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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, 2002
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File 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)
(212) 271-7640
(Registrants telephone number, including area code)
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
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. |X|
As of October 29, 2002 the issuer had outstanding 11,697,967 shares of
Class A Common Stock. The aggregate market value of the Class A Common Stock
held by nonaffiliates as of October 29, 2002 was approximately $31,004,647,
based on a closing price for the Class A Common Stock of $3.04 on the Nasdaq
National Market on that 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 ................................ 13
Item 3. Legal Proceedings ........................................ 13
Item 4. Submission of Matters to a Vote of Security Holders ...... 13
PART II .................................................................... 14
Item 5. Market for Internet Commerce Corporation's Common Equity
and Related Stockholder Matters .......................... 14
Item 6. Selected Consolidated Financial Data ..................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 33
Item 8. Financial Statements and Supplementary Data .............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 39
PART III ................................................................... 39
Item 10. Directors and Executive Officers of Internet Commerce
Corporation .............................................. 39
Item 11. Executive Compensation ................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 39
Item 13. Certain Relationships and Related Transactions ........... 39
PART IV .................................................................... 40
Item 14. Financial Statements, Financial Statement Schedules,
Exhibits and Reports on Form 8-K ......................... 42
Signatures ........................................................ 43
Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002...........................................45
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
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 33 of this annual report under the heading
"Risk Factors"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. 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 software systems, because our service is
provided at a lower cost, with greater transmission speed and
offers more features. During the fourth fiscal quarter of
2002, the Company completed the integration of its data
mapping and XML services groups into its ICC.NET business
segment. These products and services had previously been
included in our Professional Services segment. This action was
taken to more closely align these data transfer components
as they are now primarily utilized to support our ICC.NET VAN
service. 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;
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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
are not equipped to receive electronically transmitted
documents;
o Data Mapping -- our data mapping capabilities maximize
the value of our network by providing in-line data
translation facilities to our customers.
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 Point-of-Sale service --The exchange of Point of Sale
data is growing in the retail industry to improve supply
chain efficiency. Up to now, the cost of moving large
amounts of Point of Sale information electronically has
been prohibitive. ICC offers a Point of Sale service
that allows retailers and their suppliers to exchange
this data quickly and effectively utilizing the ICC.NET
Service; and
o ICC.CATALOG - Our web-based electronic vendor product
catalog service that transforms static vendor product
information into a pro-active purchasing tool through
the direct creation of EDI compliant purchase orders
that can be transmitted over the ICC.NET service; by
synchronizing trading partner data in real-time,
including graphic images of all products; and by
offering sophisticated navigation and advanced search
capabilities to streamline product comparison and
ordering information.
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; and
o ScanPak Professional provides UPC (Universal Product
Code) services for ASN (Advanced Ship Notice) Casing &
UCC (Uniform Code Council) 128 labels.
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 and technical resource management;
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. Through
strategic partnerships, including Emanio, Inc., we offer
third-party translators, combined with our ICC.NET data
mapping capabilities; 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.
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We are subject to various risk factors that are described under the
heading "Risk Factors" starting on page 27 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
Although the Internet has become an important new sales channel, we
believe that its primary value will be in achieving business efficiencies and
cost savings by expanding global business-to-business connectivity.
In an increasingly global economy, we believe that improvements in speed
and efficiency in the supply chain between businesses are important and that
improvements in the capacity of a business to purchase 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 may 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. These acquisitions have
enabled 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
standard-based applications for standard-based EDI exchange over VANs, 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 assists its clients to conduct business electronically through a
continuum of services, including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Data transformation mapping has subsequently been integrated into the ICC.NET
service offerings.
In our fiscal quarter ended July 31, 2002, we achieved approximately
$587,000 of positive cash flow from operations, including $1,500,000 under our
amended agreement with Triaton. We also received $1,500,000 under this amended
agreement in October 2002 but do not expect any revenues or significant receipts
from Triaton in the future. While we anticipate that we will achieve positive
cash flow from operations in the year ending July 31, 2003, we do not anticipate
positive cash flow from operations in the first or second quarters of that
fiscal year, and there
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can be no assurance that we will be successful in achieving positive cash flow
for the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" and "Risk
Factors" elsewhere in this annual report.
Business Strategy
We believe that our ICC.NET service provides a platform with many
applications that allows 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.
We intend to continue to market ICC.NET to new customers with an
increasing focus on industries in which ICC.NET has achieved significant
penetration and revenues. Those industries include book retailing and
publishing, pharmaceutical manufacturing, automotive, footwear manufacturing,
office supplies, transportation logistics, financial services, manufacturing,
retail, grocery and soft goods manufacturing.
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 in our three 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 manages 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, and associated mapping and XML technology, custom application
development, comprehensive e-commerce
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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 by
bridging the incompatibility gap and enabling 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 formats. 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 we believe
are less than the prices currently charged by more established VANs.
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 connection;
o Our customers can 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.
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We believe that ICC.NET is one of the only Internet-based data
transmission services that is approved to interconnect with approximately sixty
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 Mapping Factory(R). We are a provider of EDI mapping services. Our EDI
Mapping Factory(R) provides off-site mapping using a variety of translators on
multiple platforms. Our experience includes mapping for ANSI ASC X12and
UN/EDIFACT Transaction Sets, XML and other standards, including support for SAP
IDOCs. We provide expert data mapping services for HIPAA compliance initiatives.
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 many operating system environments,
including Windows, NT, UNIX, AS/400 and mid-range systems.
XML Services. The industry standardization of XML continues to evolve
slowly, with no clear winners for a single business-to-business, or B2B,
standard. New proposed standards continue to emerge periodically, and
consolidation may be some time away. Our experience with XML, in it's many
forms, allows us to provide the flexibility and interoperability our customers
require in this changing environment. We provide a complete spectrum of
services, from design, through inline translation between XML, EDI, and flat
file formats, and full end-to-end B2B solutions. We have participated in the
development of several standards for the use of XML in B2B and EDI environments,
and remain in the forefront of this technology.
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.
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, clearinghouses and healthcare providers that transmit information
electronically. By combining our expertise in traditional EDI and HIPAA
requirements with our client's knowledge of its operations and systems, we offer
solutions that enable our clients to comply with the HIPAA regulations. We have
also formed partnerships aimed at HIPAA compliance that couple third-party
translators with our data mapping capabilities. Our ICC.NET service can
facilitate the exchange of healthcare eligibility and enrollment forms, care
review, patient information and claim status and payments.
Large-scale electronic document management and delivery. Our ICC.NET
service can electronically transmit large-scale EDI and non-EDI electronic
documents and other large files, which may include catalogs, Point of Sale data,
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. ICC's Point of Sale service allows retailers and their suppliers to
exchange information quickly and effectively.
ICC.CATALOG. In 2002, we launched a web-based electronic product catalog
("ICC.CATALOG") service 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. Users can
electronically access and selectively download the product information, and
generate EDI compliant purchase orders. Both the retailer and the vendor can
access the service worldwide using the Internet and can perform real-
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time updates. ICC.CATALOG complies with industry standards and is designed to
reduce the costs of both retailers and vendors through ease of use, advanced
features, functions and low cost pricing. The ICC.CATALOG integrates seamlessly
with our ICC.NET service.
EDI to fax service. Traditional EDI users 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 worldwide 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.
AS2 Connectivity. We continue to invest in leading edge technology to meet
the changing requirements of our customers. An example of this is AS2, which is
one of the newest standards associated with moving information across the
Internet. We have incorporated AS2 technology into our service offerings so that
our customers can utilize the technology without a huge up front investment in
software. By using ICC's AS2 solution our customers avoid the hidden support
costs associated with purchasing an AS2 software product.
The Service Bureau
The ICC Service Bureau allows vendors to comply with its customers'
electronic commerce needs. ICC's fees can be more cost effective than
establishing an in-house EDI department.
The ICC Service Bureau is focused on the retail industry and is capable of
exchanging business transactions with most major retailers. Customers can view
account activity on-line through the use of the Internet.
The primary features of the Service Bureau include:
o Purchase Order, Invoice and Product Activity Data Processing
o UPC Maintenance
o UPC and UCC 128 Label Service and Ship Notices
o Automated packing process using ScanPak Professional
Our service bureau also offers an assortment of software products. Our
principal software products are:
o ScanPak Professional is a Windows-based warehouse management tool
providing an automated Advanced Ship Notice and UCC/EAN-128 label
solution. ScanPak Professional allows our customers to scan
merchandise and automatically generate bar code labels for each case
as it is packed. Keyboard use at packing stations can be eliminated.
This product electronically matches the contents of each case
against purchase orders. From the casing information created by
ScanPak, our customers can generate and transmit accurate EDI ship
notices to retailers or third party EDI software products. ScanPak
Professional interfaces with ICC.NET and other third party EDI
software products.
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 that cannot
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
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products that do not have UPC numbers assigned and accepts current
UPC numbers for products with them. Tracking active, inactive 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.
Software sales have not been a significant source of revenue during the
years ended July 31, 2002 and 2001.
Professional Services
Our professional services facilitate the development and operations of
comprehensive business-to-business electronic commerce solutions. We specialize
in electronic commerce, or EC, solutions involving EDI and EAI (Enterprise
Application Integration) by providing mission critical EC consulting, EC
software, outsourced EC services, technical resource management and HIPAA gap
analysis
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 experience to support our customers' information technology
functions. 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 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. Custom courses can be arranged for our
customers at their locations. We also offer public and private 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 knowledge of claim
processing and remittance transactions.
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 14 of the notes to our consolidated
financial statements included elsewhere in this annual report. Our revenue by
geographic region is set forth in Note 13 of the notes to our consolidated
financial statements.
International
Triaton GmbH (formerly Hightech International Services GmbH), a subsidiary
of Thyssen Krupp Information Services GmbH, licensed our ICC.NET service under
the joint services agreement dated July 28, 2000. In July of 2002 the joint
services agreement was terminated and we entered into a new licensing agreement
with Triaton. Under the new agreement, Triaton was granted a non-exclusive
license to use ICC's electronic data interchange system in its most recent
version anywhere in the continent of Europe, Great Britain and Ireland for a
five-year term in exchange for a licensing fee of $3,000,000. Triaton has the
right to provide and use the ICC.NET service with its customers. ICC will not
report any additional revenues under the amended agreement with Triaton, except
that at Triaton's request, ICC shall provide sales support, customer support and
software support services on its standard terms and conditions.
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.
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We have also entered into reseller agreements in Brazil and the United
Kingdom. Our Brazilian partner, Advanced Trade Technologies and Services
Limited, or ATTS, will be reselling the full line of ICC services and products
including service bureau, software, consulting services, ICC.CATALOG and ICC.NET
in South America. Freshlook LLC is focusing on reselling all ICC.NET services in
the UK and Ireland.
Competition
Our principal competitors include: Inovis Inc. (formerly a subsidiary of
Peregrine Systems, Inc.); GXS, Global eXchange Services Inc., owned by Francisco
Partners LP; International Business Machines Corporation Global Services;
Sterling Commerce, Inc., a subsidiary of SBC Communications Inc.; EasyLink
Corp.; and KleinSchmidt Inc. Each of these competitors has an established VAN
that has provided EDI for 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 resulted in significant changes during 2002.
Traditional VAN's such as GXS, Sterling and Inovis have either been sold by
their parent companies or are currently for sale. GXS was recently acquired by
Francisco Partners, Inovis was spun off from Peregrine Systems, Inc. and
acquired by Golden Gate Capital Inc., and we believe that SBC is attempting to
sell Sterling Commerce. We believe that much of this activity is attributed to
the impact of the Internet on traditional VAN's.
New competition is emerging in the form of Web Services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. Competitors providing these alternatives include
Cyclone Corporation and IPNet Solutions, Inc. They offer software solutions
that utilize the Internet to transmit data between trading partners. We believe
that the high cost of implementation and the ongoing costs of supporting a
company's trading partners are a barrier to the wider acceptance of their
product offerings in the marketplace.
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
responsed 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 our competitors.
We rely on many of our competitors to interconnect with our service to
promote an "open community" so all businesses can take advantage of the
efficiencies of EDI no matter what network they choose as their provider. In
September 2001, and January 2002, two of our competitors, GXS and Sterling
Commerce, terminated existing interconnection agreements with us and we made
alternative arrangements to serve our customers.
The addition of our catalog service adds Quick Response Systems
Corporation, or QRS, to our list of competitors. QRS and Global exchange
Services have dominated the catalog service industry for more than ten years,
but our catalog pricing and functionality has the potential to create
competitive advantages for our service.
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.
9
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 that 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
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.
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, 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.
Sales and Marketing
We employ a variety of marketing initiatives 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. Our sales force
currently consists of professional sales staff and support personnel located
across the United States to serve our diverse geographic customer-base. Our
sales force consists of field sales representatives who provide direct
assistance with sales calls at customer sites and must meet target quotas. Our
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
10
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 seminars, consisting of a traveling
road show providing targeted group demonstrations and selling activities to
pre-qualified audiences invited to events in their own localities by direct mail
and advertising supported by telemarketing confirmation. ICC maintained its
participation in industry tradeshows and has personnel who focus solely on this
area. We plan to staff national shows with sales, support and executive
personnel from our headquarters.
Industry Initiatives. To broaden our market appeal and customer
penetration, ICC has initiated a variety of special products, each aimed at
increasing traffic across our ICC.NET network. For example, we offer retail
customers the ICC.CATALOG, a web-based facility that enables suppliers and
vendors to enhance their e-commerce capabilities and realize improved
efficiencies and economies. In the healthcare arena, ICC offers a complete suite
of solutions focused on the federally mandated Healthcare Insurance Portability
and Accountability Act. These solutions include strategic and tactical
consulting, integrated third party software, mapping and transaction transport.
Among our other focused initiatives are scan-based trading, Point-of-Sale and
telecommunications industry offerings.
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 that recommend our products and services. In addition, ICC is integrated
into and sold by various enterprise requirement planning (ERP), purchasing,
accounting, procurement and EDI translation software product vendors. ICC is
also the underlying EDI and VAN services provider for vertically oriented
portals and exchanges in the automotive, home furnishings, retail, electronics
and EDI outsource industries. We believe that an interface with our
Internet-based electronic commerce system will appeal to complementary providers
of software and services by highlighting the cutting-edge character of their
offerings and enabling them to provide a complete solution to their customers.
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 1,100 customers.
Approximately 600 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, Avery Dennison,
Barnes & Noble, Inc., BMG Entertainment, Brother International Corporation, CIT
Group, Inc., Colgate-Palmolive, Dot Foods, Hastings Entertainment, Inc., Linens
n' Things, Inc., Mack Trucks, Inc., The McGraw-Hill Companies, Inc., New Balance
Athletic Shoes, Inc., Nordstrom.com, 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 professional service contracts. Current customers include
Preferred Care, Atlantic Tech Services, Health Network America, and Lockheed
Martin.
Our service bureau has approximately 500 customers.
11
One customer accounted for 22% of our consolidated revenues, or 30% of the
revenues of our ICC.NET business segment, during the year ended July 31, 2002.
This customer also accounted for 11% of our consolidated revenues and 22% of our
ICC.NET segment revenues in the year ended July 31, 2001. This customer is not
expected to be a significant customer in the future. No single customer
accounted for a material portion of our revenues during the year ended July 31,
2000.
Research and Development
Research and development costs related to the enhancement and improvement
of our ICC.NET service amounted to $977,000, $931,000, and $702,000 for the
years ended July 31, 2002, 2001 and 2000, respectively.
Employees
At July 31, 2002, ICC had 115 full-time employees.
12
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New York
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.
We lease general office space 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. Effective August 1,
2002, ICC entered into an agreement with the landlord of the Cary facility that
reduced the rent on approximately 13,000 square feet, while the landlord pursues
its release to new tenants. The agreement reduced the annual base rent for such
property to approximately $420,000. Subsequently the abandoned 13,000 square
feet has been leased to new tenants. In addition, approximately 3,600 square
feet of the remaining space has been subleased.
Our data center is located at the facilities of The Securities Industry
Automation Corporation (SIAC) under an agreement that expires in December 2002.
The agreement shall be renewed automatically for an additional one-year term.
We believe that these facilities should be adequate for our present and
reasonably foreseeable operating requirements.
Item 3. Legal Proceedings
None; the lawsuit by Thomas Lipscomb against us previously disclosed was
dismissed in our favor.
Item 4. Submission of Matters to a Vote of Security Holders
No meetings of stockholders took place during the fourth quarter of the
year ended July 31, 2002.
13
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, were traded in the over-the-counter market on the OTC
Bulletin Board until February 2002 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.
The Units, Class A Warrants and Class B Warrants expired in February 2002.
No trading information was available during the first, second and third fiscal
quarters of 2002 prior to their expiration.
Fiscal Year Ended July 31:
- --------------------------
2002 2001
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
- --------------------
First Quarter $ 4.00 $ 1.50 $18.00 $ 4.50
Second Quarter $ 4.80 $ 2.45 $ 7.32 $ 2.50
Third Quarter $ 4.50 $ 2.55 $ 7.00 $ 2.00
Fourth Quarter $ 3.55 $ 1.55 $ 4.83 $ 2.50
Units
- -----
First Quarter $ N/A $ N/A $21.00 $21.00
Second Quarter $ N/A $ N/A $ 9.00 $ 7.00
Third Quarter $ N/A $ N/A $ 7.63 $ 4.00
Fourth Quarter $ -- $ -- $ 6.25 $ 6.25
Class A Warrants
- ----------------
First Quarter $ N/A $ NA $13.75 $ 3.75
Second Quarter $ N/A $ N/A $ 6.50 $ 1.13
Third Quarter $ N/A $ N/A $ 2.75 $ 1.15
Fourth Quarter $ -- $ -- $ 1.25 $ 0.51
Class B Warrants
- ----------------
First Quarter $ N/A $ N/A $ 5.75 $ 1.63
Second Quarter $ N/A $ N/A $ 2.50 $ 0.75
Third Quarter $ N/A $ N/A $ 1.50 $ 0.25
Fourth Quarter $ -- $ -- $ 0.25 $ 0.25
(b) Holders
As of July 31, 2002, there were approximately 179 record holders of our
class A common stock. 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.
14
(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
2002, ICC paid cash dividends of $6,582.97 in payment of the dividend due on
July 1, 2002. In July 2001, ICC issued 7,601 shares of class A common stock in
payment of the dividend due on July 1, 2001. 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 98,839 shares of class A
common stock in payment of the dividend due January 1, 2002, and 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
On July 11, 2002, we entered into a Settlement Agreement with ING Merger,
LLC and ING Capital, LLC, a wholly owned subsidiary of ING Merger, pursuant to
which we issued to ING Capital 200,000 shares of class A common stock and
warrants to purchase 60,000 shares of class A common stock. The warrants are
exercisable for five years at an exercise price per share of $3.50. The issuance
of these securities was exempt from registration under Section 4(2) of the
Securities Act.
In May 2002, we issued a total of 22,218 shares of class A common stock to
six non-employee directors of ICC in payment of directors fees. The issuance of
these securities was exempt from registration under section 4(2) of the
Securities Act.
We commenced a warrant exchange offer on April 23, 2002 that ended on May
31, 2002. The offer was extended to investors who participated in our private
placement on October 29, 2001 and to holders of warrants issued as fees in
connection with the private placement. The offer reduced the exercise price of
the warrants issued in the private placement to $2.50 per share for those
investors that agreed to exercise those warrants. In addition, for each share of
class A common stock purchased pursuant to the warrant exercise, a new five-year
warrant to purchase an equivalent number of shares of class A common stock was
issued. These new warrants have an exercise price of $3.50 per share and
otherwise contain the same terms as the warrants issued in the private
placement. We received $659,288 in gross proceeds and issued a total of 263,715
shares of class A common stock and warrants to purchase the same number of
shares of class A common stock. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act.
On October 29, 2001, we sold in a private placement 1,159,716 shares of
class A common stock and warrants to purchase 347,915 shares of class A common
stock for gross proceeds of $3,189,219. The warrants expire in October 2006 and
are exercisable at $3.58 per share. The warrants are redeemable at our option
for $0.10 per warrant commencing in April 2003 if the closing bid price of our
class A common stock is at least 200% of the exercise price of the warrants for
30 consecutive trading days. In connection with the private placement, we
incurred fees of $152,111, of which $35,000 was paid in cash and $117,511 was
paid by issuing warrants to purchase 50,000 shares of class A common stock.
These warrants have substantially the same terms as the warrants issued in the
October 2001 private placement. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act
15
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, 2002 is presented below. Our
selected balance sheet data is presented below as of July 31, 2002, 2001, 2000,
1999 and 1998. 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,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 14,222 $ 9,743 $ 1,303 $ 105 $ 19
-------- -------- -------- -------- --------
Expenses:
Cost of services 8,776 9,354 2,514 452 11
Product development and enhancement 977 931 702 517 576
Selling and marketing 3,499 5,384 3,273 420 --
General and administrative 5,849 9,683 4,814 3,581 2,307
Non-cash charges for stock-based
compensation, services and legal
settlements 250 991 5,161 3,267 --
Impairment of goodwill and acquired
intangibles 1,711 16,708 -- -- --
Impairment of assets -- -- -- -- 178
-------- -------- -------- -------- --------
Total operating expenses (21,062) (43,051) (16,464) (8,237) (3,072)
-------- -------- -------- -------- --------
Operating loss (6,840) (33,308) (15,161) (8,132) (3,053)
-------- -------- -------- -------- --------
Other income (expense), net 292 523 675 (1,490) 56
-------- -------- -------- -------- --------
Loss before income taxes (6,548) (32,785) (14,486) (9,622) (2,997)
Income tax benefit -- 1,930 -- -- --
-------- -------- -------- -------- --------
NET LOSS (6,548) (30,855) (14,486) (9,622) (2,997)
Dividends on preferred stock (365) (420) (458) (191) --
Dividends to preferred stockholders for
beneficial conversion feature -- -- (4,549) (1,222) --
Beneficial conversion feature from
repricing and issuance of warrants (461) -- -- -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $ (7,374) $(31,275) $(19,493) $(11,035) $ (2,997)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.68) $ (3.57) $ (4.49) $ (7.62) $ (2.79)
======== ======== ======== ======== ========
Weighted average common shares
outstanding - basic and diluted 10,867 8,768 4,337 1,447 1,076
======== ======== ======== ======== ========
July 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 2,088 $ 2,223 $ 14,003 $ 114 $ 178
Working capital (deficit) 2,622 646 17,831 3,119 (915)
Total assets 12,625 15,674 22,332 6,540 1,535
Capital lease obligations 374 255 231 358 197
Total liabilities 3,244 4,487 2,242 1,486 1,398
Stockholders' equity 9,381 11,187 20,090 5,055 132
16
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 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 33 of this annual report under the heading "Risk Factors" 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. 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
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 service
bureau and our professional services.
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 is provided at lower cost,
with greater transmission speed and offers more features. Our service bureau
manages and translates the data of small and mid-sized companies that exchange
EDI data with large companies. Our professional services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001 we made two acquisitions that 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, an EDI service bureau. IDC delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments.
In November 2000, we acquired RTCI, thereby expanding our professional
services capability. RTCI was an e-commerce infrastructure solutions company
serving the business-to-business e-commerce market. RTCI assists its clients to
conduct business electronically through a continuum of services including
eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking.
RTCI developed a business model that offered remote service delivery, fixed and
value-based pricing and reusable solutions. Subsequent to the acquisition in
fiscal 2001, 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 during the fourth quarter of 2001 based
on the related discounted expected future cash flows.
17
Due to a continued decline in its revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted future
operating profits, the Professional Services segment was tested for impairment
during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was
recognized as a result of this evaluation. The fair value of the Professional
Services segment unit was estimated using net present value of expected future
cash flows.
During the fourth quarter of fiscal 2002 the Company integrated its data
mapping and XML services and personnel into the ICC.NET business segment. These
products and services had previously been part of the Company's Professional
Services segment. These products and services are primarily utilized to support
customers of the ICC.NET VAN service. The reorganization was undertaken to more
closely align these data transfer services with the customers they serve. The
segment information presented below in the results of operations has been
restated, for each period presented, to reflect this reorganization as if it had
occurred August 1, 2001.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 50
business-to-business networks for the benefit of our customers. Two of the
largest, GE Global Exchange Services ("GXS") and Sterling Commerce, networks
which we believe to account for approximately 60% of the estimated EDI users,
have chosen to discontinue their interconnect arrangements with the Company. GXS
discontinued its interconnection with our service in September 2001 and Sterling
Commerce discontinued its interconnection with our service in April 2002. We
have entered into arrangements with Peregrine Systems, Inc. and IBM Corporation
so our customers can continue to communicate through us with their trading
communities. As a result of these new interconnection arrangements, we will
incur additional costs and may lose existing customers if the arrangements we
have provided are inadequate for their business purposes. We believe, however,
that the arrangements we have made satisfy our existing customers and that
our business and financial condition will not be materially or adversely
affected as a result of these new arrangements.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
In December 2001, the Securities and Exchange Commission ("SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in Note 2 of the notes to the consolidated
financial statements included elsewhere in this annual report. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles with no need for management's judgment
in their application. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially different
result. We have identified the following to be critical accounting policies of
the Company:
Revenue Recognition: The Company derives 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, generally one year. Usage fees are recognized in the period the services
are rendered. The Company also derives revenue through implementation fees,
interconnection fees and by providing data mapping services to its customers.
Implementation fees are recognized over the life of the subscription period.
Interconnection fees are fees charged to connect to another VAN service and are
recognized when the data is transmitted to the connected service. Revenue from
data mapping services is recognized when the map has been completed and
delivered to the customer.
18
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, UPC catalog maintenance and UPC label
printing. The service bureau also derives revenue from software licensing and
provides software maintenance and support. Revenue from the EDI services and UPC
services is 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", as amended. Revenue from software licenses's recognized when all
of the following conditions are met: (1) a non-cancelable non-contingent license
agreement has been signed; (2) the software product has been delivered; (3)
there are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts is recognized ratably over the life of the
contract. The service bureau's software license revenue was not significant in
any of the periods presented.
In addition, SOP 97-2, generally requires revenue from software
arrangements involving multiple elements to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation, or training and
recognized as the element is delivered and the Company has no significant
remaining performance obligations. The Company's multiple element arrangements
generally consist of a software license and post contract support. The Company
allocates the aggregate revenues from multiple element arrangements to each
element based on vendor specific objective evidence. The Company has established
vendor specific objective evidence for each of the elements as it sells both the
software and post contract customer support independent of multiple element
agreements. Customers are charged standard prices for the software and post
contract customer support and theses prices do not vary from customer to
customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education and
training at seminars hosted by leading universities around the United States.
Revenue from EDI and electronic commerce consulting and education and training
are recognized when the services are provided. Revenue from fixed fee
professional service contracts are recognized using the percentage-of-completion
method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill will be written down to its
implied fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
19
Other Intangible Assets: Other Intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets that were
not subject to amortization
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
future undiscounted cash flows of the asset when indications of impairment are
present. If it is determined that an impairment in value has occurred, the
excess of the carrying value of the asset will be written down to the present
value of the expected future operating cash flows to be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation arrangements with its employees using the intrinsic value method 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.
Income Taxes: We have a history of unprofitable operations which generated
significant state and federal tax net operating losses, or NOL carryforward.
Generally accepted accounting principles in the United States require that we
record a valuation allowance against the deferred tax asset associated with this
NOL if it is "more likely than not" that we will not be able to utilize it to
offset future taxes. Due to our history of unprofitable operations, we have
recorded a valuation allowance equal to 100% of these deferred tax assets.
It is possible, however, that we could be profitable in the future at
levels which cause management to conclude that it is more likely than not that
we will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, we would immediately record the estimated net realizable value of
the deferred tax asset at that time and would then provide for income taxes at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax asset could
cause our provision for income taxes to vary significantly from period to
period, although our cash tax payments would remain unaffected until the benefit
of the NOL is utilized.
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.
The following discussion reviews items incorporated in our financial statements
that required the use of significant management estimates.
In connection with our purchase of Intercoastal Data Corporation ("IDC")
and Research Triangle Commerce, Inc. ("RTCI"), we allocated the total
acquisition costs to all tangible and intangible assets acquired and all
liabilities assumed, with the excess purchase price over the fair value of net
assets acquired recorded to goodwill. To arrive at the allocation of the total
purchase price, management used the best information available to make certain
assumptions in estimating the fair market value of IDC's and RTCI's tangible
assets, intangible assets (such as trademarks, brand, intellectual property
rights to developed technology, and customer lists) and liabilities.
Impairments of goodwill and acquired intangibles in the amount of
$1,711,000 and $16,708,000 were as recorded during the years ended July 31, 2002
and July 31, 2001, respectively. During fiscal 2001, due to a significant
reduction of the workforce of the professional services segment, a steep decline
in the value of companies similar to it, continued operating losses and a
significant reduction in the forecasted future operating profits, management
determined that triggering events had occurred related to the certain acquired
intangible assets of the Professional Services segment, namely its assembled
workforce, its customer list and goodwill. The projected cash flow analysis
related to those assets determined that the assets had been impaired. These
intangible
20
assets were written down to fair value based on the discounted expected
future cash flows from the intangible assets over their remaining estimated
useful lives. An impairment loss of $16,708,000 was recognized as a result of
this evaluation. During fiscal 2002, due to a continued decline in its revenues
throughout the course of 2002, continued operating losses and a significant
reduction in forecasted future operating profits, the Professional Services
segment was tested for impairment during the fourth quarter of fiscal 2002. An
impairment loss of $1,711,000 was recognized as a result of this evaluation. The
fair value of the Professional Services segment unit was estimated using the net
present value of expected future cash flows.
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 Black-Scholes option-pricing model was used to determine
the market value of these options, which required management to make certain
estimates for values of variables used by the model. Non-cash consulting charges
for this stock option amounted to $450,000 in the year ended July 31, 2001.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes pricing model. This amount has been deducted from the Company's
net loss to increase the net loss attributable to common stockholders.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for 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 options and warrants were valued using the
Black-Scholes pricing model. Management estimated the values for stock price
volatility, the expected life of the options and risk-free rate based on
information that was available to management at the time the Black-Scholes
option-pricing calculations were made. The fair value of the vested portion of
the options was included in the purchase price for RTCI.
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2002 Compared with Fiscal Year Ended July 31, 2001.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported segment.
All significant intersegment activity has been eliminated. Accordingly, the
segment results below exclude the effect of transactions with our subsidiary.
Year Ended
July 31,
------------------------------
Income (loss) before income taxes: 2002 2001
----------- ------------
ICC.NET $(3,126,008) $(12,057,379)
Service Bureau 4,948 (391,048)
Professional Services (3,426,493) (20,336,812)
----------- ------------
Consolidated loss before income taxes $(6,547,553) $(32,785,239)
=========== ============
Results of Operations - ICC.NET
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
21
trading communities, many of which may have incompatible systems, by translating
the documents and data files into any format required by the receiver. The
following table summarizes operating results for our ICC.Net service:
Year Ended
July 31,
------------------------------
2002 (1) 2001 (1)
----------- ------------
Revenues:
VAN services $ 7,330,664 $ 4,690,919
Services to Triaton 105,626 1,068,500
Technology license 3,000,000 --
----------- ------------
10,436,290 5,759,419
Expenses:
Cost of services 5,744,587 5,794,541
Product development and enhancement 822,314 625,279
Selling and marketing 3,034,683 4,523,331
General and administrative 4,230,242 6,913,600
Non-cash charges 59,989 450,110
----------- ------------
13,891,815 18,306,861
----------- ------------
Operating loss (3,455,525) $(12,547,442)
----------- ------------
Other income, net 329,517 490,063
----------- ------------
Loss before income taxes $(3,126,008) $(12,057,379)
=========== ============
(1) Restated to reflect the integration of data mapping services into
the ICC.NET segment.
Revenues - ICC.Net - Revenues of our ICC.NET service were 73% of our total
consolidated revenues for the fiscal year ended July 31, 2002 ("2002"). Our
ICC.NET service revenues increased $4,677,000 in 2002 from the fiscal year ended
July 31, 2001 ("2001"). VAN revenues increased $2,640,000 in 2002, or 56% from
the prior year. This increase is the result of a larger customer base and
increased volume. Services to Triaton decreased from $1,069,000 under the
original agreement in 2001 to $106,000 in 2002. During 2002, we recognized
technology license revenue of $3,000,000 from Triaton for the license of our
ICC.NET service. Under the terms of the July 2002 license agreement, we granted
Triaton a non-exclusive license to use ICC's electronic data interchange system
in its most recent version anywhere in the continent of Europe, Great Britain
and Ireland for a five-year term. Triaton has the right to provide and use the
ICC.NET service to its customers. Triaton paid us $1,500,000 in July 2002 and an
additional $1,500,000 in October 2002 under this license agreement. ICC will not
report any additional revenues under the amended agreement with Triaton, except
that, at Triaton's request, ICC shall provide sales support, customer support
and software support on its standard terms and conditions
Cost of services - ICC.Net - Cost of services relating to our ICC.NET
service was 55% of revenues derived from the service in 2002, compared to 101%
of revenues derived from the service in 2001. These costs consist primarily of
salaries and employee benefits, data lines and amortization of capitalized
software and mapping technology. The decrease of $50,000 in 2002 from the prior
year was primarily the result of increased connectivity costs offset by lower
salaries and employee benefits. We reduced our cost of services personnel to 28
at the end of 2002 from 38 at the end of 2001 and as a result we were able to
reduce salaries and employee benefits by $521,000. The reduction in the number
of employees did not affect the quality or reliability of our service. Rental
expenses for leased computer equipment decreased $120,000 in 2002 compared to
the prior year. Connectivity fees are those costs that we incur to transmit data
electronically. These fees include charges from other VANs and charges from
Internet service providers. Total connectivity fees increased $370,000 in 2002.
The increase in connectivity fees was primarily due to additional fees incurred
to offer our customers and their trading partners alternate connectivity as a
result of GXS and Sterling disconnecting our service from their networks. In
addition, amortization increased $239,000 in 2002. This was primarily due to the
acquisition of RTCI. Because the acquisition took place at the beginning of the
second quarter of 2001, only nine months of mapping technology amortization was
recognized in 2001, compared to twelve months of amortization in 2002. We
anticipate that our
22
ICC.NET cost of services will continue to decline as a percentage of revenues in
future periods due to increased utilization of our existing infrastructure as we
expect the use of our ICC.NET service to increases.
Product development and enhancement - ICC.Net - Product development and
enhancement costs relating to our ICC.Net service consist primarily of salaries
and employee benefits. The increase of $197,000 in 2002 from 2001 was primarily
caused by an increase in salaries and employee benefits of $317,000 partially
offset by reductions in facility-related costs of $72,000, travel expenses which
were reduced $22,000 and computer equipment rental costs which were reduced
$27,000. These reductions were the result of our cost reduction measures.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising, trade shows and travel-related costs. Selling and marketing
expenses related to our ICC.NET were reduced $1,489,000 in 2002 from 2001.
Salaries and employee benefits related to our ICC.NET service decreased
$645,000, primarily due to the elimination of our telesales force. Consulting
and professional fees were reduced $275,000, advertising and trade show expenses
were reduced $233,000, rent and facility-related costs were reduced $157,000,
and travel-related costs were reduced $141,000--all as a result of our cost
reduction measures.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, rent, depreciation, telephone, insurance, amortization and consulting
and professional fees. General and administrative expenses supporting our
ICC.NET service decreased $2,683,000 in 2002 from the prior year. Salaries and
related employee benefits decreased $1,220,000 in 2002, due to a reduction in
the workforce. In addition, recruiting fees decreased $137,000. The prior year,
2001, included severance payments of $448,000, primarily due to the termination
of an officer. Consulting and professional fees decreased $704,000 in 2002
primarily as a result of the termination of a consulting contract with a former
officer of the Company that was recognized in 2001. Amortization decreased
$119,000, primarily as a result of the Company's implementation of SFAS No. 142,
effective August 1, 2001, which requires goodwill to be tested for impairment on
a periodic basis and no longer permits the amortization of goodwill.
Non-cash charges - ICC.NET - During 2002 the non-employee members of our
Board of Directors received class A common stock with a value of $60,000 as
compensation for their services. No such compensation was paid in 2001. 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 of ICC. Non-cash consulting charges for this stock option amounted to
$450,000 in 2001. No such charges were incurred in 2002.
Other income, net - ICC.NET - Interest and investment income decreased
$364,000 in 2002 compared to 2001 as the result of lower average cash balances
and interest rates compared to the prior year. This was partially offset by
other non-operating income of $208,000 during 2002. This includes a legal
settlement from a competitor of $63,000 and the favorable settlement of an
acquisition liability of $145,000. No such settlements were recorded in 2001.
Results of Operations - 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 various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau:
Year Ended
July 31,
---------------------------
2002 2001
---------- -----------
Revenues:
Services $1,633,183 $ 1,462,088
Expenses:
Cost of services 839,217 668,535
Product development and enhancement 154,589 305,750
Selling and marketing 123,100 105,382
General and administrative 511,329 773,469
---------- -----------
1,628,235 1,853,136
---------- -----------
Operating income (loss) 4,948 (391,048)
---------- -----------
Other income, net -- --
---------- -----------
Income (loss) before income taxes $ 4,948 $ (391,048)
========== ===========
23
Revenues - Service Bureau - Revenues of our service bureau were 11% of our
total consolidated revenues for 2002. The service bureau's revenues were
primarily generated from services performed, customer support and licensing
fees. This increase in revenues of $171,000 was primarily the result of an
increased demand for barcode label printing from existing customers.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 51% of revenues of the service bureau in 2002, compared to
46% of revenue of the service bureau in 2001. These costs consist primarily of
salaries and employee benefits, data lines, rent and consultants. Salary and
benefits increased by $112,000 in 2002 from 2001, primarily as a result of an
increase in staff. Facilities related costs increased $29,000 and consulting
expenses increased $10,000 from the prior year.
Product development and enhancement - Service Bureau - Product development
and enhancement costs relating to our service bureau consist primarily of
salaries and employee benefits and rent. Product development and enhancement
costs incurred by our service bureau decreased $151,000 in 2002 from 2001. The
decrease was primarily attributable to capitalized labor costs for newly
developed software in the amount of $92,000. Also, consulting fees were reduced
by $52,000.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent, which increased $18,000.
General and administrative - Service Bureau - General and administrative
expenses supporting our service bureau consist primarily of salaries and
employee benefits, depreciation, amortization, rent, telephone and office
expenses. Amortization decreased $241,000, primarily as a result of the
Company's implementation of SFAS No. 142, effective August 1, 2001, which
requires goodwill to be tested for impairment on a periodic basis and no longer
permits the amortization of goodwill.
Results of Operations - Professional Services
Our professional services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions. Our professional services segment also conducts a
series of product-independent EDI seminars for electronic commerce users. The
following table summarizes operating results for our professional services:
Year Ended
July 31,
-------------------------------
2002 (1) 2001 (1)
------------ ------------
Revenues:
Services $ 2,152,323 $ 2,521,012
Expenses:
Cost of services 2,191,750 2,891,278
Selling and marketing 341,717 754,871
General and administrative 1,107,741 1,995,515
Non-cash charges for stock-based 190,019 540,938
compensation & services
Impairment of goodwill and acquired
intangible 1,710,617 16,708,479
------------ ------------
5,541,844 22,891,081
------------ ------------
Operating loss (3,389,521) (20,370,069)
Other income (expense), net (36,972) 33,257
------------ ------------
Loss before income taxes $ (3,426,493) $(20,336,812)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
24
Revenues - Professional services - Revenues from professional services
were 15% of our total consolidated revenues for 2002. Revenues from professional
services consist of consulting and educational services. As a result of the
continuing economic slowdown, revenues from professional services decreased
$369,000 in 2002 from 2001 for consulting services.
Cost of services - Professional Services - Cost of services relating to
professional services was 102% of revenues derived from professional services in
2002, compared to 115% of revenues in 2001. Cost of services consists primarily
of salaries and benefits, consultants, travel related expenses, amortization and
off site facilities. Cost of services related to our professional services
decreased $700,000 in 2002. Amortization expense decreased $472,000 from the
prior year. As required by FAS 142, we reclassified the workforce intangible
from other intangible assets to goodwill and as a result, no such amortization
charge was incurred in 2002. We reduced our cost of services personnel to 13 at
the end of 2002 from 24 at the end of 2001. As a result salary and employee
benefits decreased by $158,000 in 2002. In addition, as part of our cost
reduction measures, facility-related costs and computer equipment rentals
decreased $50,000 from the prior year.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits, travel related expenses, advertising, trade shows and
amortization. Selling and marketing expenses related to our professional
services were reduced $413,000 in 2002 from the prior year. This decrease is the
result of a decrease in salaries and employee benefits of $78,000. Amortization
expense for the acquired customer list was no longer recorded during 2002 as an
impairment charge for the full carrying value was recognized in the fourth
quarter of 2001. This resulted in a decrease of $61,000 in amortization expense
during the current year. In addition, as part of our cost reduction measures,
travel-related expenses, tradeshow fees, advertising expenses and office
expenses decreased by $272,000 from the prior year.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, legal fees, telephone charges,
depreciation, amortization and professional fees. General and administrative
costs supporting our professional services decreased $888,000 in 2002 from 2001.
The decrease was partially attributable to a decrease in depreciation and
amortization of $886,000, a result of the Company's implementation of SFAS No.
142, effective August 1, 2001, which requires goodwill to be tested for
impairment on a periodic basis and no longer permits the amortization of
goodwill. The decrease was also attributable to a decrease in salaries and
employee benefits of $254,000, primarily due to a reduction in the workforce.
Offsetting these decreases were a lease abandonment charge of $193,000 and an
increase of $61,000 in legal and professional fees.
Non-cash charges - Professional Services - Non-cash charges for
compensation and services relating to our professional services in 2002
consisted of $190,000 of stock-based compensation expenses related to 172,907
unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI. The value of the restricted shares was amortized from the
date of acquisition through January 1, 2002. During 2001, professional services
recognized $541,000 of stock based compensation expense related to these
restricted shares.
25
Impairment of Acquired Intangibles - Professional Services - During 2001,
professional services recorded an impairment charge of $16,708,000 related to
the impaired intangibles acquired from RTCI. Due to a significant reduction of
the workforce of professional management, a steep decline in the value of
similar companies, continued operating losses and a significant reduction in
forecasted operating profits, we determined that a triggering event had occurred
related to the to certain acquired intangible assets of the professional
services segment, namely the assembled workforce, the customer list and
goodwill. Projected cash flow analysis related to these assets determined that
this asset had been impaired. This intangible assets were written down in 2001
to fair value based on the related discounted expected future cash flows and
from the intangible assets. During 2002 management once again determined that
triggering events had occurred related to goodwill. The carrying value of
goodwill was reevaluated for impairment and an impairment charge of $1,711,000
was recognized in 2002.
Income tax benefit - Professional Services - The 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. No such benefit was recorded in 2002.
Fiscal Year Ended July 31, 2001 Compared with Fiscal Year Ended
July 31, 2000.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segment. All significant intersegment activity has been eliminated. Accordingly,
the segment results below exclude the effect of transactions between with our
subsidiary.
Year Ended
July 31,
----------------------------
Consolidated income (loss) before income taxes: 2001(1) 2000
------------ ------------
ICC.NET $(12,057,379) $(14,485,627)
Service Bureau (2) (391,048) --
Professional Services (3) (20,336,812) --
------------ ------------
Consolidated loss before income taxes $(32,785,239) $(14,485,627)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
(2) We acquired our service bureau in August 2000.
(3) We acquired our porfessional services business in November 2000.
Results of Operations - ICC.Net
The following table summarizes operating results for our ICC.Net service:
Year Ended
July 31,
-------------------------------
2001 (1) 2000
------------ ------------
Revenues:
VAN services $ 4,690,919 $ 1,303,441
Services to Triaton 1,068,500 --
------------ ------------
5,759,419 1,303,441
Expenses:
Cost of services 5,794,541 2,514,282
Product development and enhancement 625,279 702,218
Selling and marketing 4,523,331 3,273,294
General and administrative 6,913,600 4,814,160
Non-cash charges 450,110 5,160,345
------------ ------------
18,306,861 16,464,299
------------ ------------
Operating loss (12,547,442) $(15,160,858)
------------ ------------
Other income, net 490,063 675,231
------------ ------------
Loss before income taxes $(12,057,379) $(14,485,627)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET business segment.
26
Revenues - ICC.NET - Revenues of our ICC.NET service were 59% of our total
consolidated revenue for the fiscal year ended July 31, 2001 ("2001"). Our
ICC.NET services revenues increased $4,456,000 in 2001 from the fiscal year
ended July 31, 2000. VAN revenue increased $3,387,000 in 2001 or 260% from the
prior year. The increase is the result of a larger customer base and increased
volume. This increase includes $1,000,000 of fees from Triaton, under a Joint
Services Agreement dated July 28, 2000.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was $5,795,000, or 101% of revenues derived from the service in 2001,
compared to $2,514,000 or 193% of revenues in 2000. These costs consist
primarily of salaries and employee benefits, data lines and amortization of
capitalized software and mapping technology. Salaries and employee benefits
related to the ICC.NET service increased $1,814,000 and computer equipment
rentals increased $222,000. Depreciation and amortization increased $680,000
primarily as a result of the amortization of the mapping technology acquired as
part of our acquisition of RTCI during 2001. In addition, data lines costs
increased $207,000, consulting fees increased $152,000 and rent expense
increased $92,000. 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.
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 ifrastructure as the use of our service increases.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The decrease of $77,000 in 2001 from 2000 is attributable
to a decrease in salaries and benefits of $205,000, partially offset by
increases in rent expense of $81,000 and computer equipment rental costs of
$44,000.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consisted primarily of salaries and employee benefits,
advertising, trade shows and travel-related costs. Selling and marketing
expenses for our ICC.NET service increased $1,250,000 from the prior year. This
is attributable to an increase in salaries and employee benefits of $718,000 as
well as expenditures for trade shows, advertising and consultants which
increased a total of $348,000 as we increased our marketing efforts. In
addition, rent expense increased $109,000 due to the lease of additional office
space expenditures related to the RTCI acquisiiton and were not present in the
prior year.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, rent, depreciation, telephone, insurance, amortization and consulting
and professional fees. Expenses related to our ICC.Net services increased
$2,099,000 in 2001. The general and administrative expenses include increases in
rent expense of $251,000 and salaries and benefits of $633,000. In addition,
depreciation expenses increased $224,000 from the prior year, primarily as a
result of additional fixed assets acquired. Severance of $455,000 was recognized
primarily due to the termination of an executive officer in
27
2001. In addition, consulting fees increased $499,000 primarily due to a former
director's consulting agreement.
Non-cash charges - ICC.NET - Non-cash charges for compensation and
services amounted to $450,000 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 $6,319,000 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. 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.
Results of Operations - Service Bureau
We acquired our service bureau through the purchase of IDC in August 2000.
The following table summarizes operating results for our service bureau:
Year Ended
July 31,
---------------------------
2001 2000
----------- -----------
Revenues:
Services $ 1,462,088 $ --
Expenses:
Cost of services 668,535 --
Product development and enhancement 305,750 --
Selling and marketing 105,382 --
General and administrative 773,469 --
----------- -----------
1,853,136 --
----------- -----------
Operating income (loss) (391,048) --
----------- -----------
Other income, net -- --
----------- -----------
Income (loss) before income taxes $ (391,048) $ --
=========== ===========
Revenues - Service Bureau - Revenue in the amount of $1,462,000, or 15% of
2001 revenue, was generated from our service bureau. The service bureau's
revenue was primarily generated from the services performed, customer support
and licensing fees.
Cost of services - Service Bureau - 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
$458,000. Other service bureau costs include data lines and support of $60,000
and consulting fees of $44,000.
Product development and enhancement - Service Bureau - Product development
and enhancement costs incurred by our service bureau were $306,000, which
consisted of $223,000 in salaries and employee benefits and $52,000 of
consulting fees.
Selling and marketing - Service Bureau - Our service bureau incurred
selling expenses in the amount of $105,000, which were primarily comprised of
salaries and employee benefits.
28
General and administrative - Service Bureau - Our new service bureau
incurred general and administrative expenses in the amount of $773,000. These
costs were made up of salaries and employee benefits of $379,000, amortization
from goodwill of $241,000 and rent of $81,000 all relating to our purchase of
IDC during 2001.
Results of Operations - Professional Services
We acquired our professional services through the acquisition of RTCI in
November of 2000. The following table summarizes operating results for our
professional services:
Year Ended
July 31,
-----------------------------
2001 2000
------------ ------------
Revenues:
Services $ 2,521,012 $ --
Expenses:
Cost of services 2,891,278 --
Selling and marketing 754,871 --
General and administrative 1,995,515 --
Non-cash charges for stock-based
compensation & services 540,938 --
Impairment of goodwill acquired
intangibles 16,708,479 --
------------ ------------
22,891,081 --
------------ ------------
Operating loss (20,370,069) --
Other income (expense), net 33,257 --
------------ ------------
Loss before income taxes $(20,336,812) $ --
============ ============
Revenues - Professional services - Revenues related to our professional
services accounted for $2,521,000, or approximately 26% of 2001 revenue. The
revenue generated by our professional services consisted of consulting and
custom solutions.
Cost of services - Professional services - Cost of services relating to
our professional services were $2,891,000, or 115% of revenues derived from
professional services. Salaries and employee benefits relating to our
professional services were $1,519,000, consulting fees were $366,000, computer
equipment rental costs were $164,000, amortization of the workforce were
$472,000 and costs related for educational services were $323,000 in 2001.
Selling and marketing - Professional services - Selling and marketing for
our professional services was $755,000 in 2001. Amortization increased $61,000
due to our acquisition of RTCI's customer list. In addition, salaries and
employee benefits relating to our professional services were $437,000, travel
meals and entertainment costs were $112,000 and advertising and trade shows
costs were $110,000 in 2001.
General and administrative - Professional services - General and
administrative expenses supporting professional services were $1,996,000 in
2001. The primary component of professional services general and administrative
expenses amortization of goodwill resulting from our acquisition of RTCI
totaling $886,000. The remaining expenses
29
incurred in 2001 were comprised primarily of salaries and employee benefits in
the amount of $581,000, office rent in the amount of $342,000 and depreciation
and amortization in the amount of $195,000.
Non-cash charges - Professional services - In connection with our
acquisition of RTCI, we issued unvested restricted shares to RTCI employees and
recorded $731,000 of deferred stock-based compensation in connection with the
issuance of those shares. During 2001, we recognized $541,000 of stock-based
compensation expenses related to these shares.
Impairment of goodwill and acquired intangibles-professional services. 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. During 2001, the Company recorded an
impairment charge of $16,708,000 related to impaired intangibles acquired from
RTCI.
Income Taxes
Income tax benefit of $1,930,000 in 2001 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.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents and marketable securities, decreased to $2,219,000 as of July 31,
2002 from $2,889,000 as of July 31, 2001. We believe, these resources, together
with the remaining $1,500,000 owed to us by Triaton GmbH under the License
Agreement which was paid in October 2002, and the commitment by certain members
of our Board of Directors to provide up to a maximum of $1,000,000 in additional
funding to the Company, if required, should provide us with sufficient liquidity
to continue in operation through July 31, 2003.
We anticipate break even operations for the year ending July 31, 2003. We
anticipate that we will achieve positive cash flow from operations for our 2003
fiscal year. However, if our revenues do not increase as anticipated or if our
expenses increase more than anticipated due to competitive or other factors
described under "Risk Factors," we may not achieve break even operations or
positive cash flow from operations as anticipated for our 2003 fiscal year.
Thus, we may need to raise additional financing. Furthermore, if our
stockholders' equity securities remains less than $10 million at the end of any
future fiscal quarter, our class A common stock may no longer be eligible for
trading on the NASDAQ National Market, and , as a result, we may attempt to sell
additional equity securities to
30
increase our stockholders' equity to the required level. We cannot assure you
that any additional financing would be available on reasonable terms or at all.
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,
private placements of our class A common stock, series C preferred stock and
warrants in November 1999, a private placement of our class A common stock and
warrants in October 2001 and a warrant exchange offer in May 2002.
In the October 2001 private placement we sold 1,159,716 shares of class A
common stock and warrants to purchase 347,915 additional shares of class A
common stock for gross 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.
The warrants are redeemable at our option for $0.10 per warrant commencing in
April 2003 if the closing bid price of our class A common stock is at least 200%
of the exercise price of the warrants for 30 consecutive trading days. In
connection with the private placement, the Company incurred fees of $152,511, of
which $35,000 has been paid in cash and $117,511 has been paid by issuing
warrants to purchase 50,000 shares of class A common stock. The warrants have
substantially the same terms and conditions as the warrants issued in the
private placement.
We commenced a warrant exchange offer on April 23, 2002. The offer was
extended to investors who participated in the private placement in October 2001
and to holders of warrants issued as fees in connection with this private
placement. The offer lowered the exercise price of the warrants issued in the
private placement to $2.50 per class A common share for those investors that
agreed to exercise those warrants. In addition, for each class A common share
purchased pursuant to the warrant exercise, a new warrant (the "New Warrants")
to purchase an equivalent number of class A common shares was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for a
five-year period. The New Warrants have the same redemption terms as the
warrants issued in the private placement. The warrant exchange offer was
originally set to expire on April 30, 2002, but was extended by the Company's
board of directors until May 31, 2002. The Company received $659,288 in gross
proceeds and issued a total of 263,715 shares of class A common stock and new
warrants to purchase 263,715 shares of class A common stock.
In October 2002, we obtained commitments from certain existing investors
to provide an aggregate of up to $1,000,000 of additional capital, if required,
for us to continue as a going concern. Such additional capital may be in the
form of long term, debt, common stock, preferred stock or other equity
instruments or a combination of the foregoing and shall be on arms length terms
negotiated by the parties. The commitments expire upon the earliest to occur of
(a) July 31, 2003, (b) the sale, transfer or other disposition of all or
substantially all the assets of the Company, (c) a change in control, or (d) the
date the Company raises debt or equity capital, or a combination of debt and
equity, capital in an amount equal to or greater than $1,000,000 subsequent to
the date of the commitment.
We have a net operating loss carryforward of approximately $71 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 in April 1999, 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 the 100% ownership change when we
acquired RTCI, RTCI's 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.
Consolidated Working Capital
Consolidated working capital increased to $2,622,000 at July 31, 2002 from
$646,000 at July 31, 2001. This increase is due to a $1,379,000 increase in
accounts receivable and a $974,000 decrease in accrued expenses.
31
Analysis of Cash Flows
Cash used in operating activities decreased to $4,293,000 in 2002 from
$11,401,000 in 2001. The decrease is primarily the result of an increase in
revenue of $4,479,000.
Cash provided by investing activities increased to $464,000 in 2002
compared to cash used by investing activities of $334,000 in 2001. This increase
is primarily the result of $538,000 in proceeds from the sales of marketable
securities in 2002 and a decrease in payments for property and equipment of
$592,000.
Cash provided by financing activities increased to $3,693,000 in 2002
compared to cash used in financing activities of $45,000 in 2001. The increase
is primarily the result of net proceeds of $3,107,000 from the October 2001
private placement described above and $699,000 of proceeds from the exercise of
warrants to purchase class A common stock of which $659,000 is attributable to
the warrant exchange offer discussed above.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143"), which requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of the
related long-lived asset is correspondingly increased. Over time, the liability
is accreted to its present value and the related capitalized charge is
depreciated over the useful life of the asset. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. 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 August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). "SFAS 144" supercedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." (SFAS 121") SFAS 144 retains the
requirements of SFAS 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. The provisions of SFAS 144 are effective
for fiscal years beginning after December 15, 2001. The Company is required to
adopt SFAS 144 on August 1, 2002. 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 July 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 will supersede Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
requires that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. 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 November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A consensus was
reached that reimbursements received for out-of-pocket expenses incurred should
be characterized as revenue in the income statement. The Company adopted EITF
01-14 effective February 1, 2002. Reimbursements of out-of-pocket expenses were
not significant in any of the periods presented.
32
Risk Factors
You should carefully consider each of the following risk factors in
addition to the other information contained in this annual report. Investing in
our class A common stock involves a high degree of risk. 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 in the 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, 2002, we
had an accumulated deficit of approximately $76 million.
Our revenues are 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
information technology, sales and marketing. As a result, we expect to incur
additional losses in the near future.
If our revenues decline or grow at a slower rate then we anticipate and we
are unable to adjust spending in a timely manner or if our expenses increase
without commensurate increases in revenues, our operating results will suffer
and we may not ever achieve profitability.
We currently depend primarily on our ICC.NET service. 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 revenues derived
from our professional services and service bureau segments. Of our consolidated
total revenues of 2002, $3 million was attributable to Triaton, and will not
recur in 2003 or thereafter. We will need to generate significant additional
revenues from our ICC.NET service to replace the revenues from Triaton and to
achieve and maintain profitability.
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: Inovis (formerly a
subsidiary of Peregrine Systems, Inc.); GXS, Global eXchange Services, owned by
Francisco Partners; International Business Machines Corporation Global Services;
Sterling Commerce, Inc., a subsidiary of SBC Communications Inc.; EasyLink
Corp.; and KleinSchmidt. Each of these competitors has an established VAN that
has provided EDI for 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 resulted in significant changes during 2002.
Traditional VAN's such as GXS, Sterling and Inovis have either been sold by
their parent companies or are
33
currently for sale. GXS was recently acquired by Francisco Partners, Inovis was
spun off from Peregrine Systems, Inc. and acquired by Golden Gate Capital, and
we believe that SBC is attempting to sell Sterling Commerce. We believe that
much of this activity is attributed to the impact of the Internet on traditional
VAN's.
New competition is emerging in the form of Web Services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. Competitors providing these alternatives include
Cyclone Corporation and IPNet. They offer software solutions that utilize the
Internet to transmit data between trading partners. We believe that the high
cost of implementation and the ongoing costs of supporting a company's trading
partners are a barrier to the wider acceptance of their product offerings in the
marketplace.
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
responsed 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 our competitors.
Furthermore, we rely on many of our competitors to interconnect with our
service to promote an "open community" so all businesses can take advantage of
the efficiencies of EDI, no matter what network they choose as their provider.
In September 2001 and January 2002, two of our competitors, GXS and Sterling
Commerce, terminated existing interconnect agreements with us and we made
alternative arrangements to serve our 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 are unable to obtain necessary future capital, our business will
suffer. As of July 31, 2002, we had unrestricted cash and marketable securities
in the amount of approximately $2.1 million. We may need to raise additional
funds if competitive pressures or technological changes are greater than
anticipated, if we are unable to increase revenue at anticipated rates, if our
expenses increase significantly or if our customers delay payment of our
receivables. We cannot assure you that any additional financing will be
available on reasonable terms or at all. As of July 31, 2002 we had
stockholder's equity of $9.4 million. Nasdaq recently revised the requirements
for continued trading in The Nasdaq National Market, effective with all reports
filed with the Securities and Exchange Commission on and after November 1, 2002.
One of the revisions requires that we have stockholders' equity of at least $10
million at the end of each quarter. As a result, we may attempt to sell
additional equity securities to meet this requirement.
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 net operating loss carryforward of approximately $71
million, 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.
34
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 and sales and
marketing staffs.
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. 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. If we cannot keep pace with these changes, and
maintain the performance and reliability of our network, 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.
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.
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, 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 the precautions 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 be costly and adversely affect our 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 invalidate our proprietary rights.
We could be required to enter into royalty and licensing agreements, which may
be costly or otherwise burdensome or which may not be available on terms
acceptable to us.
35
We may suffer systems failures and business interruptions that 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.
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
36
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. Risks Relating to our Class A Common Stock
Risks Relating to the our Class A Common Stock
Our class A common stock may not remain eligible for continued trading in
The Nasdaq National Market.
Our class A common stock is currently eligible for trading in The Nasdaq
National Market under the symbol "ICCA." Recently revised continued listing
requirements of The Nasdaq National Market provide, among other things, that our
class A common stock may no longer be eligible for continued trading in The
Nasdaq National Market if our stockholders' equity is less than $10 million as
of October 31, 2002 or any future fiscal quarter. As of July 31, 2002, our
stockholders equity was $9.4 million. We do not anticipate profits of $600,000
in the quarter ending on October 31, 2002 and, therefore, in order for our class
A common stock to continue to be eligible for trading in The Nasdaq National
Market, we may need to sell additional equity securities.
Furthermore, the market price of our class A common stock has been very
volatile in the past, ranging from a high of $4.80 to a low of $1.50 since
August 1, 2001, and is likely to fluctuate substantially in the future. If our
class A common stock fails to maintain a minimum bid price of $1 for 30
consecutive trading days, it may no longer be eligible for trading in The Nasdaq
National Market.
If our class A common stock is no longer traded in The Nasdaq National
Market, it could have a material adverse effect on our investors. The resulting
lack of visibility and liquidity of our class A common stock could further
decrease the price of our class A common stock. In addition, if our class A
common stock is no longer eligible for trading in The Nasdaq National Market, it
might negatively impact our reputation and, as a consequence, our business. 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 significant diversion of resources, including management time and
attention.
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.
Between October 1999 and August 2002, we have registered on one or more
registration statements, an aggregate of 10,768,165 shares of class A common
stock, of which 4,430,000 shares remain unsold as of August 30, 2002. 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.
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 many factors, including investors' perceptions of
our business, our financial condition, operating results and prospects, the use
of the Internet for business purposes and general economic and market
conditions.
37
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. In addition, issuance of preferred shares could have the effect of
delaying, deterring or preventing an unsolicited change in control of our
company, or could impose various procedural and other requirements that could
make it more difficult for holders of our class A common stock to effect certain
corporate actions, including the replacement of incumbent directors and the
completion of transactions opposed by the incumbent Board of Directors. The
rights of the holders of our common stock would be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future. We are also subject to Section 203 of the Delaware
General Corporation Law, which prohibits us from engaging in a business
combination with any "interested" stockholder (as defined in Section 203) for a
period of three years from the date the person becomes an interested
stockholder, unless certain conditions are met.
We may have to spend significant resources indemnifying our officers and
directors or paying for damages caused by their conduct. The Delaware General
Corporation Law provides for broad indemnification by corporations of their
officers and directors and permits a corporation to exculpate its directors from
liability for their actions. Our bylaws and certificate of incorporation
implement this indemnification and exculpation to the fullest extent permitted
under this law as it currently exists or as it may be amended in the future.
Consequently, subject to this law and to some limited exceptions in our
certificate of incorporation, none of our directors will be liable to us or to
our stockholders for monetary damages resulting from conduct as a director.
38
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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
The information required to be filed by Part III (Items 10, 11, 12 and 13)
are hereby incorporated by reference from the Company's definitive proxy
statement (to be filed pursuant to Regulation 14A), which proxy statement will
be filed no later than 120 days after July 31, 2002.
Item 14. Control Procedures
Not applicable.
39
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 (10)
2.2 Agreement and Plan of Merger among ICC, IDC, and the
selling shareholders of IDC (11)
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 C Preferred
Stock (8)
3(ii).1 By-laws (6)
4.1 Specimen Certificate for Class A Common Stock (3)
4.2 Form of Class A Bridge Warrant issued in the 1998
bridge financing (1)
4.3 Warrant Agreement dated January 12, 2000, by and
among ICC and Cable and Wireless USA, Inc. (8)
4.4 Form of Registration Rights Agreement dated as of
October 29, 2001 by and among ICC and the purchase
identified therein (15)
4.5 Registration Rights Agreement dated as of October 29,
2001 by and between ICC and Amaranth Trading LLC (13)
4.6 Format Class A Common Stock Warrant issued in the
October 29, 2001 private placement (13)
10.1 1994 Stock Option Plan (3)
40
10.2 Lease Agreement between 805 Third Ave. Co. and ICC
relating to the rental of ICC's current principal
executive office (4)
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 (5)
10.4 Employment Agreement for Anthony D'Angelo dated as of
April 16, 2000 (13)
10.5 Employment Agreement for G. Michael Cassidy dated as
of April 16, 2000 (12)
10.6 Employment Agreement for David Hubbard dated as of
April 16, 2000 (12)
10.7 Employment Agreement for Walter M. Psztur dated as of
April 16, 2000 (12)
10.8 Master Agreement between Cable & Wireless PLC and ICC
executed on November 24, 1999 (7)
10.9 Amended and restated Stock Option Plan (9)
10.10 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 (12)
10.11 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 (12)
10.12 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 (11)
10.13 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 (12)
10.14 Joint Services Agreement, between ICC and Hightech
International Services GmbH (a wholly-owned
subsidiary of ThyssenKrupp Services GmbH) executed on
July 28, 2000 (14)
10.15 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 (14)
10.16 Amended agreement with Triaton dated July 2002 (13)
10.17 Subscription agreement dated October 29, 2001 by and
between ICC and Amaranth Trading LLC (14)
10.18 Form of Subscription Agreement dated October 29, 2001
by and among ICC and purchasers identified therein
(14)
23(i) Consent of Deloitte & Touche LLP (15)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (15)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (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
41
(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
October 31, 1997
(5) Incorporated by reference to amendment no. 3 to ICC's registration
statement on form S-3 (File no. 333-80043)
(6) Incorporated by reference to ICC's current report on form 8-K filed
with the SEC on July 31, 1999
(7) Incorporated by reference to ICC's current report on form 8-K dated
December 1, 1999
(8) Incorporated by reference to amendment no. 1 to ICC's registration
statement on form S-3 (File no. 333-93301)
(9) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999.
(10) Incorporated by reference to ICC's current report on form 8-K dated
June 15, 2000
(11) Incorporated by reference to ICC's current report on form 8-K dated
August 11, 2000
(12) Incorporated by reference to ICC's report on form 10-KSB dated July
31, 2000
(13) Incorporated by reference to ICC's registration statement on Form
S-3 (file No. 333-99059)
(14) Incorporated by reference to ICC's annual report on Form 10-K for
July 31, 2001
(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 40.
(d) Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page
F-1.
42
INTERNET COMMERCE CORPORATION
Index to Consolidated Financial Statements and Schedule
Page
----
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of changes in stockholders' equity and other
comprehensive income F-5
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8
Schedule II. Valuation and Qualifying Accounts F-33
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, 2002 and 2001, and the
related consolidated statements of operations, changes in stockholders' equity
and other comprehensive income, and cash flows for each of the three years in
the period ended July 31, 2002. Our audits also included the financial statement
schedule 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 misstatements. 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, 2002, and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 2002, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, 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.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
adopted the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," effective August 1, 2001.
/s/ Deloitte & Touche LLP
New York, New York
October 28, 2002
F-2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
July 31,
-----------------------------
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,087,915 $ 2,223,487
Marketable securities 130,691 665,552
Accounts receivable, net of allowance for doubtful accounts
of $241,684 and $224,022, respectively 2,976,472 1,588,242
Prepaid expenses and other current assets 478,070 401,334
------------ ------------
Total current assets 5,673,148 4,878,615
Restricted cash 157,103 276,635
Property and equipment, net 1,151,864 1,920,662
Software development costs, net 326,588 425,471
Goodwill, net 2,194,067 2,194,067
Other intangible assets, net 3,107,000 5,917,854
Other assets 15,166 60,794
------------ ------------
Total assets $ 12,624,936 $ 15,674,098
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 862,090 $ 713,670
Accrued expenses 1,407,848 2,381,788
Accrued dividends - preferred stock 231,695 273,289
Deferred revenue 164,451 306,764
Capital lease obligation 181,870 328,480
Other current liabilities 203,454 228,189
------------ ------------
Total current liabilities 3,051,408 4,232,180
Capital lease obligation - less current portion 192,298 255,009
------------ ------------
Total liabilities 3,243,706 4,487,189
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 shares issued
and outstanding in 2001 -- 2
Series C preferred stock - par value $.01 per share, 44.76 votes per share;
10,000 shares issued and outstanding (liquidation value of $10,231,695) 100 100
Common stock:
Class A - par value $ .01 per share, 40,000,000 shares authorized, one vote per share;
11,679,964 and 9,770,180 shares issued and outstanding, respectively 116,801 97,702
Class B - par value $ .01 per share, 2,000,000 shares authorized, six votes per share;
1,930 shares issued and outstanding in 2001 -- 19
Additional paid-in capital 85,401,277 80,750,153
Accumulated deficit (75,808,873) (69,261,320)
Accumulated other comprehensive loss (328,075) (209,728)
Deferred compensation - restricted stock -- (190,019)
------------ ------------
Total stockholders' equity 9,381,230 11,186,909
------------ ------------
Total liabilities and stockholders' equity $ 12,624,936 $ 15,674,098
============ ============
See notes to consolidated financial statements
F-3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations
Year Ended July 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Revenues:
Services $ 11,221,796 $ 9,742,518 $ 1,303,441
Technology license 3,000,000 -- --
------------ ------------ ------------
Total Revenues 14,221,796 9,742,518 1,303,441
------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of $118,762 and $325,834
in 2002 and 2001) 8,775,553 9,354,354 2,514,282
Product development and enhancement (excluding non-cash compensation
of $97,809 in 2000) 976,903 931,028 702,218
Selling and marketing (excluding non-cash compensation of $29,690, $94,294
and $767,639 in 2002, 2001 and 2000, respectively) 3,499,500 5,383,583 3,273,294
General and administrative (excluding non-cash compensation of $101,556,
$570,920 and $4,294,897 in 2002, 2001 and 2000, respectively) 5,849,312 9,682,586 4,814,160
Non-cash charges for stock-based compensation, services and legal settlements 250,008 991,048 5,160,345
Impairment of goodwill and acquired intangibles 1,710,617 16,708,479 --
------------ ------------ ------------
21,061,893 43,051,078 16,464,299
------------ ------------ ------------
Operating loss (6,840,097) (33,308,560) (15,160,858)
------------ ------------ ------------
Other income and (expense):
Interest and investment income 148,176 545,031 737,442
Interest expense (69,385) (73,569) (62,211)
Other income, net 213,753 51,859 --
------------ ------------ ------------
292,544 523,321 675,231
------------ ------------ ------------
Loss before income taxes (6,547,553) (32,785,239) (14,485,627)
Income tax benefit -- 1,929,887 --
------------ ------------ ------------
Net loss (6,547,553) (30,855,352) (14,485,627)
Dividends on preferred stock (364,987) (420,309) (457,535)
Dividends to preferred stockholders for beneficial conversion feature -- -- (4,549,535)
Beneficial conversion feature for repricing and issuance of warrants in
warrant exchange offer (461,084) -- --
------------ ------------ ------------
Loss attributable to common stockholders $ (7,373,624) $(31,275,661) $(19,492,697)
============ ============ ============
Basic and diluted loss per common share $ (0.68) $ (3.57) $ (4.49)
============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted 10,867,447 8,767,752 4,336,698
============ ============ ============
See notes to consolidated financial statements
F-4
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 Class B
-----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------------------
Balance - August 1, 1999 9,590 $ 96 -- $ -- -- $ -- 1,810,941 $ 18,109 115,590 $ 1,156
Conversion of series A preferred stock (8,922) (89) 1,788,400 17,884
Exchange of common stock 113,016 1,130 (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 2,574 $ 26
Conversion of series A preferred stock (443) (5) 135,584 1,356
Exchange of common stock 644 7 (644) (7)
Proceeds from exercise of employee
stock options 169,280 1,693
Stock options issued 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
Common 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 1,930 $ 19
Accumulated
---------------------------- Deferred
Additional Other Compensation- Total
Paid-In Note Comprehensive Restricted Stockholders
Capital Receivable Deficit Income Stock Equity
-----------------------------------------------------------------------------------
Balance - August 1, 1999 $28,989,889 $ -- $(23,920,341) $ (34,000) $ -- $ 5,054,909
Conversion of series A preferred stock (17,795)
Exchange of common stock
Proceeds from exercise of warrants 4,226,172 4,239,773
Proceeds from exercise of employee
stock options 859,997 868,495
Proceeds from private placement of
preferred stock 9,999,900 10,000,000
Proceeds from private placement of
common stock 9,495,434 9,499,776
Issuance of common stock for settlement 839,003 839,323
Charge on price-based stock options 3,311,257 3,311,257
Issuance of options for services 1,185,865 1,185,865
Preferred stock dividends - cash (457,535) (457,535)
Net loss (14,485,627) (14,485,627)
Unrealized gain - marketable securities 34,000 34,000
------
Total comprehensive income (14,451,627)
-----------------------------------------------------------------------------------
Balance - July 31, 2000 $58,432,187 $ -- $(38,405,968) $ -- $ -- $20,090,236
Conversion of series A preferred stock (1,351)
Exchange of common stock
Proceeds from exercise of employee
stock options 371,986 373,679
Stock options issued for services 450,110 450,110
Common stock issued for acquisitions 19,828,610 19,858,185
Options and warrants issued for
Acquisitions 1,667,323 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) (420,309)
Common stock issued as payment for
dividends on preferred stock 421,597 422,784
Net loss (30,855,352) (30,855,352)
Unrealized loss - marketable securities (209,728) (209,728)
--------
Total comprehensive income (31,065,080)
-----------------------------------------------------------------------------------
Balance - July 31, 2001 $80,750,153 $ -- $(69,261,320) $(209,728) $ (190,019) $11,186,909
See consolidated notes to financial statements
F-5
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 Class B
----------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------------------
Balance - July 31, 2001 225 $ 2 10,000 $ 100 -- $ -- 9,770,180 $ 97,702 1,930 $ 19
Conversion of series A preferred stock (225) (2) 73,688 737
Proceeds from exercise of employee
stock options 69,452 695
Forfeiture of cash related to options
issued in acquisition 106,979
Conversion of Class B common stock 1,930 19 (1,930) (19)
Proceeds from exercise of warrants 23,910 239
Proceeds from warrant exchange offer 263,715 2,638
Proceeds from private placement of
common stock and warrants 1,159,716 11,597
Common stock issued to directors 22,218 222
Forfeiture and cancellation of a former
officer's restricted common stock (23,684) (237)
Common stock issued to investment advisors 200,000 2,000
Common stock issued to consultants 20,000 200
Common stock issued as payment for
dividends on preferred stock 98,839 989
Accrued dividends on preferred stock
Amortization of deferred compensation for
restricted stock
Net loss
Unrealized loss - marketable securities
Total comprehensive income
----------------------------------------------------------------------------------------
Balance - July 31, 2002 -- $ -- 10,000 $ 100 -- $ -- 11,679,964 $116,801 -- $ --
========================================================================================
Accumulated
------------------------------ Deferred
Additional Other Compensation- Total
Paid-In Comprehensive Restricted Stockholders
Capital Deficit Income Stock Equity
-------------------------------------------------------------------------
Balance - July 31, 2001 $80,750,153 $(69,261,320) $(209,728) $ (190,019) $11,186,909
Conversion of series A preferred stock (735) --
Proceeds from exercise of employee
stock options 223,187 223,882
Forfeiture of cash related to options
issued in acquisition 106,979
Conversion of Class B common stock --
Proceeds from exercise of warrants 59,536 59,775
Proceeds from warrant exchange offer 636,936 639,574
Proceeds from private placement of
common stock and warrants 3,095,671 3,017,268
Common stock issued to directors 59,766 59,988
Forfeiture and cancellation of a former
officer's restricted common stock (144,000) (144,237)
Common stock issued to investment advisors 502,560 504,560
Common stock issued to consultants 77,200 77,400
Common stock issued as payment for
dividends on preferred stock 399,011 400,000
Accrued dividends on preferred stock (364,987) (364,987)
Amortization of deferred compensation for
restricted stock 190,019 190,019
Net loss (6,547,553) (6,547,553)
Unrealized loss - marketable securities (118,347) (118,347)
--------
Total comprehensive income (6,665,900)
-------------------------------------------------------------------------
Balance - July 31, 2002 $85,401,277 $(75,808,873) $( 328,075) $ -- $ 9,381,230
=========================================================================
See consolidated notes to financial statements
F-6
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows
Year Ended July 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (6,547,553) $(30,855,352) $(14,485,627)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of goodwill and intangible assets 1,710,617 16,708,479 --
Depreciation and amortization 2,132,467 3,693,664 831,900
Allowance for doubtful accounts 223,107 261,640 --
Loss on disposal of fixed assets 10,453 6,370 --
Gain (loss) on sale of marketable securities (121,020) (116,599) 14,937
Non-cash charges for equity instruments issued for compensation,
services, change of control and legal settlement 250,008 991,048 5,160,445
Deferred taxes -- (1,929,887) --
Changes in:
Accounts receivable (1,611,337) (485,326) (579,663)
Prepaid expenses and other assets (35,664) 253,854 (467,164)
Accounts payable 148,420 (300,042) 271,818
Accrued expenses (285,000) 497,875 73,126
Deferred revenue (142,314) (201,990) 250,000
Other liabilities (24,735) 74,989 69,418
------------ ------------ ------------
Net cash used in operating activities (4,292,551) (11,401,277) (8,860,810)
------------ ------------ ------------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired -- (22,055) --
Capitalization of software development costs (175,034) (188,175) --
Notes receivable -- -- (5,000,000)
Purchases of property and equipment (49,535) (641,671) (362,048)
Purchase of certificate of deposits -- -- (88,199)
Proceeds from sales of property and equipment 31,252 -- --
Proceeds from sales of marketable securities 537,535 270,720 3,987,126
Proceeds from maturity of certificate of deposits 119,532 247,228 --
------------ ------------ ------------
Net cash provided by (used in) investing activities 463,750 (333,953) (1,463,121)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- -- 10,000,000
Net proceeds from issuance of common stock and warrants 3,107,269 -- 9,499,776
Proceeds from exercise of warrants 699,348 -- 4,239,773
Proceeds from exercise of employee stock options 223,882 373,678 868,495
Payment of dividends (6,583) -- (181,772)
Payments of capital lease obligations (330,687) (418,290) (213,270)
------------ ------------ ------------
Net cash provided by (used in) financing activities 3,693,229 (44,612) 24,213,002
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (135,572) (11,779,842) 13,889,071
Cash and cash equivalents, beginning of period 2,223,487 14,003,329 114,258
------------ ------------ ------------
Cash and cash equivalents, end of period $ 2,087,915 $ 2,223,487 $ 14,003,329
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 69,385 $ 73,569 $ 62,211
See notes to consolidated financial statements
F-7
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.
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.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November
6, 2000, provided 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.
As of July 31, 2002, we had cash and cash equivalents and marketable
securities of approximately $2,219,000. These resources, together with the
amounts owed to the Company by Triaton GmbH under a technology license
agreement (see Note 9) and the commitment by certain existing investors to
provide up to a maximum of $1,000,000 in additional funding to the
Company, if required (see Note 16), should provide the Company with
sufficient liquidity to continue in operation through July 31, 2003. The
technology license agreement requires a payment by Triaton of $1,500,000
in October 2002. However, if our expenses increase more than anticipated,
or 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 any
financing will be available or that the terms will be acceptable to us, or
that any financing will be consummated.
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
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 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, generally one year. Usage fees are recognized in the period the
services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping
services to its customers.
F-8
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Implementation fees are recognized over the life of the subscription
period. Interconnection fees are fees charged to connect to another VAN
service and are recognized when the data is transmitted to the connected
service. Revenue from data mapping services are recognized when the map
has been completed and delivered to the customer.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education
and training at seminars hosted by leading universities around the United
States. Revenue from EDI and electronic commerce consulting and education
and training are recognized when the services are provided. Revenue from
fixed fee professional service contracts are recognized using the
percentage-of-completion method of accounting, as prescribed by SOP 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in
the estimated profitability of a fixed-price contract. In such
circumstances, adjustments to cost and profitability estimates are made in
the period in which the underlying factors requiring such revisions become
known. If such revisions indicate a loss on a contract, the entire loss is
recorded at such time. Amounts billed in advance of services being
performed are recorded as deferred revenue. Certain fixed-fee contracts
may have substantive customer acceptance provisions. The acceptance terms
generally include a single review and revision cycle for each deliverable
to incorporate the customer's suggested or required modifications.
Deliverables are considered accepted upon completion of the review and
revision and revenue is recognized upon acceptance.
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, UPC catalog
maintenance and UPC label printing. The service bureau also derives
revenue from software licensing and provides software maintenance and
support. Revenue from the EDI services and UPC services is 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", as amended. Revenue from software licenses is recognized
when all of the following conditions are met: (1) a non-cancelable
non-contingent license agreement has been signed; (2) the software product
has been delivered; (3) there are no material uncertainties regarding
customer acceptance; and (4) collection of the resulting receivable is
probable. Revenue from software maintenance and support contracts is
recognized ratably over the life of the contract. The service bureau's
software license revenue was not significant in any of the periods
presented.
In addition, SOP 97-2 generally requires revenue from software
arrangements involving multiple elements to be allocated to each element
of the arrangement based on the relative fair values of the elements, such
as software licenses, post contract customer support, installation or
training and recognized as the element is delivered and the Company has no
significant remaining performance obligations. The Company's multiple
element arrangements generally consist of a software license and post
contract support. The Company allocates the aggregate revenues from
multiple element arrangements to each element based on vendor specific
objective evidence. The Company has established vendor specific objective
evidence for each of the elements as it sells both the software and post
contract customer support independent of multiple element agreements.
Customers are charged standard prices for the software and post contract
customer support and theses prices do not vary from customer to customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred
until all elements of the arrangement are delivered.
F-9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
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.
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 $273,017, $237,296 and $237,296 for the
years ended July 31, 2002, 2001 and 2000, respectively. Costs associated
with the development of software for internal use have been capitalized in
the amounts of $52,597 and $108,148 during the fiscal years ended July 31,
2002 and 2001. No amounts were capitalized in fiscal 2000.
F-10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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 development. Costs incurred subsequent to the establishment of
technological feasibility are capitalized. Capitalization of costs ceases
when the product is available for general release to customers.
Capitalized software costs are amortized over the shorter of three years
or the expected life of the product. Amortization of these software
development costs were insignificant during the fiscal year ended July 31,
2002. No amounts were amortized in fiscal 2001 or 2000. Development costs
in the amount of $122,437 and $80,027 were capitalized under the
provisions of SFAS 86 during the fiscal years ended July 31, 2002 and
2001. No amounts were capitalized in the fiscal year ending July 31, 2000.
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. Significant accounting estimates used in the preparation
of the Company's consolidated financial statements include the fair value
of acquired assets, purchase price allocations, the fair value of equity
securities underlying stock based compensation, the realizability of
deferred tax assets, the carrying value of goodwill and intangible assets,
and depreciation and amortization.
Impairment of long-lived assets:
Long-lived assets of the Company, including amortizable intangibles, 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. When such events or changes in circumstances
occur, the Company tests for impairment by comparing the carrying value of
the long-lived asset to the estimated undiscounted future cash flows
expected to result from use of the asset and its eventual disposition. If
the sum of the expected undiscounted future cash flows is less than the
carrying amount of the asset, the Company would recognize an impairment
loss. The amount of the impairment loss will be determined by comparing
the carrying value of the long-lived asset to the present value of the net
future operating cash flows to be generated by the asset (See Note 4).
F-11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Stock-based compensation:
The Company accounts for stock-based compensation arrangements with its
employees using the intrinsic value method 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 No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 established a fair-value-based method of accounting for stock-based
compensation plans. Stock-based awards to non employees are accounted for
at fair value in accordance with the provisions of SFAS 123.
Goodwill:
Goodwill consists of the excess of the purchase price over the fair value
of identifiable net assets of businesses acquired. Effective August 1,
2001 the Company adopted SFAS No. 141 "Business Combinations" ("SFAS 141")
and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires that all business combinations subsequent to June 30,
2001, be accounted for using the purchase method of accounting. SFAS 141
also requires that the fair value of an assembled workforce acquired be
included in the amount initially recorded as goodwill. Upon adopting the
provisions of SFAS 141, the Company reclassified $1,710,617 into goodwill
which was initially recorded as other intangible assets related to the
value of the assembled workforce of RTCI
SFAS 142 requires that goodwill no longer be amortized; instead, goodwill
is to be evaluated for impairment at least annually and whenever events or
circumstances indicate impairment may have occurred. The assessment
requires the comparison the fair value of each of the Company's reporting
units to the carrying value of its respective net assets, including
allocated goodwill. If the carrying value of the reporting unit exceeds
its fair value, the Company must perform a second test to measure the
amount of impairment. The second step of the goodwill impairment test
compares the implied fair value of reporting unit goodwill with the
carrying amount of that goodwill. The Company allocates the fair value of
a reporting unit to all of the assets and liabilities of that unit as if
the reporting unit had been acquired in a business combination and the
fair value of the reporting unit was the price paid to acquire the
reporting unit. The excess of the fair value of a reporting unit over the
amounts assigned to its assets and liabilities is the implied fair value
of goodwill. If the carrying amount of reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss shall be
recognized by the Company in an amount equal to that excess (see 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).
F-12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Recent Accounting Pronouncements:
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of
the related long-lived asset is correspondingly increased. Over time, the
liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. 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 August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). "SFAS 144"
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144
retains the requirements of SFAS 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. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company is required to adopt SFAS 144 on August 1,
2002. 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 July 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities
("SFAS 146"). SFAS 146 will supersede Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with an exit or
disposal plan be recognized when incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. 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 November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization
of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A
consensus was reached that reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the income
statement. The Company adopted EITF 01-14 effective February 1, 2002.
Reimbursements of out-of-pocket expenses were not significant in any of
the periods presented.
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 management's opinion that the IDC merger qualifies as a tax-free
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code of 1986.
F-13
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
3. ACQUISITIONS (CONTINUED)
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.
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
-----------
Goodwill $ 2,408,816
===========
Prior to the adoption of SFAS 142 on August 1, 2001, which requires that
goodwill no longer be amortized, the Company was amortizing goodwill on a
straight-line basis over a period of ten years. Amortization charges
relating to goodwill from the acquisition of IDC, in the amount of
$240,882, were included in general and administrative expenses for the
year ended July 31, 2001.
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 exchanged for $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 exchanged for 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 has 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).
In the opinion of management 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
Deferred Income tax liabilities 1,580,776
------------
Recorded goodwill $ 14,801,825
============
Prior to the adoption of SFAS 142 on August 1, 2001, which requires that
goodwill no longer be amortized, the Company was amortizing goodwill on a
straight-line basis over a period of ten years. Amortization charges
relating to goodwill from the acquisition of RTCI, in the amount of
$885,962, were included in general and administrative expenses for the
year ended July 31, 2001.
At the date of acquisition the intangible assets acquired from RTCI
consisted of 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 Company has recorded significant impairment charges during
the years ended July 31, 2002 and 2001 related to the acquisition of RTCI
(see Note 4).
4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
On August 1, 2001 the Company adopted the provisions of SFAS No. 141,
"Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 142 requires that the fair value of
an assembled workforce acquired be included in the amount initially
recorded as goodwill. Upon adoption of SFAS 141 the Company reclassified
$1,710,617 into goodwill which was initially recorded as other intangible
assets related to the value of the assembled workforce of RTCI as required
by this statement. SFAS 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 142 also
requires the goodwill of each reporting unit shall be tested for
impairment as of the beginning of the fiscal year in which this statement
is initially applied. The Company evaluated goodwill for impairment at
August 1, 2001 and determined no impairment existed at that date. The
Company's reporting units utilized for evaluating the recoverability of
goodwill are the same as its operating segments.
The following table presents the net loss and loss per basic and diluted
share that would have been recognized in all periods presented exclusive
of goodwill amortization expense recognized in those periods.
F-15
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS (CONTINUED)
Year Ended
July 31,
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Reported net loss $ (6,547,553) $ (30,855,352) $ (14,485,627)
Add: Goodwill amortization -- 1,283,639 156,795
-------------- -------------- --------------
Adjusted net loss $ (6,547,553) $ (29,571,713) $ (14,328,832)
============== ============== ==============
Reported basic and diluted loss per
common share $ (0.68) $ (3.57) $ (4.49)
Add: Goodwill amortization -- 0.15 0.04
-------------- -------------- --------------
Adjusted basic and diluted loss per share $ (0.68) $ (3.40) $ (4.46)
============== ============== ==============
At July 31, 2002, Other Intangible assets consisted of proprietary data
mapping technology acquired in the acquisition of RTCI. The data mapping
technology is being amortized over five years and amortization expense has
been recorded in cost of services. Information on the Company's other
intangible assets is as follows:
As of July 31, 2002 As of July 31, 2001
------------------------------- -------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Value Amortization Value Amortization
-------------- -------------- -------------- --------------
Amortized intangible assets
Data mapping technology $ 4,780,000 $ 1,673,000 $ 4,780,000 $ 717,000
Assembled workforce -- -- 2,154,595 299,741
-------------- -------------- -------------- --------------
Total $ 4,780,000 $ 1,673,000 $ 6,934,595 $ 1,016,741
============== ============== ============== ==============
The Company did not have any indefinite lived intangible assets that were
not subject to amortization as of July 31, 2002. The aggregate
amortization expense for other intangible assets was approximately
$956,000 and $1,286,000 during the twelve months ended July 31, 2002 and
July 31, 2001, respectively.
At July 31, 2002, estimated amortization expense for other intangible
assets for the next five fiscal years is as follows:
Year Estimated Amortization Expense
---- ------------------------------
2003 $956,000
2004 $956,000
2005 $956,000
2006 $239,000
The changes in the carrying amount of goodwill for the year ended July 31,
2002, are as follows:
F-16
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
4. GOODWILL AND ACQUIRED INTANGIBLE ASSETS (CONTINUED)
Service Professional
ICC.NET Bureau Services Total
----------------------------------------------------------
Balance at July 31, 2001 $ 182,927 $ -- $ -- $ 182,927
Acquired goodwill -- 2,408,816 14,801,825 17,210,641
Amortization (156,795) (240,881) (885,963) (1,283,639)
Impairment loss -- -- (13,915,862) (13,915,862)
----------------------------------------------------------
Balance at July 31, 2002 26,132 2,167,935 -- 2,194,067
Reclassification of
workforce intangibles -- -- 1,710,617 1,710,617
Impairment loss -- -- (1,710,617) (1,710,617)
----------------------------------------------------------
Balance at July 31, 2002 $ 26,132 $ 2,167,935 $ -- $ 2,194,067
All reporting units are tested annually for impairment as of August 1. Due
to a continued decline in it revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted
future operating profits the Professional Services segment was tested for
impairment during the fourth quarter of fiscal 2002. An impairment loss of
$1,710,617 was recognized as a result of this evaluation. The fair value
of the Professional Services segment unit was estimated using the net
present value of expected future cash flows.
Prior to the Company's adoption of SFAS 142, on August 1, 2001, it was
required to evaluate its long lived assets and identifiable intangibles
for impairment pursuant to FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121
requires 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.
During fiscal 2001, due to a significant reduction of the workforce of the
professional services segment, a steep decline in the value of companies
similar to it, continued operating losses and a significant reduction in
the forecasted future operating profits, management determined that
triggering events had occurred related to certain acquired intangible
assets of the professional services segment, namely the assembled
workforce, the customer list and goodwill. The 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:
Gross Unrealized
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Equity investments - July 31, 2002 $ 458,766 $ 9,601 $ ( 337,676) $ 130,691
============ ============ ============ ============
Equity investments - July 31, 2001 $ 875,280 $ 82,217 $ ( 291,945) $ 665,552
============ ============ ============ ============
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.
F-17
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
6. NOTE RECEIVABLE
On June 14, 2000, the Company loaned $5,000,000 to RTCI in exchange for a
promissory note (the "Note"). The Note bore 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. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
July 31,
Estimated ---------------------------
Useful Lives (Years) 2002 2001
------------------- ----------- -----------
Computers and office equipment 3 $ 3,052,774 $ 2,964,013
Furniture and fixtures 7 372,074 372,073
Purchased software 3 814,189 984,138
Leasehold improvements 158,556 158,556
----------- -----------
4,397,593 4,478,780
Less accumulated depreciation and amortization (3,245,729) (2,558,118)
----------- -----------
$1,151,864 $ 1,920,662
=========== ===========
Depreciation and amortization expense related to property and equipment,
including property and equipment acquired under capital leases, was
$897,997, $887,200 and $435,218 for the years ended July 31, 2002, 2001
and 2000, respectively. At July 31, 2002, property and equipment acquired
under capital leases had a cost basis of $998,167.
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
July 31,
-----------------------
2002 2001
---------- ----------
Employee compensation and severance $ 405,701 $ 544,907
Vacation 364,170 353,549
Consulting fees -- 202,400
Professional fees 135,293 34,692
Acquisition related liabilities -- 937,789
Lease abandonment 192,749 --
Other 309,935 308,451
---------- ----------
$1,407,848 $2,381,788
========== ==========
F-18
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. JOINT SERVICES AGREEMENT AND TECHNOLOGY LICENSE
In July 2000, the Company entered into an agreement with Triaton GmbH
("Triaton"), a member of the ThyssenKrupp Information Services Group GmbH,
whereby Triaton would host and market the Company's ICC.Net services in
Europe on a semi-exclusive basis. Triaton was entitled to market and
provide the Company's ICC.Net services on a non-exclusive basis worldwide.
Pursuant to the agreement, ICC was to receive usage based fees. The
agreement, as amended in July 2001, provided that the Company shall
receive aggregate minimum fees payable in specified quarterly installments
aggregating $8,000,000 from Triaton by July 2003.
During the year ended July 31, 2001, the Company received $1,000,000 under
the agreement. At July 31, 2001, Triaton had also advanced the Company
$250,000 for services and reimbursable expenses expected to be provided by
the Company to Triaton in addition to those services required under the
original agreement. At July 31, 2002, $75,875 of the advance is included
in deferred revenue.
The agreement had a five year initial term. If the Company did not extend
the agreement, the Company would 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.
In July 2002, the Company and Triaton terminated the joint services
agreement. The Company and Triaton entered into a new agreement which
provides Triaton a non-exclusive five-year license to use the Company's
electronic data interchange system in Europe. The agreement also provides
that Triaton may purchase sales support and customer support services
based on ICC's standard terms and conditions. Beginning in January 2003,
Triation may also purchase software maintenance and support on an annual
basis. The sale price for the license was $3,000,000 which was recognized
as revenue in the period ended July 31, 2002. Under the terms of the
agreement, Triaton paid $1,500,000 in July 2002 and a second payment of
$1,500,000 was paid in October 2002.
10. STOCKHOLDERS' EQUITY
Private Placement of Common Stock:
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
gross 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 30 consecutive trading days. The redemption price is
ten cents per warrant.
In connection with the private placement the Company incurred fees of
$152,511, of which $35,000 was paid in cash and $117,511was paid by
issuing warrants to purchase 50,000 shares of class A common stock. The
warrants have substantially the same terms and conditions as the warrants
issued in the private placement.
Approximately 20%, or $635,000, of the gross proceeds were received from
directors and officers and entities with which the Company's directors are
affiliated.
Warrant Exchange Offer:
On April 23, 2002, the Company commenced a warrant exchange offer. The
offer was made to investors who participated in the Company's private
placement on October 29, 2001 and to holders of warrants issued as fees in
connection with that private placement. The warrant exchange offer reduced
the exercise price of the warrants issued in the private placement from
$3.58 per share to $2.50 per share of class A common stock for investors
that agreed to exercise those warrants by the expiration date of the
warrant exchange offer.
F-19
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
In addition, for each share of class A common stock purchased pursuant to
a warrant exercise, a new warrant, (the "New Warrants"), to purchase an
equivalent number of shares of class A common stock was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for
five years. The Company may redeem the warrants, at its option, at any
time beginning 180 calendar days after the issuance of the New Warrants,
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 warrant exchange offer had an initial
expiration date of April 30, 2002, but was extended until May 31, 2002.
The Company received $659,288 in gross proceeds and issued a total of
263,715 shares of class A common stock and warrants to purchase an
equivalent number of shares of class A common stock as a result of the
warrant exchange offer. The Company has recorded a deemed dividend in the
amount of $461,084, in connection with the warrant exchange offer
representing the aggregate fair value of the repriced warrants exercised
in the warrant exchange offer and the fair value of the New Warrants.
In connection with the New Warrants, the Company incurred fees of
approximately $19,000 which were paid in cash.
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 C 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. As of July 31, 2002, there are no
outstanding shares of class B 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 was 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.
F-20
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
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 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 had no voting rights.
On July 1, 2002, the Company paid cash dividends of $6,583 to series A
preferred stockholders. 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.
At July 31, 2001, the Company had accrued dividends on its series A
preferred stock of $1,157. There were no accrued dividends at July 31,
2002. At July 31, 2002, the Company does not have any outstanding shares
of series A preferred stock.
Series C Preferred Stock:
During the year ended July 31, 2000, the Company issued 10,000 shares of
series C preferred stock and warrants to purchase 400,000 shares of class
A common stock, at an exercise price of $22.21 per share, 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 stock 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 the certificate of designation of the 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 stock is convertible.
F-21
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
On January 1, 2002, the Company issued 98,839 shares of class A common
stock in payment of the dividends on series C preferred stock. 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, 2002
and 2001, the Company had accrued $231,695 and $272,131 for dividends
payable, respectively.
The total liquidation value of series C preferred stock was $10,000,000
plus accrued dividends of $231,695 at July 31, 2002.
Warrants:
As of July 31, 2002, the following warrants to purchase class A common
stock were outstanding:
Number of Exercise
--------- --------
Shares Price Expiration Date
------ ----- ---------------
2001 Assumed RTCI warrants 45,760 (a) $ 5.77 January 22, 2003
Consulting Warrants 18,000 (b) $ 9.94 March 31, 2004
C & W Warrants 400,000 (c) $ 22.21 January 12, 2005
2001 Private Placement Warrants 84,200 (d) $ 3.58 October 28, 2006
2001 Private Placement Commission Warrants 25,000 (e) $ 3.58 October 28, 2006
2002 Warrant Exchange Offer Warrants 263,715 (f) $ 3.50 April 24, 2007
a) Issued to warrant holders of RTCI upon acquisition of RTCI. Upon
exercise, holder is entitled to one share of class A common stock.
b) Upon exercise of each warrant, holder is entitled to 1.36891 shares
of class A common stock.
c) Issued to C&W in private placement. Upon exercise, holder is
entitled to one share of class A common stock.
d) Redeemable by the Company at $0.10 per warrant under certain
conditions.
e) Issued to solicitation agents for their role in the October 2001
private placement. Redeemable by the Company at $0.10 per warrant
under certain conditions.
f) Redeemable by the Company at $0.10 per warrant under certain
conditions.
The fair market value of warrants issued for compensation and services has
been recognized as an expense in the period the respective services were
performed.
On February 18, 2002, 234,140 class A warrants and 263,835 class B
warrants expired. The warrants were exercisable for an aggregate of
1,002,200 shares of the Company's class A common stock.
On April 29, 2002, 43,350 Private Placement Commission Warrants expired.
The warrants were exercisable for an aggregate of 43,350 shares of the
Company's class A common stock.
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.
F-22
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
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 two to three 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 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 this option 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 was included in the
purchase price of RTCI.
In May 2002 the Company granted options to purchase an aggregate of
845,000 shares of class A common stock to certain executive officers. The
options all have an exercise price of $2.70 per share, which was the fair
value of the class A common stock at the date of grant. One-third of these
options were vested upon issuance. The remaining two-thirds vest on
November 10, 2007. If the Company meets certain performance objectives the
vesting of the options will be accelerated. On the day the closing price
of the Company's class A common stock equals or exceeds $10.00 per share
one-third of such options shall vest. On the first day of the month
succeeding any calendar month in which the Company's net revenues exceed
$2,000,000 one-third of the options will vest. All of these options will
vest immediately upon a change in control of the Company as defined in the
option agreements.
F-23
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. 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 date of grant consistent with
the provisions 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 Year ended July 31,
--------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Pro forma net loss:
As reported $ (6,547,553) $ (30,855,352) $ (14,485,627)
Pro forma effect of SFAS No. 123 (9,755,547) (14,959,286) (2,419,185)
-------------- -------------- --------------
Pro forma after giving effect to SFAS No. 123 (16,303,100) $ (45,814,638) $ (16,904,812)
============== ============== ==============
Basic and diluted loss per common share:
As reported $ (0.68) $ (3.57) $ (4.49)
Pro forma effect of SFAS No. 123 (0.90) (1.66) (0.56)
-------------- -------------- --------------
Pro forma after giving effect to SFAS No. 123 $ (1.58) $ (5.23) $ (5.05)
============== ============== ==============
The weighted-average fair value at the date of grant for options granted
during the years ended July 31, 2002, 2001 and 2000 was $2.37, $3.81 and
$16.87 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,
----------------------------------
2002 2001 2000
---------- ---------- ----------
Risk-free interest rate 3.77% 4.73% 6.12%
Expected lives 3 3 3
Expected volatility 140% 150% 156%
Expected dividend yield 0% 0% 0%
The following table summarizes the Company's stock options at July 31,
2002, 2001 and 2000, as well as changes during the years then ended:
Year ended July 31,
------------------------------------------------------------------------
(Shares in thousands) 2002 2001 2000
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------- ---------------------- ----------------------
Options outstanding at beginning
of year 4,517.7 $ 12.93 4,088.6 $ 18.39 1,947.7 $ 1.42
Granted 1,672.1 $ 3.08 1,145.0 $ 4.62 3,069.0 $ 24.46
Acquisitions -- -- 349.1 $ 6.53 -- --
Forfeited (698.0) $ 16.03 (895.8) $ 26.79 (78.3) $ 22.50
Exercised (69.5) $ 3.22 (169.2) $ 2.08 (849.8) $ 1.02
--------- --------- ---------
Options outstanding at end of year 5,422.3 $ 9.62 4,517.7 $ 12.93 4,088.6 $ 18.39
========= ========= =========
Options exercisable at end of year 4,048.4 $ 7.53 2,966.0 $ 11.39 2,113.6 $ 11.16
========= ========= =========
F-24
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table presents information relating to stock options
outstanding as of July 31, 2002:
(Shares in thousands)
Options Outstanding Options Exercisable
------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Exercise Prices Contractual Exercise Exercise
Shares Life Price Shares Price
------------------------------------------------------------------------------------- -----------------------
$ 0.26 - $ 0.34 367.2 4.8 $ 0.30 367.2 $ 0.30
$ 1.41 - $ 2.13 92.0 3.5 $ 1.50 92.0 $ 1.50
$ 2.50 - $ 4.77 2,590.6 8.1 $ 2.93 1,743.8 $ 2.85
$ 5.13 - $ 7.16 417.6 8.5 $ 5.18 254.5 $ 5.22
$11.50 - $17.00 668.9 6.7 $ 12.37 640.2 $ 12.32
$19.00 - $23.38 994.0 7.7 $ 19.18 706.0 $ 19.17
$34.50 - $45.69 164.0 7.3 $ 37.17 126.0 $ 37.54
$60.00 - $80.00 128.0 7.1 $ 68.25 118.7 $ 68.74
--------- --------- --------- --------- ---------
5,422.3 7.6 $ 9.62 4,048.4 $ 10.09
========= =========
The Company had 879,189 options available for grant under the Plan as of
July 31, 2002.
Restricted stock:
The Company 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 related to
the restricted stock of $730,957 was recorded at the time of the merger.
The Company recognized non cash compensation expense related to the
restricted stock of $190,019 and $540,938 in the years ended July 31, 2002
and 2001, respectively. All outstanding shares of restricted stock vested
on January 1, 2002.
On July 11, 2002, the Company entered into a Settlement Agreement with ING
Merger, LLC and ING Capital, LLC, a wholly-owned subsidiary of ING Merger
(collectively "ING"), pursuant to which the Company issued to ING Capital
200,000 shares of class A common stock and warrants to purchase 60,000
shares of class A common stock. The warrants are exercisable for five
years at an exercise price per share of $3.50. ING had provided certain
investment banking services to ICC in connection with its acquisition of
RTCI. The Company had accrued $650,000 for such services at the time of
the acquisition. The aggregate fair value of the class A common stock and
warrants issued pursuant to the settlement was approximately $540,500. The
Company recognized the difference of $109,500 as other income during the
year ended July 31, 2002.
In connection with the acquisition of RTCI, the Company paid $300,000 of
investment banking fees on behalf of a former officer of the Company.
During 2002, the former officer forfeited 23,689 shares of class A common
stock issued in the merger, as repayment for these investment banking
fees. The number of shares forfeited were valued at the market price of
ICC common stock as defined in the merger agreement and plan of merger
among ICC and RTCI.
F-25
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. INCOME TAXES
The Company's effective tax rate varied from the statutory federal income
tax rate as follows:
For the year ended July 31,
2002 2001 2000
------ ------ ------
Expected tax rate (benefit) (35.0)% (34.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Non-deductible amortization and write-off of intangibles 9.1% 15.7% --
Permanent differences from exercise of stock options -- -- (40.0)%
Other permanent differences 1.5% 1.9% 5.8%
State and local income tax (benefit), net of federal effect 25.9% (4.5)% (21.2)%
Other (6.7%) -- --
Increase in valuation allowance 5.2% 15.0% 89.4%
------ ------ ------
Effective tax rate -- (5.9)% --
====== ====== ======
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, 2002 and 2001 are as follows:
July 31,
2002 2001
------------ ------------
Deferred tax assets:
Accrued expenses $ 262,768 $ 203,378
Deferred revenues 65,780 157,573
Deferred rent 57,632 76,310
Property and equipment 199,217 38,300
Marketable securities 131,233 --
Federal, state and local net operating loss carryforwards 28,430,956 29,971,667
------------ ------------
29,147,586 30,447,228
Deferred tax liabilities:
Purchased intangibles (1,242,800) (2,544,677)
Marketable securities -- (286,187)
Capitalized software development costs (130,636) (182,953)
------------ ------------
(1,373,436) (3,013,817)
------------ ------------
Net deferred tax asset before valuation allowance 27,774,150 27,433,411
Valuation allowance (27,774,150) (27,433,411)
------------ ------------
Net deferred tax asset $ -- $ --
============ ============
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, 2002 was
$340,739.
The Company has a net operating loss carryforward for tax purposes of
approximately $71 million as of July 31, 2002. This carryforward expires
from 2007 to 2022.
F-26
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. INCOME TAXES (CONTINUED)
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.
12. COMMITMENTS AND CONTINGENCIES
Employment agreements:
The Company has employment agreements with certain of its officers and key
employees which expire on various dates through July 2003. The agreements
require aggregate annual payments of $1,030,000 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 and ending July 31, 2002. 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 intended 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, 2002 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 2006. Rent expense under
these leases was approximately $1,319,000, $1,559,000 and $362,000 for the
years ended July 31, 2002, 2001 and 2000, respectively. Certain leases
contain escalation clauses for operating expenses.
At July 31, 2002, minimum future rental payments due under non-cancelable
operating leases are as follows:
2003 $1,189,850
2004 1,208,754
2005 442,972
2006 80,000
----------
$2,921,576
==========
F-27
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Obligations under capital leases:
The Company has various non-cancelable capital leases for computer
equipment and software. At July 31, 2002, minimum future lease payments
under non-cancelable capital leases were as follows:
2003 $ 230,509
2004 149,772
2005 43,239
2006 --
---------
423,520
Amount representing interest 49,352
---------
Present value of future minimum lease payments 374,168
Less current portion (181,870)
---------
Capital lease obligation - less current portion $ 192,298
=========
Letters of credit:
The Company has provided cash collateral for letters of credit in the
aggregate amount of $157,103 and $276,635, at July 31, 2002 and 2001,
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.
Litigation:
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 sought compensatory damages of $672,000 and
punitive damages of $1 million.
Subsequently, by Demand for Arbitration dated November 30, 2001, Mr.
Lipscomb commenced an arbitration against the Company arising out of the
same alleged breach of his employment agreement that formed the underlying
basis for his suit against Messrs. Alpern and Medici. In the arbitration,
Mr. Lipscomb sought recovery of $614,000 before interest, costs and
attorneys' fees.
These actions have both been dismissed in favor of the Company.
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. The final payment under this agreement was made in August of
2002.
F-28
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
13. 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.
The Company had one customer that accounted for 22% and 11% of revenue for
the years ended July 31, 2002 and 2001, respectively. No single customer
accounted for greater than 10% of revenues for the year ended July 31,
2000.
The Company, also had one customer that accounted for approximately 52% of
accounts receivables at July 31, 2002. No single customer accounted for
more than 10% of accounts receivable at July 31, 2001 or 2000.
Revenue by geographic region, based on customer location is as follows:
North South
Year ended July 31, America Europe Asia America Total
------------------- ----------- ----------- ------- ------- -----------
2002 $11,171,976 $ 3,024,118 $ 5,362 $20,340 $14,221,796
2001 8,665,395 1,072,860 4,263 -- 9,742,518
2000 1,297,168 2,831 3,442 -- 1,303,441
14. BUSINESS SEGMENT INFORMATION
As a result of the acquisitions of IDC and RTCI in fiscal 2001, 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.
During the fourth quarter of fiscal 2002 the Company integrated its data
mapping and XML services into the ICC.NET business segment. These products
and services had previously been part of the Company's Professional
Services segment. These products and services are primarily utilized to
support customers of the ICC.NET VAN service. The reorganization was
undertaken to more closely align these data transfer services with the
customers they serve. The segment information presented below has been
restated, for each period presented, to reflect this reorganization as if
it had occurred on August 1, 2001.
F-29
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
14. BUSINESS SEGMENT INFORMATION (CONTINUED)
The table below summarizes information about operations and long-lived
assets as of and for the year ended July 31, 2002 and 2001:
Service Professional
ICC.NET Bureau services Total
------- ------ -------- -----
Year Ended - July 31, 2002 (Restated)
Revenues from external customers $ 10,436,290 $ 1,633,183 $ 2,152,323 $ 14,221,796
============== ============== ============== ==============
Operating loss $ (3,455,525) $ 4,949 $ (3,389,521) $ (6,840,097)
Other income, net 329,517 -- (36,973) 292,544
-------------- -------------- -------------- --------------
$ (3,126,008) $ 4,949 $ (3,426,494) $ (6,547,553)
============== ============== ============== ==============
Supplemental segment information:
Amortization and depreciation $ 1,688,891 $ 114,415 $ 329,161 $ 2,132,467
Impairment of acquired intangibles -- -- 1,710,617 1,710,617
Non-cash charges for stock-based
compensation and services 59,989 -- 190,019 250,008
As of July 31, 2002
Property and Equipment, net $ 590,679 $ 90,410 $ 470,775 $ 1,151,864
Capitalized software, net -- 326,588 -- 326,588
Acquired identified intangibles, net 3,107,000 -- 3,107,000
Goodwill, net 26,132 2,167,935 -- 2,194,067
-------------- -------------- -------------- --------------
Long lived assets, net $ 3,723,811 $ 2,584,933 $ 470,775 $ 6,779,519
============== ============== ============== ==============
Service Professional
ICC.NET Bureau services (A) Total
------- ------ ------------ -----
Year Ended - July 31, 2001 (Restated)
Revenues from external customers $ 5,759,418 $ 1,462,088 $ 2,521,012 $ 9,742,518
============== ============== ============== ==============
Operating loss $ (12,547,442) $ (391,048) $ (20,370,070) $ (33,308,560)
Other income, net 490,063 -- 33,258 523,321
Income tax benefit -- 349,110 1,580,777 1,929,887
-------------- -------------- -------------- --------------
$ (12,057,379) $ (41,938) $ (18,756,035) $ (30,855,352)
============== ============== ============== ==============
Supplemental segment information:
Amortization and depreciation $ 1,753,647 $ 260,605 $ 1,679,412 $ 3,693,664
Impairment of acquired intangibles -- -- 16,708,479 16,708,479
Non-cash charges for stock-based
compensation and services 450,110 -- 540,938 991,048
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 4,063,000 -- 1,854,854 5,917,854
Goodwill, net 26,132 2,167,935 -- 2,194,067
-------------- -------------- -------------- --------------
Long lived assets, net $ 5,336,054 $ 2,416,058 $ 2,705,942 $ 10,458,054
============== ============== ============== ==============
(A) - Subsequent to RTCI's acquisition on November 6, 2000.
F-30
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
15. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash investing and financing activities:
Year ended July 31,
2002 2001 2000
----------- ----------- --------
Equipment acquired under capital leases $ 121,367 $ 44,945 $205,634
Issuance of common stock for dividends on preferred stock 400,000 422,784 --
Common stock issued to consultants 77,400 -- --
Private placement commissions 117,511 -- --
Common stock issued to investment advisors 504,560 -- --
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 --
16. SUBSEQUENT EVENTS
In October 2002, the Company obtained commitments from certain existing
investors to provide an aggregate of up to $1,000,000 of additional
capital, if required, for the Company to continue as a going concern. Such
additional capital may be in the form of long term, debt, common stock,
preferred stock or other equity instruments or a combination of the
foregoing and shall be on arms length terms negotiated by the parties. The
commitments expire upon the earliest to occur of (a) July 31, 2003, (b)
the sale, transfer or other disposition of all or substantially all the
assets of the Company, (c) a change in control, or (d) the date the
Company raises debt or equity capital, or a combination of debt and
equity, capital in an amount equal to or greater than $1,000,000
subsequent to the date of the commitment.
F-31
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
17. 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 2002
Revenues, net $ 3,046 $ 2,690 $ 2,725 $ 5,761
Total costs and expenses (5,195) (4,678) (4,528) (6,661)
-------- -------- -------- --------
Operating loss (2,149) (1,988) (1,803) (900)
Interest and investment income, net 44 (33) 65 216
Income tax benefit -- -- -- --
-------- -------- -------- --------
Net loss $ (2,105) $ (2,021) $ (1,738) $ (684)
======== ======== ======== ========
Basic and diluted loss per common share $ (0.22) $ (0.19) $ (0.21) $ (0.06)
======== ======== ======== ========
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 $ (0.51) $ (0.52) $ (0.45) $ (1.94)
======== ======== ======== ========
F-32
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, 2002
Allowance for doubtful accounts $ 224,022 $ 223,107 $ -- $ (205,445) $ 241,684
Allowance on deferred tax asset $ 27,433,411 $ 340,739 $ -- $ -- $ 27,774,150
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 $ -- $ -- $ 27,433,411
Year ended July 31, 2000
Allowance for doubtful accounts $ -- $ 88,802 $ -- $ (14,414) $ 74,388
Allowance on deferred tax asset $ 9,477,727 $ 12,780,620 $ -- $ -- $ 22,258,347
F-33
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 (10)
2.2 Agreement and Plan of Merger among ICC, IDC, and the
selling shareholders of IDC (4)
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 C Preferred
Stock (8)
3(ii).1 By-laws (6)
4.1 Specimen Certificate for Class A Common Stock (3)
4.2 Form of Class A Bridge Warrant issued in the 1998
bridge financing (1)
4.3 Warrant Agreement dated January 12, 2000, by and
among ICC and Cable and Wireless USA, Inc. (8)
4.4 Form of Registration Rights Agreement dated as of
October 29, 2001 by and among ICC and the purchase
identified therein (15)
4.5 Registration Rights Agreement dated as of October 29,
2001 by and between ICC and Amaranth Trading LLC (13)
4.6 Format Class A Common Stock Warrant issued in the
October 29, 2001 private placement (13)
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 (4)
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 (5)
10.4 Employment Agreement for Anthony D'Angelo dated as of
April 16, 2000 (13)
10.5 Employment Agreement for G. Michael Cassidy dated as
of April 16, 2000 (12)
10.6 Employment Agreement for David Hubbard dated as of
April 16, 2000 (12)
10.7 Employment Agreement for Walter M. Psztur dated as of
April 16, 2000 (12)
10.8 Master Agreement between Cable & Wireless PLC and ICC
executed on November 24, 1999 (7)
10.9 Amended and restated Stock Option Plan (9)
10.10 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 (12)
10.11 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 (12)
10.12 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 (12)
10.13 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 (14)
10.14 Joint Services Agreement, between ICC and Hightech
International Services GmbH (a wholly-owned
subsidiary of ThyssenKrupp Services GmbH) executed on
July 28, 2000 (14)
10.15 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 (14)
10.16 Amended agreement with Triaton dated July 2002 (13)
10.17 Subscription agreement dated October 29, 2001 by and
between ICC and Amaranth Trading LLC (14)
10.18 Form of Subscription Agreement dated October 29, 2001
by and among ICC and purchasers identified therein
(14)
23(i) Consent of Deloitte & Touche LLP (15)
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (15)
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (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
October 31, 1997
(5) Incorporated by reference to amendment no. 3 to ICC's registration
statement on form S-3 (File no. 333-80043)
(6) Incorporated by reference to ICC's current report on form 8-K filed
with the SEC on July 31, 1999
(7) Incorporated by reference to ICC's current report on form 8-K dated
December 1, 1999
(8) Incorporated by reference to amendment no. 1 to ICC's registration
statement on form S-3 (File no. 333-93301)
(9) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999.
(10) Incorporated by reference to ICC's current report on form 8-K dated
June 15, 2000
(11) Incorporated by reference to ICC's current report on form 8-K dated
August 11, 2000
(12) Incorporated by reference to ICC's report on form 10-KSB dated July
31, 2000
(13) Incorporated by reference to ICC's registration statement on Form
S-3 (file No. 333-99059)
(14) Incorporated by reference to ICC annual report on form 10-K dated
July 31, 2001
(15) Filed herewith
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 31, 2002
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
43
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 31, 2002
- ------------------------------- Officer and Director
G. Michael Cassidy (Principal Executive Officer)
/s/ Walter M. Psztur Chief Financial Officer October 31, 2002
- ------------------------------- (Principal Financial
Walter M. Psztur and Accounting Officer)
/s/ Richard J. Berman Director October 31, 2002
- -------------------------------
Richard J. Berman
/s/ Peter J. Boni Director October 31, 2002
- -------------------------------
Peter J. Boni
/s/ Spencer I. Browne Director October 31, 2002
- -------------------------------
Spencer I. Browne
/s/ Kim D. Cooke Director October 31, 2002
- -------------------------------
Kim D. Cooke
/s/ Charles C. Johnston Director October 31, 2002
- -------------------------------
Charles C. Johnston
/s/ Arthur R. Medici Director October 31, 2002
- -------------------------------
Arthur R. Medici
/s/ Sarah Byrne-Quinn Director October 31, 2002
- -------------------------------
Sarah Byrne-Quinn
44
CERTIFICATIONS OF
CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, G. Michael Cassidy, certify that:
1. I have reviewed this annual report on Form 10-K of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report.
/s/ G. Michael Cassidy
- ------------------------
G. Michael Cassidy
Chief Executive Officer
October 31, 2002
I, Walter M. Psztur, certify that:
1. I have reviewed this annual report on Form 10-K of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report.
/s/ Walter M. Psztur
- ------------------------
Walter M. Psztur
Chief Financial Officer
October 31, 2002
45