January,
2000, by and between JB Squared LLC and ICC relating to the
rental of an additional approximately 4,800 square feet at
the Lakeview Executive Center, 45 Research Way, East
Setauket, New York, 11733 (14)
10.12 First Amendment of Lease Agreement between Madison Third
Building Companies LLC and ICC relating to the rental of
additional office space at 805 Third Avenue, New York, New
York 10022 (14)
10.13 Lease Agreement, dated as of August 2, 2000, by and between
IDC Realty, LLC as landlord and ICC as tenant relating to
the rental of an approximately 8,000 square feet facility
used by ICC's service bureau division (14)
10.14 Lease Agreement, dated as of November 1, 1999, by and
between Shannon Oaks Partnership as landlord and RTCI as
tenant relating to the rental of an approximately 8,000
square feet facility used by ICC's professional services
division (15)
10.15 Joint Services Agreement, between ICC and Hightech
International Services GmbH (a wholly-owned subsidiary of
ThyssenKrupp Services GmbH) executed on July 28, 2000 (15)
10.16 Letter agreement dated July 25, 2001 between ICC and Triaton
GmbH (f/k/a HighTech International Services, a wholly-owned
subsidiary of ThyssenKrupp Services GmbH) amending Joint
Services Agreement (15)
10.17 Subscription Agreement dated as of October 29, 2001 by and
between ICC and Amaranth Trading LLC (15)
10.18 Form of Subscription Agreement dated as of October 29, 2001
by and among ICC and the purchasers identified therein (15)
23(i) Consent of Deloitte & Touche LLP (15)
23(ii) Consent of Richard A. Eisner LLP (15)
----------------------------
(1) Incorporated by reference to ICC's registration statement on form S-3
(File no. 333-80043)
(2) Incorporated by reference to ICC's annual report on form 10-KSB for
the year ended July 31, 1998
(3) Incorporated by reference to ICC's registration statement on form SB-2
(File no. 33-83940)
(4) Incorporated by reference to ICC's report on form 10-QSB dated January
31, 1997
(5) Incorporated by reference to ICC's report on form 10-QSB dated October
31, 1997
(6) Incorporated by reference to amendment no. 3 to ICC's registration
statement on form S-3 (File no. 333-80043)
(7) Incorporated by reference to ICC's current report on form 8-K filed
with the SEC on July 31, 1999
(8) Incorporated by reference to ICC's current report on form 8-K dated
December 1, 1999
(9) Incorporated by reference to amendment no. 1 to ICC's registration
statement on form S-3 (File no. 333-93301)
(10) Incorporated by reference to ICC's current report on form 8-K dated
March 28, 2000
(11) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999.
(12) Incorporated by reference to ICC's current report on form 8-K dated
June 15, 2000
(13) Incorporated by reference to ICC's current report on form 8-K dated
August 11, 2000
(14) Incorporated by reference to ICC's report on form 10-KSB dated July
31, 2000
(15) Filed herewith