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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, 2003
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 |_| No |X|
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of October 28, 2003 the issuer had outstanding 13,797,567 shares of
Class A Common Stock. The aggregate market value of the Class A Common Stock
held by non-affiliates as of October 28, 2003 was approximately $17,936,837,
based on a closing price for the Class A Common Stock of $1.30 on the Nasdaq
SmallCap 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. 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
Risk Factors............................................. 37
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 41
Item 8. Financial Statements and Supplementary Data.............. 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 42
Item 9A Controls and Procedures.................................. 42
PART III .................................................................. 43
Item 10. Directors and Executive Officers ........................ 43
Item 11. Executive Compensation................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 43
Item 13. Certain Relationships and Related Transactions........... 43
Item 14. Principal Accounting Fees and Services................... 43
PART IV .................................................................. 44
Item 15. Financial Statements, Financial Schedules, Exhibits
and Reports on Form 8-K.................................. 44
Signature......................................................... 47
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 37 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 is in the e-commerce business-to-business
communication services market, providing electronic commerce ("EC")
infrastructure solutions. 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.
Our business operates in three segments. These three segments are:
o 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 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,
email-based and other Internet-based software systems, because our
service is provided at a low cost, generally with greater
transmission speed in nearly real-time and offers more features.
ICC.NET provides the following services:
o Traditional VAN services -- our ICC.NET service provides
the full suite of traditional VAN services, but uses the
Internet to provide cost savings and increased
capabilities for our customers;
o Electronic data interchange ("EDI") for web-based
retailers -- our ICC.NET service provides an electronic
document and data file delivery link between web-based
retailers and their vendors that require documents and
data files to be transmitted using EDI format;
o AS2 capability -- ICC supports the EDI-INT standard for
those customers that are required to communicate via
this protocol.;
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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
data quickly and effectively utilizing the ICC.NET
service;
o ICC.CATALOG - our web-based electronic product catalog
service 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 order information; and
o HIPAA.ICC.NET -- our HIPAA.ICC.NET is a highly secure
Internet-based low cost network that reliably moves all
EDI healthcare documents between providers and payers in
real-time over the ICC.NET service and provides users
with a specialized user interface.
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 and software products:
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 Software - ICC markets a broad range of Windows-based
software products used by suppliers to reach large
retailers including ScanPak Professional, which 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;
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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 alliances with industry leading
partners, including Emanio, Inc., a leading provider of
translator software; HCEC a leading healthcare E-business
collaborative that markets ICC's services to its member
organizations; and ACOM, a leading provider of tactical
back-office technology solutions that integrates financial/ERP
systems to form comprehensive Electronic Purchasing-to-Payment
(EP2P) systems, 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 across the United States. We also develop
in-house EDI training programs and offer public seminars for
understanding and implementing HIPAA regulations.
We are subject to various risk factors that are described under the
heading "Risk Factors" starting on page 37 of this Form 10-K.
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
Industry Background
Although the Internet has become an important sales channel, we believe
that its primary value is in achieving business efficiencies and cost savings by
expanding global business-to-business connectivity.
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 is 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 between businesses are
hindered by incompatibilities in technologies and methodologies used to
communicate business information among trading communities, which slows down the
flow of information and creates 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 the continued development and enhancement 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-
3
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.
On a sequential quarterly basis, cash used in operating activities for the
second, third and fourth fiscal quarters of 2003 was $1.2 million, $809,000 and
$159,000, respectively. While we anticipate that we will achieve positive cash
flow from operations in the third and fourth quarters of the year ending July
31, 2004, we do not anticipate positive cash flow from operations in the first
or second quarters of that fiscal 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
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 than they previously incurred. ICC.NET provides our customers with the
ability to send us the majority of their important documents and data files
which we then transmit to each of the intended recipients in any form requested
by the recipient. Therefore, our customers can integrate a substantial portion
of their document and data file delivery methods into a single, seamless
process.
We intend to continue to market ICC.NET to new customers with an
increasing focus on industries in which ICC.NET has achieved 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.
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 are aware that a significant number of these hub companies intend to
expand their 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 are also
able to receive electronic documents using our ICC.NET fax service. As a result,
large hub companies can now 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 could 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 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. See
"International" below.
We will continue 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.
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We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that sequential
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 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, service bureau and professional
services.
ICC.NET Service
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 gap in technological
capabilities 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. 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.
Our ICC.NET service improves the basic infrastructure of
business-to-business electronic communications by providing intelligent
messaging and routing using the Internet, which, 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 are highly
competitive.
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, including higher costs, slower transmission and greater
difficulty in operation 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 to consistently 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 certain 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.
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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 certain 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.
ICC.NET is one of the only Internet-based data transmission services that
communicates to over sixty-five traditional VANs, private networks and exchanges
that currently provide EDI services for approximately 90% of companies that 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 reach these networks 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 to
enable translation between different data formats.. Our EDI Mapping Factory(R)
provides off-site mapping using a variety of translators on multiple platforms.
Our experience includes mapping for ANSI ASC X12 and 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 emerge periodically, and consolidation we
believe may be some time away. Our experience with XML, in 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 meet these
requirements and thus 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
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our ICC.NET VAN service. ICC's Point-of-Sale service allows retailers and their
suppliers to exchange information quickly and effectively.
ICC.CATALOG. ICC provides 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-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.
HIPAA.ICC.NET. ICC offers leading-edge services for EDI healthcare
transactions mandated by HIPAA. By combining our expertise in EDI and HIPAA
requirements, we offer clients best of breed, one-stop solutions. HIPAA.ICC.NET
is based on the low-cost, proven ICC.NET transaction exchange system. and
provides users with a specialized browser interface. ICC.NET reliably moves
healthcare claims, eligibility and enrollment forms, and all the other HIPAA
transactions, including NCPDP.
EDI-to-fax service. Traditional EDI users convert electronic documents
into a faxable format and fax the documents manually to their trading partners
that are unable to receive electronically transmitted documents in EDI format.
Our ICC.NET IP-based worldwide fax service allows our customers to send a
document electronically, which we then electronically convert to faxable format
and fax to any of our customer's trading partners that are unable to receive
electronically transmitted documents in EDI format.
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 significant up-front
investment in software. By using ICC's AS2 solution, our customers avoid the
support costs associated with purchasing an AS2 software product.
The Service Bureau
ICC's Service Bureau allows vendors to comply with its customers'
electronic commerce needs. ICC's fees are generally more cost effective than
establishing an in-house EDI department.
ICC's 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; and
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 software electronically matches the contents of each case
against purchase orders. From the casing information created by
ScanPak
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Professional, 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 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, 2003 and 2002.
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 15 of the notes to our consolidated
financial statements included elsewhere in this annual report. Our revenue by
geographic region is set forth in Note 14 of the notes to our consolidated
financial statements.
International
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.
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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 use and provide 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 will provide sales support,
customer support and software support services on its standard terms and
conditions.
We have also entered into reseller agreements in Brazil and the United
Kingdom. 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 United
Kingdom and Ireland. During the years ended July 31, 2003 and 2002 we did not
recognize significant revenue from these reseller agreements.
Competition
Our principal competitors include: Inovis Inc.; GXS, Global eXchange
Services Inc.; International Business Machines Corporation Global Services;
Sterling Commerce, Inc.; EasyLink Services Corp.; and Kleinschmidt Inc.
Two of the largest networks, Global eXchange Services ("GXS") and Sterling
Commerce, which we believe to account for approximately 60% of the estimated EDI
users, discontinued 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 Inovis, Inc. (formerly a division of
Peregrine Systems, Inc. and now an independent company) and IBM Corporation so
our customers can continue to communicate through us with their trading
communities. As a result of these interconnection arrangements, we 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.
Our market is characterized by intense price competition and rapidly
changing technology, customer demands and innovation. The Internet's growth and
the intense competition in our industry resulted in significant changes.
Traditional VAN's such as GXS and Inovis have been sold by their parent
companies. GXS was acquired by Francisco Partners in September 2002, and Inovis
was spun off from Peregrine Systems, Inc. and acquired by Golden Gate Capital
Inc. also in September 2002. We believe that much of this activity is attributed
to the impact of the Internet on traditional VAN's.
Our principal competitors have significant existing customer relationships
and larger financial, marketing, customer support, technical and other resources
than we do. As a result, they may be able to respond more quickly to changing
technology and changes in customer requirements or be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to potential customers and employees, or be able to
devote greater resources to the development, promotion and sale of their
services than we can. As a result, we may not be successful in competing against
our competitors.
New competition is emerging in the form of web services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. ICC has enhanced its technologies to communicate with
these AS2-based technologies. Competitors providing these alternatives include
Cyclone Corporation and Inovis. They offer software solutions that utilize the
Internet to transmit data between trading partners. We believe that the high
cost of implementation of these software solutions and the ongoing costs of
supporting a company's trading partners are a barrier to the wider acceptance of
these product offerings in the marketplace.
Our catalog service competes with Quick Response Systems Corporation, or
QRS, QRS and Global eXchange Services have dominated the catalog service
industry for more than ten years, but we believe that our catalog pricing and
functionality may create competitive advantages for our service.
9
Patents and Trademarks
Patents
On August 26, 1997, ICC was granted patent U.S. 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 U.S. 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 U.S. No. 5,473,687, entitled
"Method for Retrieving Secure Information from a Database," covering its
technology for providing a secure method for the commercial distribution and use
of digital information on a rental basis using a technique to discourage
long-term use without endangering the computer or the operating system.
In February 1995, ICC was granted patent U.S. 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 owns 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 patents owned by ICC or
our trade secrets will afford us adequate protection or not be challenged,
invalidated, infringed upon 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.
10
Trademarks
ICC's trademarks, ICC.NET, INFOSAFE, COMMERCESENSE, EDI MAPPING FACTORY,
EZ-EDI and UPC Manager have been registered with the United States Patent and
Trademark Office. Our applications to register AUDINET, B2B4B2C, B to B for B to
C, E-COMMERCE MADE EASY and XML MAGIC 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 and medium
sized 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 make
direct 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 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 staff national shows with sales, support and executive personnel from
our headquarters and field locations.
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 HIPAA. 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.
11
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 1,600 customers.
Approximately 1,100 of these customers use our ICC.NET service and represent a
variety of industries, including book retailing and publishing, pharmaceutical
manufacturing, automotive, footwear manufacturing, office supplies,
transportation logistics, financial services, manufacturing, retail, grocery and
soft goods manufacturing. Customers in these and other industries include
American Power Conversion Corporation, AOL Time Warner, Barnes & Noble, Inc.,
BMG Entertainment, Brother International Corporation, CIT Group, Inc.,
Colgate-Palmolive, Dot Foods, Hastings Entertainment, Inc., Linens n' Things,
Inc., The McGraw-Hill Companies, Inc., New Balance Athletic Shoes, Inc.,
Nordstrom.com, Random House Inc., Revlon, Inc., Sealy Inc., Sector
Communications, Inc., a SIAC company, Simon & Schuster, Inc., Smartworks, LLC,
TravelCenters of America, Inc., Verizon Wireless and Volvo IT N.A..
The customer base of our professional services segment changes frequently
due to the nature of professional service contracts. Current customers include
Atlantic Tech Services, F. Schumacker & Co., State of North Carolina, Accenture,
LLP, Hanger Othropedic Group and Merck & Co. Inc.
Our service bureau has approximately 500 customers.
For the year ended July 31, 2003, no single customer accounted for a
material portion of our revenues. For the year ended July 31, 2002, one customer
accounted for 22% of our consolidated revenues, or 30% of the revenues of our
ICC.NET business segment. 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.
Research and Development
Research and development costs related to the enhancement and improvement
of our ICC.NET service amounted to $1,111,000, $977,000 and $931,000 for the
years ended July 31, 2003, 2002 and 2001, respectively.
Employees
At July 31, 2003, ICC had 90 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, which the landlord
released to new tenants. The agreement reduced the annual base rent for such
property to approximately $405,000. In addition, approximately 6,580 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 2004.
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.
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, 2003.
13
PART II
Item 5. Market for Internet Commerce Corporation's Common Equity and Related
Stockholder Matters
(a) Market Information
From September 20, 2000 until January 30, 2003, ICC's class A common stock
was traded on the Nasdaq National Market under the symbol ICCA. Since January
30, 2003, ICC's class A common stock has been traded on the Nasdaq SmallCap
Market under the symbol ICCA. The following table sets forth the high and low
closing prices of ICC's common stock for the periods indicated. These quotations
represent prices between dealers in securities, do not include retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
Fiscal Year Ended July 31:
2003 2002
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
- --------------------
First Quarter $ 3.17 $ 1.30 $ 4.00 $ 1.50
Second Quarter $ 2.10 $ 1.15 $ 4.80 $ 2.45
Third Quarter $ 1.41 $ .80 $ 4.50 $ 2.55
Fourth Quarter $ 2.04 $ 1.15 $ 3.55 $ 1.55
(b) Holders
As of October XX, 2003, there were approximately 200 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, and we are unable to
estimate the number of stockholders represented by these record holders.
(c) Dividends
ICC has not paid any cash dividends on its class A common stock and does
not intend to declare or pay cash dividends on the class A common stock in the
foreseeable future. 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 of each year. ICC issued 302,343 shares of class A common stock in
payment of the dividend due January 1, 2003 and 98,839 shares of class A common
stock in payment of the dividend due on January 1, 2002.
14
(d) Securities Authorized for Issuance under Equity Compensation Plans
Shares of class A common
stock remaining available
Shares of class A common for future issuance under
stock to be issued upon Weighted-average equity compensation plans
exercise of outstanding exercise price of (excluding securities
options, warrants and rights outstanding options, reflected in column (a))
(in thousands) warrants and rights (in thousands)
Plan Category
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders (1) 5,112 $7.42 969
Equity compensation plans not
approved by security holders (2) 442 $24.06 -
--------------------------- --------------------- -------------------------
Total 5,554 $8.59 969
(1) Includes stock options to purchase 114,491 shares of class A common stock
with a weighted average exercise price of $5.82 per share under the Employee
Stock Option plan of RTCI, which was assumed in connection with the acquisition
of RTCI completed on November 6, 2000.
(2) Includes stock options to purchase 150,000 shares of class A common stock
and warrants to purchase 292,140 shares of class A common stock issued pursuant
to individual compensation arrangements. These stock options have a weighted
average exercise price of $60.00 per share and were awarded to a former
president and chief executive officer of the Company under an employment
contract. The warrants are described in Note 9, Stockholders' Equity, of the
Notes to Consolidated Financial Statements included in our annual report on Form
10-K for the year ended July 31, 2003. The issuance of all the warrants shown
under the captions Consulting Warrants, 2001 Private Placement Commission
Warrants, ING Warrants, 2003 Private Placement Commission Warrants and Silicon
Valley Bank Warrants constitute individual compensation arrangements. In
addition, warrants to purchase 38,460 shares of class A common stock shown under
the caption 2003 Private Placement Warrants were issued as settlement of certain
outstanding payables for services and constitute an individual compensation
arrangement.
Recent Sales of Unregistered Securities
In 2003, we issued a total of 51,703 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 the Securities Act pursuant
to Section 4(2).
On January 1, 2003, the Company issued 302,343 shares of class A common
stock in payment of the dividends on series C preferred stock.
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, 2003 is presented below. Our
selected balance sheet data is presented below as of July 31, 2003, 2002, 2001,
2000 and 1999. 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,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 12,083 $ 14,222 $ 9,743 $ 1,303 $ 105
-------- -------- -------- -------- --------
Expenses:
Cost of services 7,622 8,776 9,354 2,514 452
Impairment of software inventory 248 -- -- -- --
Impariment of capitalized software 148 -- -- -- --
Product development and enhancement 1,111 977 931 702 517
Selling and marketing 3,035 3,499 5,384 3,273 420
General and administrative 4,439 5,849 9,683 4,814 3,581
Non-cash charges for stock-based
compensation, services and legal settlements 139 250 991 5,161 3,267
Impairment of goodwill and acquired intangibles 982 1,711 16,708 -- --
-------- -------- -------- -------- --------
Total operating expenses 17,724 21,062 43,051 16,464 8,237
-------- -------- -------- -------- --------
Operating loss (5,641) (6,840) (33,308) (15,161) (8,132)
-------- -------- -------- -------- --------
Other income (expense), net (363) 292 523 675 (1,490)
-------- -------- -------- -------- --------
Loss before income taxes (6,004) (6,548) (32,785) (14,486) (9,622)
Income tax benefit -- -- 1,930 -- --
-------- -------- -------- -------- --------
NET LOSS (6,004) (6,548) (30,855) (14,486) (9,622)
Dividends on preferred stock (400) (365) (420) (458) (191)
Dividends to preferred stockholders for
beneficial conversion feature (107) -- -- (4,549) (1,222)
Beneficial conversion feature from repricing and
issuance of warrants -- (461) -- -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $ (6,511) $ (7,374) $(31,275) $(19,493) $(11,035)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.53) $ (0.68) $ (3.57) $ (4.49) $ (7.62)
======== ======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 12,303 10,867 8,768 4,337 1,447
======== ======== ======== ======== ========
July 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 2,283 $ 2,088 $ 2,223 $ 14,003 $ 114
Working capital 1,700 2,622 646 17,831 3,119
Total assets 8,598 12,625 15,674 22,332 6,540
Capital lease obligations 194 374 255 231 358
Total liabilities 2,758 3,244 4,487 2,242 1,486
Stockholders' equity 5,840 9,381 11,187 20,090 5,055
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 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 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 32 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 in the e-commerce business-to-business communication services
market providing complete EC 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, email-based and other
Internet-based software systems, because our service is provided at a low cost,
with greater transmission speed in nearly real-time 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
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues and
operating income resulting primarily from the bankruptcy of its largest
customer. An impairment loss of $982,142 was recognized as a result of this
evaluation. The fair value of the Service Bureau reporting unit was estimated
using the net present value of expected future cash flows.
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 the 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 2002 and 2001 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 65
business-to-business networks for the benefit of our customers. Two of the
largest networks, Global eXchange Services ("GXS") and Sterling Commerce, which
we believe to account for approximately 60% of the estimated EDI users,
discontinued 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 Inovis, Inc. (formerly a division of Peregrine Systems,
Inc. and now an idependent company) and IBM Corporation so our customers can
continue to communicate through us with their trading communities. As a result
of these interconnection arrangements, we will continue to 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.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
Critical accounting policies are those policies 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 on Form 10-K for
the year ended July 31, 2003. 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 includes 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 three to six months. 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. The Company has a limited number of
fixed fee data mapping services contracts. Under these arrangements the Company
is required to provide a specified number of maps for a fixed fee. Revenue from
such arrangements is recognized using the percentage-of-completion method of
accounting (see below).
18
Service Bureau revenue is comprised of EDI services including data
translation services, EDI-to-print and print-to-EDI purchase order and invoice
processing, UPC services including UPC number generation, UPC catalog
maintenance and UPC label printing. The Service Bureau also derives revenue from
licensing software and providing software maintenance and support. Revenue from
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 ("SOP 97-2"). 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 that revenue from software
arrangements involving multiple elements be allocated among 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. Furthermore,
SOP 97-2 requires that revenue be recognized as each element is delivered with
no significant performance obligation remaining on the part of the Company. The
Company's multiple element arrangements generally consist of a software license
and post contract support. The Company allocates the aggregate revenue 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 these
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 throughout 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 data mapping and professional service contracts is
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 cycle 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 is 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 other
than goodwill that were not subject to 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.
Stock-based compensation: The Company accounts for stock-based
compensation with its employees using the intrinsic value method in accordance
with the provisions of Account 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 No. 123"). SFAS No.
123 establishes a fair-value method of accounting for stock-based compensation
plans. Stock-based awards to non-employees are accounted for at fair value in
accordance with SFAS No. 123.
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.
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 equity securities
underlying stock based compensation, the realizability of deferred tax assets,
the carrying value of goodwill, intangible assets and long-lived assets, and
depreciation and amortization. The following discussion reviews items
incorporated into our financial statements for the years ended July 31 2003,
2002 and 2001 that required the use of significant management estimates.
The Company has entered into several transactions involving the issuance
of warrants and options to purchase shares of the Company's class A common stock
to consultants, lenders, warrant holders, placement agents and other business
associates and vendors. The issuance of these securities required management to
estimate their value using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires management to make certain estimates
for values of variables used by the model. Management estimated the values for
stock price volatility, the expected life of the equity instruments and the risk
free rate based on information that was available to management at the time the
Black-Scholes option-pricing calculations were performed. Changes in such
estimates could have a significant impact on the estimated fair value of those
equity instruments.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of 1 year. On October 22, 2003, the Company and Silicon Valley Bank amended the
Financing Agreement to extend the term of the agreement to August 31, 2004. In
connection with the Financing Agreement, the Company issued the Bank warrants to
purchase 40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39 per share, equal to the
fair market value of the Company's class A common stock on the date of closing
of the Financing Agreement. The warrants are exercisable for a seven-year
period. The value of the warrants in the amount of $34,000 is being amortized
over the life of the Financing Agreement.
20
On March 10, 2003, the Company issued options to purchase 100,000 shares
of class A common stock to a non-employee member of the board of directors as
compensation for consulting services. The estimated fair value of the options
was determined by management to be $42,000.
The allocation of the proceeds from the sale of the series D preferred
stock and warrants issued in the Company's April 30, 2003 private placement
between the fair value of the series D preferred stock and the fair value of the
detachable warrants required management to estimate the fair value of the
warrants. Management's estimate resulted in a beneficial conversion feature in
the amount of $106,730. The discount was immediately accreted and treated as a
deemed dividend to the holder of the series D preferred as all of the series D
preferred stock was eligible for conversion upon issuance.
In connection with the private placement that closed during April and May
of 2003, the Company incurred fees which were paid by issuing warrants to
purchase 110,680 shares of class A common stock at an exercise price of $1.47
per share. The fair value of the warrants was determined by management to be
$87,800.
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 option-pricing model. This amount has been added to the Company's
net loss to increase the net loss attributable to common stockholders during
fiscal 2002.
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 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
option-pricing model. The fair value of the vested portion of the options was
included in the purchase price for RTCI.
Goodwill is evaluated for impairment at least annually and whenever events
or circumstances indicate impairment may have occurred. The assessment requires
the comparison of 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 is recognized by the Company in an amount
equal to that excess.
The Company estimates the fair value of its reporting units based on the
net present value of expected future cash flows. The use of this method requires
management to make estimates of the expected future cash flows of the reporting
unit and the Company's weighted average cost of capital. Estimating the
Company's weighted average cost of capital requires management to make estimates
for long-term interest rates, risk premiums, and beta coefficients. Management
estimated these items based on information that was available to management at
the time the Company prepared its estimate of the fair value of the reporting
unit. Changes in either the expected cash flows or the weighted average cost of
capital could have a significant impact on the estimated fair value of the
Company's reporting units.
Impairments of goodwill and acquired intangibles in the amount of
$982,000, $1,711,000 and $16,708,000 were as recorded during the years ended
July 31 2003, 2002 and 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 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. During
21
the fourth quarter of fiscal 2003 the goodwill of the Service Bureau was tested
for impairment due to a significant decline in revenues and operating income
resulting primarily from the bankruptcy of its largest customer. An impairment
loss of $982,142 was recognized as a result of this evaluation. The fair value
of the Service Bureau reporting unit was estimated using the net present value
of expected future cash flows.
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2003 Compared with Fiscal Year Ended July 31, 2002.
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: 2003 2002
------------ ------------
ICC.NET $(4,004,933) $(3,126,008)
Service Bureau (1,132,102) 4,949
Professional Services (867,283) (3,426,494)
----------- -----------
Consolidated loss before income taxes $(6,004,318) $(6,547,553)
22
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 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,
----------------------------
2003 2002 (1)
----------- ------------
Revenues:
VAN services $ 8,237,525 $ 6,266,277
Mapping services 571,063 1,064,387
Services to Triaton 58,333 105,626
Technology license -- 3,000,000
------------ ------------
8,866,921 10,436,290
Expenses:
Cost of services 5,167,554 5,744,587
Product development and enhancement 975,583 822,314
Selling and marketing 2,757,489 3,034,683
General and administrative 3,492,835 4,230,242
Non-cash charges for stock-based compensation 139,415 59,989
------------ ------------
12,532,876 13,891,815
------------ ------------
Operating loss $ (3,665,955) $ (3,455,525)
------------ ------------
Other (expense) income, net (338,978) 329,517
------------ ------------
Loss before income taxes $ (4,004,933) $ (3,126,008)
------------ ------------
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
Revenues - ICC.NET - Revenues from our ICC.NET service were 73% of our
total consolidated revenues for the fiscal year ended July 31, 2003 ("2003")
compared to 73% for the fiscal year ended July 31, 2002 ("2002"). Total ICC.NET
revenue decreased $1,569,000 in 2003 from 2002, or approximately 15%. VAN
services revenue increased $2,030,000, or approximately 32%, in 2003 from the
prior year. The increase in VAN services revenue is attributable to an increase
in the number of customers to approximately 1,100 in July 2003 from
approximately 600 in July 2002. Approximately 300 of these new customers signed
up for our service during the month of April 2003. Mapping services decreased
$493,000 or approximately 46% in 2003 compared to 2002 primarily due to the
continued slowdown in the economy. During 2002, we recognized technology license
revenue of $3,000,000 from Triaton GmbH, a subsidiary of Thyssen Krupp
Information Services, GmbH, 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 use and provide 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 July 2002 agreement with Triaton, except that, at
Triaton's request, ICC will provide sales support, customer support and software
support on ICC's standard terms and conditions. 2002 included $105,000 of fees
from Triaton under a July 2001 agreement.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 58% of revenue derived from the ICC.NET service in 2003, compared to
55% of revenue in 2002. Cost of services related to our ICC.NET service consists
primarily of salaries and employee benefits, connectivity fees, amortization and
rent. Total cost of services decreased $577,000 in 2003 from 2002. Product
development personnel who were temporarily assigned to cost of services during
2002 represented $278,000 of this decrease. These employees were used to
implement
23
alternative connectivity solutions for the ICC.NET service when GXS and Sterling
disconnected our service from their networks during 2002. Amortization decreased
$246,000 in 2003 compared to 2002 primarily due to certain capitalized software
costs becoming fully amortized during 2002. Salaries and employee benefits
decreased $138,000 primarily due to a reduction of personnel to 28 at the end of
2003 from 38 at the beginning of 2002. In addition, consulting costs decreased
$159,000 in 2003 compared to 2002 due primarily to decrease in costs associated
with technology license revenue from Triaton. However, these savings were
partially offset by increased connectivity costs of $306,000 in 2003 from 2002.
The increase in connectivity fees was primarily due to additional fees incurred
to offer our customers and their trading partners alternative connectivity when
GXS and Sterling disconnected our service from their networks during 2002. Cost
of services relating to VAN services decreased to $3,744,000 in 2003 from
$4,009,000 in 2002. Cost of services relating to mapping services decreased to
$1,424,000 in 2003 from $1,683,000 in 2002. Cost of services relating to
services provided to Triaton was $53,000 in 2002 compared to no costs in 2003.
We anticipate that our ICC.NET cost of services will decline as a percentage of
revenue in future periods due to increased utilization of our existing
communications infrastructure as we expect the use of our ICC.NET service to
increase.
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 $153,000 in 2003 over 2002 was primarily
attributable to an increase of $267,000 of costs relating to product development
personnel who had been temporarily assigned to cost of services during 2002. The
personnel were utilized to implement alternative connectivity solutions for the
ICC.NET service when GXS and Sterling disconnected our service from their
networks during 2002. The prior year allocation was partially offset by a
decrease of $78,000 in salaries and employee benefits as a result of reduction
in staff to 8 at the end of 2003 from 14 at the beginning of 2002. Also,
consulting costs decreased $17,000 in 2003 compared to 2002 due to increased
reliance on staff.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising and trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $277,000 in 2003 from 2002.
Advertising and trade show costs were reduced $175,000 because we attended fewer
trade shows and placed fewer print advertisements. The sales function was
centralized in the second fiscal quarter of 2003, a portion of the cost of our
sales force was allocated to the Professional Services segment based on the
level of effort utilized in selling Professional Services products. In 2003
these allocations totaled $99,000.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees and depreciation. General
and administrative costs supporting our ICC.NET service decreased $737,000 in
2003. Legal fees decreased $356,000 in 2003 primarily relating to our
disconnection from other VAN's. Bad debt expense decreased $173,000 in 2003 from
2002 due to a decrease in customer defaults from the prior year. In addition,
rent expense decreased $112,000 in 2003 from 2002 due to the renegotiation of
our lease to reduce office space at one of our existing facilities. These
decreases were partially offset by an increase in accounting fees of $130,000 in
2003 over 2002 due to services provided in connection with SEC filings and other
matters. For cost reduction purposes, the Company's executive management, human
resources, accounting and finance functions for all segments of the Company were
centralized and are now performed by ICC.NET personnel. Commencing in the second
fiscal quarter of 2003, ICC.NET began allocating the costs of executive
management, human resources, accounting and finance tasks to the segments based
on the level of services provided to each segment. In 2003, these allocations
totaled $234,000.
Non-cash charges - ICC.NET - Non-cash charges increased $79,000 in 2003
over 2002. In 2003, $60,000 of expense was recognized for common stock and
options issued to a non-employee member of our board of directors as
compensation for consulting services. In addition, expense recognized for common
stock to be issued to non-employee members of our board of directors as
compensation increased $19,000 in 2003 over 2002.
Other income, net - ICC.NET - Other expenses increased $668,000 in 2003
compared to 2002. An impairment charge of $318,000 was recorded in 2003 for the
write down of available-for-sale marketable securities due to an other than
temporary decline in value. In 2002 other income includes a legal settlement
from a competitor
24
of $63,000 and the favorable settlement of an acquisition-related liability of
$145,000. In addition, net gains from the disposition of marketable securities
decreased $140,000 in 2003 from 2002.
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,
----------------------------
2003 2002
----------- -----------
Revenues:
Services $ 1,487,946 $ 1,633,183
Expenses:
Cost of services 735,136 839,217
Impairment of capitalized software 148,479 --
----------- -----------
Total cost of services 883,615 839,217
Product development and enhancement 135,358 154,589
Selling and marketing 135,411 123,100
General and administrative 483,522 511,328
Impairment of acquired intangible 982,142
----------- -----------
2,620,048 1,628,234
----------- -----------
Operating income (loss) (1,132,102) 4,949
----------- -----------
Other income, net -- --
----------- -----------
Income (loss) before income taxes $(1,132,102) $ 4,949
=========== ===========
Revenues - Service Bureau - Revenue related to our service bureau was 12%
of our consolidated revenue in 2003 compared to 11% of consolidated revenue in
2002. The service bureau's revenue was primarily generated from services
performed, customer support and licensing fees. The decrease in revenue of
$145,000 in 2003 compared to 2002 was primarily the result of a decrease in
service revenue of $122,000 due to a large customer ceasing operations.
Cost of services - Service Bureau - Total cost of services relating to our
Service Bureau was 58% of revenue derived from the service bureau in 2003
compared to 51% in 2002. Excluding the impairment of the capitalized software,
costs of services was 49% of revenue derived from the Service Bureau in 2003
compared to 51% of revenue derived from the Service Bureau in 2002. Cost of
services related to our service bureau consists primarily of salaries and
employee benefits and rent. Cost of services, excluding the capitalized software
impairment charge, decreased $104,000 in 2003. This decrease in cost of services
was primarily the result of an $80,000 decrease in the use of consultants for
customer service and support and data entry services and a decrease in salary
and benefits of $22,000. Delivery charges to customers decreased $11,000 in 2003
compared to 2002 due to customers paying these cost directly to the delivery
agent. Cost of services - impairment of capitalized software of $148,000 in 2003
represents an impairment of capitalized software for in-process projects that
management decided, due to unfavorable market conditions continuing into the
foreseeable future, not to complete.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits and
rent. Product development and enhancement costs incurred by our service bureau
decreased $19,000 in 2003 from 2002. This decrease was primarily attributable to
a decrease in salaries and employee benefits of $16,000 as a result of reduced
staffing to 4 at the end of 2003 from 5 at the beginning of 2002.
25
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent. Selling and marketing increased $12,000 in 2003 primarily due
to an increase in salaries and employee benefits of $8,000, and a $5,000
severance payment in 2003.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. General
and administrative costs decreased $28,000 in 2003 from 2002. Salaries decreased
$160,000 in 2003 from 2002 as a result of a reduction in staff to 1 at the end
of 2003 from 4 at the end of 2002, and 6 at the beginning of 2002. This was
offset by an increase of $135,000 in general and administrative support staff
salary and benefits allocated by ICC.NET to the Service Bureau in 2003. See
"General and administrative - ICC.NET" above for a discussion of the allocation
of general and administrative expenses among segments.
Impairment of Acquired Intangibles - Service Bureau - During the fourth
quarter of fiscal 2003 the goodwill of the Service Bureau was tested for
impairment due to a significant decline in revenues and operating income
resulting primarily from the bankruptcy of its largest customer. An impairment
loss of $982,142 was recognized as a result of this evaluation. The fair value
of the Service Bureau reporting unit was estimated using the net present value
of expected future cash flows.
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,
---------------------------
2003 2002 (1)
----------- ------------
Revenues:
Services $ 1,728,447 $ 2,152,323
Expenses:
Cost of services 1,719,118 2,191,750
Impairment of software inventory 248,092 --
----------- -----------
Total cost of services 1,967,210 2,191,750
Selling and marketing 141,826 341,717
General and administrative 462,273 1,107,741
Non-cash charges for stock-based compensation -- 190,019
Impairment of acquired intangible -- 1,710,617
----------- -----------
2,571,309 5,541,844
----------- -----------
Operating loss (842,862) (3,389,521)
Other income (expense), net (24,421) (36,973)
----------- -----------
Loss before income taxes $ (867,283) $(3,426,494)
=========== ===========
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
Revenues - Professional Services - Revenue related to professional
services was 14% of our consolidated revenue in 2003 compared to 15% of
consolidated revenue in 2002. Revenue generated from professional services
consists of consulting and educational services. As a result of the continued
slowdown in the economy, which has
26
resulted in a decrease in capital expenditures for information technology and
related services, revenue from our professional services decreased $424,000 in
2003 from 2002.
Cost of services - Professional Services - Total cost of services relating
to professional services was 114% of revenue derived from professional services
in 2003 compared to 102% in 2002. Excluding the impairment of software
inventory, the total cost of services was 99% of revenue from professional
services in 2003 compared to 102% of revenue in 2002. Cost of services related
to our professional services consists primarily of salaries and employee
benefits, and contract labor. Costs of services, excluding the impairment
charge, related to professional services decreased $473,000 in 2003 from 2002.
This was primarily attributable to a decrease in salaries and employee benefits
of $332,000 partially due to a reduction in workforce to 8 at the end of 2003
from 13 at the end of 2002 and 24 at the beginning of 2002. Travel, meals and
entertainment decreased $104,000 in 2003 from 2002 due to lower travel
requirements associated with projects. In addition, costs for rental of space
for educational seminars decreased $62,000 in the 2003 compared to 2002 due to
the use of lower cost facilities. Impairment of software inventory of $248,000
in 2003 represents an impairment for software inventory held by Professional
Services resulting from insufficient historical and projected revenue from these
products to support the recoverability of that carrying value.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits. Selling and marketing expenses related to our professional
services were reduced $200,000 in 2003 from 2002. The decrease in selling and
marketing expenses was primarily attributable to a decrease in salaries and
benefits of $196,000 in 2003. In addition, rent, travel and entertainment and
severance decreased $28,000, $26,000 and $21,000, respectively, in 2003 from
2002. These decreases were offset by an increase in the allocation of selling
and marketing expenses from ICC.NET of $99,000 in 2003 compared to 2002. See
"Selling and marketing - ICC.NET" above for a discussion of the allocation of
selling and marketing expenses between ICC.NET and professional services.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation, amortization, legal and
other professional fees and telephone charges. General and administrative costs
supporting our professional services decreased $645,000 in 2003 from 2002. The
decrease was attributable in part to decreased rent expense of $281,000 as a
result of the renegotiation of our lease to reduce office space in our existing
facility. In addition, salary and benefits decreased $258,000 primarily due to a
reduction in personnel to 3 at the end of 2003 from 6 at the end of 2002 and 10
at the beginning of 2002. Legal fees decreased $109,000 in 2003 compared to 2002
due to the resolution of a legal matter in 2002. In addition, depreciation and
amortization decreased $93,000 in 2003 from 2002 due to assets reaching the end
of their depreciable or amortizable lives. These decreases were offset by an
increase in allocation of general and administrative expenses from ICC.NET of
$99,000 in 2003 compared to 2002. See "General and administrative - ICC.NET"
above for a discussion of the allocation of general and administrative expenses
among segments.
Non-cash charges - Professional Services - Non-cash charges in the 2002
consisted of stock-based compensation expense related to assumed unvested
restricted shares issued to RTCI employees in connection with our acquisition of
RTCI.
27
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 4,949 (391,048)
Professional Services (3,426,494) (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 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.
28
ICC.NET revenue included $1,064,000 attributable to mapping and XML services in
2002 as compared to $913,000 in 2001. 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 will provide
sales support, customer support and software support on ICC's 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 our acquired
mapping technology. ICC.NET cost of services included $1,683,000 attributable to
mapping and XML services in 2002 as compared to $1,905,000 in 2001. 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 recognized in 2002. 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
infrastructure as we expect the use of our ICC.NET service to increase.
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.
29
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 511,328 773,469
----------- -----------
1,628,234 1,853,136
----------- -----------
Operating income (loss) 4,949 (391,048)
----------- -----------
Other income, net -- --
----------- -----------
Income (loss) before income taxes $ 4,949 $ (391,048)
=========== ===========
Revenues - Service Bureau - Revenues of our service bureau were 11% of our
consolidated revenues for 2002. The service bureau's revenues were primarily
generated from services performed, customer support and licensing fees. The
increase in revenues of $171,000 in 2002 as compared to 2001 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 revenues 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. Consulting fees were also reduced
by $52,000.
30
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 in 2002.
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 in 2002 as compared to 2001, 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
compensation & services 190,019 540,938
Impairment of 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 (36,973) 33,257
------------ ------------
Loss before income taxes $ (3,426,494) $(20,336,812)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
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 primarily as a result of a
reduced number of consulting projects.
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.
31
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 decreased $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 recognized during 2002 as
an impairment charge for the full carrying value of this asset 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 were reduced by $272,000 in 2002 compared to 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, 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 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.
Impairment of Acquired Intangibles - Professional Services - During 2001,
professional services recorded an impairment charge of $16,708,000 related to
the intangibles acquired from RTCI. Due to a significant reduction of the
workforce of professional services, a steep decline in the value of similar
companies, continued operating losses and a significant reduction in forecasted
operating profits, management 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
their value had been impaired. These intangible assets were written down in 2001
to fair value based on the related discounted expected future cash flows 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 Taxes
An 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, increased to $2,375,000 as of July 31,
2003 from $2,219,000 as of July 31, 2002. We believe these resources, combined
with an accounts receivable financing agreement executed on May 30, 2003 with
Silicon Valley Bank, will provide us with sufficient liquidity to continue in
operation through July 31, 2004.
On a sequential quarterly basis, cash used in operating activities for the
second, third and fourth fiscal quarters of 2003 $1.2 million, $809,000 and
$159,000, respectively. While we anticipate that we will achieve positive cash
flow from operations in the third and fourth quarters of the year ending July
31, 2004, we do not anticipate positive cash flow from operations in the first
or second quarters of that fiscal year.
32
Competitive or other factors described under the heading "Risk Factors" in this
annual report may prevent us from achieving positive cash flow from operations
in the third or fourth fiscal quarters of 2004 and therefore, we may need to
undertake additional cost reduction activities or raise additional capital.
There can be no assurance that additional capital, if required, will be
available to us 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, a warrant exchange offer in May 2002 and a private
placement of our class A common stock and warrants and series D preferred stock
and warrants in April and May 2003.
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 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 was 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 October 2001 private placement.
On April 23, 2002, we commenced a warrant exchange offer that ended on May
31, 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 that private placement. The offer reduced the exercise price of
the warrants issued in the private placement to $2.50 per share of class A
common stock 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 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 otherwise contain the same 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.
During April and May 2003, the company completed a private placement of
common stock, convertible preferred stock and warrants to purchase shares of
common stock (the "2003 Private Placement") for aggregate gross proceeds of
approximately $2,085,000.
In the 2003 Private Placement the Company sold 1,682, 683 shares of class
A common stock and warrants to purchase 1,528,838 of class A common stock
providing gross proceeds of approximately $1,835,000 and 250 shares of series D
convertible redeemable preferred stock ("series D preferred) and warrants to
purchase 153,845 shares of class A common stock for $250,000. All warrants are
immediately exercisable and have an exercise price of $1.47 per share. The
warrants are exercisable until the fifth anniversary of the date of issuance. In
addition, the warrants are redeemable at the Company's option, if the closing
bid price of the Company's class A common exceeds 200% of the exercise price of
the warrants for 30 consecutive trading days. The redemption price is $0.10 per
share for each share issuable under the warrants.
The 250 shares of series D preferred are convertible into 192,307 shares
of class A common stock. The allocation of the proceeds from the sale of the
series D preferred between the fair value of the series D and the fair value of
the detachable warrants resulted in a beneficial conversion feature in the
amount of $106,730. The discount was immediately accreted and treated as a
deemed dividend to the holder of the series D preferred as all of the series D
preferred was eligible for conversion upon issuance.
33
In connection with the 2003 Private Placement, the Company incurred fees
of $325,750, of which $237,938 was payable in cash and $87,802 was paid by
issuing warrants to purchase 110,680 shares of class A common stock. These
warrants have substantially the same terms as the warrants issued in the 2003
Private Placement.
In connection with the 2003 Private Placement, the Company issued 48,706
shares of class A common stock and warrants to purchase 38,460 shares of class A
common stock in settlement of certain outstanding payables. The common stock and
warrants were valued at $50,000, the invoice amount of the services provided to
the Company.
Approximately 21%, or $432,000, of the gross proceeds from the 2003
Private Placement were received from directors and officers and entities with
which the Company's directors are affiliated.
Subsequent to the completion of the Company's private placement described
above, the Company determined that in order to comply with NASD Marketplace Rule
4350(i)(1)(A), the purchase price per share for the shares of class A common
stock purchased by directors and officers in the private placement should be
increased to market value, and on June 17, 2003 the directors and officers
agreed to do so. As a result, two directors and three officers agreed to pay an
additional $0.58 per share, or an aggregate of $85,502, for the shares of class
A common stock they purchased in the private placement.
In August 2003, the Company paid bonuses of approximately $40,000 to
reimburse the officers for their additional $0.58 per share payment.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of one year. Under the Financing Agreement, the Company may borrow, subject to
certain conditions, up to 80% of its outstanding accounts receivable up to a
maximum of $2,000,000. The applicable interest rate is the prime rate plus .35%
plus a collateral handling fee equal to .20% on the average daily outstanding
receivable balance, and interest is payable monthly. The Bank has been granted a
security interest in substantially all of the Company's assets. In connection
with the Financing Agreement, the Company issued the bank warrants to purchase
40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39, equal to the fair market
value of the Company's class A common stock on the date of closing of the
Financing Agreement. The warrants are exercisable for a seven-year period. The
fair value of the warrants in the amount of approximately $34,000 will be
amortized to interest expense over the term of the Financing Agreement. During
the year ended July 31, 2003 the Company recorded interest expense in the amount
of approximately $5,700 for the amortization of the fair value of the warrants.
At July 31, 2003, there were no amounts outstanding under the financing
arrangement. On October 22, 2003, the Company and Silicon Valley Bank amended
the Financing Agreement to extend the term of the agreement to August 31, 2004.
We have a net operating loss carryforward of approximately $75 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 decreased to $1,700,000 at July 31, 2003 from
$2,622,000 at July 31, 2002. This decrease is due to a $1,244,000 decrease in
accounts receivable, primarily attributable to the collection of $1,500,000 from
Triaton during the quarter ended October 31, 2002, and to a decrease in prepaid
and other current
34
assets of $183,000 mainly attributable to an impairment of software inventory of
$248,000, offset by a decrease of $173,000 in accounts payable and accrued
expenses as well as continued operating losses during the 2003 twelve months
ended July 31, 2003 (the "2003 Twelve Months"). Our cash and marketable
securities increased $157,000 at July 31, 2003 compared to July 31, 2002.
Analysis of Cash Flows
Cash used in operating activities decreased to $1,703,000 in 2003 compared
to cash used in operating activities of $4,293,000 during the year ended July
31, 2002. The decrease in 2003 is primarily the result of cost reduction
measures and the effects of a decrease in accounts receivable of $1.2 million.
On a sequential quarterly basis, cash used in operating activities for the
second, third and fourth fiscal quarters of 2003 was $1.2 million, $809,000 and
$159,000, respectively. The Company believes that it will achieve positive cash
flow from operations in the third and fourth quarters of the 2004 fiscal year.
We do not anticipate positive cash flows from operations in the first and second
quarters of that fiscal year. See "Liquidity and Capital Resources."
Cash provided by investing activities decreased to $10,000 in 2003 from
$464,000 provided by investing activities in 2002. During 2003 cash provided by
investing activities was primarily the result of $55,000 of proceeds from the
sales of marketable securities offset by purchases of property and equipment of
$58,000 and capitalized software of $16,000. Cash provided by investing
activities in the 2002 Twelve Months was primarily the result of $538,000 of
proceeds from the sale of marketable securities offset by investments in
capitalized software in the amount of $175,000. Additionally, $120,000 was
realized from the maturity of certificates of deposit.
Cash provided by financing activities was $1,888,000 in the 2003 Twelve
Months compared to cash provided by financing activities of $3,693,000 in the
2002 Twelve Months. Cash provided by financing activities in 2003 was primarily
due to the net proceeds of approximately $2,065,000 from the April 2003 and May
2003 private placement, offset by payments on capital leases of $180,000. Cash
provided by financing activities in 2002 was primarily due to the net proceeds
of $3,107,000 from the October 2001 private placement and proceeds form the
exercise of warrants of $700,000.
The Company enters into many contractual and commercial undertakings during the
normal course of business. The following table summarizes information about
certain of our obligations at July 31, 2003. The table should be read together
with the Notes to the Consolidated Financial Statements included in this Annual
Report on Form 10-K.
- ---------------------------------------------------------------------------------------------------------
Payments due by period
- ---------------------------------------------------------------------------------------------------------
Contractual Obligation Total Less than one year 1-2 years More than 2 years
- ---------------------------------------------------------------------------------------------------------
Capital lease obligations $ 206,765 $ 159,536 $ 47,229 --
- ----------------------------
Operating lease obligations 1,630,047 1,192,916 437,131 --
- ---------------------------------------------------------------------------------------------------------
Total $1,836,812 $1,352,452 $ 484,360 --
========== ========== ========== =======
- ----------------------------
35
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standard Board ("FASB") issued SFAS
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 adopted this standard
on August 1, 2002. The adoption of this standard did not have a significant
impact on the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 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 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 adopted SFAS 144 on August 1, 2002. The adoption
of this standard did not have a significant impact on the Company's consolidated
financial position or results of operations.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes 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.
The Company adopted SFAS 146 on January 1, 2003. The adoption of this standard
did not have a significant impact on the Company's consolidated financial
position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of Interpretation
No. 45 are applicable on a prospective basis to guarantees issued or modified
after December 31, 2002. The disclosure requirements in this Interpretation are
effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has provided information regarding commitments
and contingencies relating to guarantees in Note 13. The adoption of this
standard did not have a significant impact on the consolidated financial
position or results of operations.
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF 00-21 addresses certain aspects of the accounting by a
vendor for arrangements under which the vendor will perform multiple revenue
generating activities. The EITF will be effective for revenue arrangements
entered into in fiscal years and interim periods beginning after June 15, 2003.
Management believes that the adoption of this consensus will not have a
significant impact on the Company's consolidated financial position or results
of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" (
"SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation"
to provide alternative methods to account for the transition from the intrinsic
value method of recognition of stock-based employee compensation in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" to the fair
value recognition provisions under SFAS 123. SFAS 148 provides two additional
methods of transition and will no longer permit the SFAS 123 prospective method
to be used for fiscal years beginning after December 15, 2003. In addition, SFAS
148 amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both annual and interim financial statements about the method of
36
accounting for stock-based employee compensation and the pro-forma effects had
the fair value recognition provisions of SFAS 123 been used for all periods
presented. The adoption of SFAS 148 did not have a significant impact on the
Company's consolidated financial position and results of operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities". Interpretation No. 46 clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The Company adopted Interpretation No. 46 on January
31, 2003. The adoption of this standard did not have a material impact on the
Company's consolidated financial position or results of operations.
In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and
clarifies accounting for derivative instruments, and for hedging activities
under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable
characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the
circumstances in which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a financing
component that requires special reporting in the statement of cash flows. This
Statement is generally effective for contracts entered into or modified after
June 30, 2003 and did not have a significant impact on the Company's
consolidated financial position or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This Statement will become effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003. For financial instruments created before the issuance date of
this Statement and still existing at the beginning of the interim period of
adoption, transition shall be achieved by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value or other measurement attribute required by this
Statement. The adoption of this Statement is not expected to have a material
impact on the Company's consolidated financial position or results of
operations.
Risk Factors
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 under this 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.
37
Risks Relating to ICC
We have never earned a profit, may 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, 2003, we
had an accumulated deficit of approximately $80.7 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. We are primarily
focusing on our ICC.NET service and its success, as well as the success of our
other services, depends to a large extent on the future of business-to-business
electronic commerce, our ability to compete in the marketplace and our ability
to earn a profit, each of which is uncertain. As a result, we may incur
additional losses in the near future.
Our expected revenue growth for the foreseeable future is almost entirely
dependent on the success of our ICC.NET service. If our revenues grow at a
slower rate than we anticipate, or decrease, 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 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 Inc.; GXS, Global eXchange
Services Inc.; International Business Machines Corporation Global Services;
Sterling Commerce, Inc.; EasyLink Services Corp.; and Kleinschmidt Inc.
Our market is characterized by intense price competition and rapidly
changing technology, customer demands and innovation. The Internet's growth and
the intense competition in our industry resulted in significant changes.
Traditional VAN's such as GXS and Inovis have been sold by their parent
companies. GXS was acquired by Francisco Partners, Inovis was spun off from
Peregrine Systems, Inc. and acquired by Golden Gate Capital Inc. We believe that
much of this activity is attributed to the impact of the Internet on traditional
VAN's.
Our principal competitors have significant existing customer relationships
and larger financial, marketing, customer support, technical and other resources
than we do. As a result, they may be able to respond more quickly to changing
technology and changes in customer requirements or be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to potential customers and employees, or be able to
devote greater resources to the development, promotion and sale of their
services than we can. As a result, we may not be successful in competing against
our competitors.
New competition is emerging in the form of web services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. ICC has enhanced its technologies to communicate with
these AS2-based technologies. Competitors providing these alternatives include
Cyclone Corporation and Inovis. 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.
Our catalog service competes with Quick Response Systems Corporation, or
QRS, QRS and Global eXchange Services have dominated the catalog service
industry for more than ten years, but we believe that our catalog pricing and
functionality may create competitive advantages for our service.
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 April 2002, two of our competitors, GXS and Sterling
Commerce, terminated existing interconnect agreements with us and we made
alternative arrangements to serve our customers.
38
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, 2003, we had unrestricted cash and marketable securities
in the amount of approximately $2.4 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. 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 $75
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.
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 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 or other proposed services that respond to
technological change or customer demands, our business will suffer.
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 online 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
39
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.
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 which 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.
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. 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.
Risks Relating to the Internet and Online Commerce Aspects of Our Business
If Internet usage does not continue to grow or if 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
40
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.
Government regulation and legal uncertainties relating to the Internet
could harm our business. Changes in the regulatory environment in the United
States and other countries could decrease our revenues and increase our costs.
The Internet is largely unregulated and the laws governing the Internet remain
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy and taxation apply to the Internet. In addition,
because of increasing popularity and use of the Internet, any number of laws and
regulations may be adopted in the United States and other countries relating to
the Internet or other online services covering issues such as:
o user privacy;
o security;
o pricing and taxation;
o content; and
o distribution.
Costs of transmitting documents and data could increase, which would harm
our business and operating results. The cost of transmitting documents and data
over the Internet could increase. We may not be able to increase our prices to
cover these rising costs. Also, foreign and state laws and regulations relating
to the provision of services over the Internet are still developing. If
individual states or foreign countries impose taxes or laws that negatively
impact services provided over the Internet, our cost of providing our ICC.NET
and other services may increase.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is primarily exposed to interest rate risk, equity risk and
credit risk.
Interest Rate Risk - Interest rate risk refers to fluctuations in the
value of a security resulting from changes in the general level of interest
rates. Investments that are classified as cash and cash equivalents have
original maturities of three months or less. Changes in interest rates may
affect the value of these investments.
Equity Risk - Refers to the change in the value of investments in common
stock. The Company has investments in marketable common stocks that are subject
to price fluctuation risk.
Credit Risk - Our accounts receivables are subject, in the normal course
of business, to collection risks. We regularly assess these risks and have
established policies and business practices to protect against the adverse
effects of collection risks. As a result we do not anticipate any material
losses in this area.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of this
annual report.
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Our management, including our chief executive officer and chief financial
officer, have carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of July 31, 2003, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Based upon that evaluation, our chief executive
officer and chief financial officer have concluded that as of such date, our
disclosure controls and procedures in place are adequate to ensure material
information and other information requiring disclosure is identified and
communicated on a timely basis. There were no significant changes in the
registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
42
PART III
The information required to be filed by Part III (Items 10, 11, 12, 13 and
14) are hereby incorporated by reference from the Company's definitive proxy
statement (to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A), which proxy statement will be filed no later than 120 days
after July 31, 2003.
43
PART IV
Item 15. Financial Statements, Financial Schedules, Exhibits 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 (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(i).6 Certificate of Designations-- Series D Preferred Stock (8)
3(ii).1 Amended and Restated 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)
4.7 Form of Warrant Agreement issued in the April 30, 2003 and May 1,
2003 private placement (15)
4.8 Form of Registration Rights Agreement dated April 30, 2003, among
Internet Commerce Corporation and the purchasers of shares of
class A common stock identified therein (15)
44
4.9 Form of Registration Rights Agreement dated April 30, 2003,
between Internet Commerce Corporation and Blue Water Venture Fund
II, L.L.C. (15)
4.10 Warrant Agreement dated May 30, 2003 by and between Silicon Valley
Bank, a California-chartered bank ("SVB") and the Company. *
4.11 Registration Rights Agreement dated as of May 30, 2003 by and
between SVB and the Company. *
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 Master Agreement between Cable & Wireless PLC and ICC executed on
November 24, 1999 (7)
10.5 Amended and restated Stock Option Plan (9)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 Joint Services Agreement, between ICC and Hightech International
Services GmbH (a wholly-owned subsidiary of ThyssenKrupp Services
GmbH) executed on July 28, 2000 (14)
10.11 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)
10.12 License agreement with Triaton dated July 2002 (13)
10.13 Subscription agreement dated October 29, 2001 by and between ICC
and Amaranth Trading LLC (14)
10.14 Form of Subscription Agreement dated October 29, 2001 by and among
ICC and purchasers identified therein (14)
10.15 Form of Subscription Agreement dated as of April 30, 2003, among
Internet Commerce Corporation and the purchasers of shares of
class A common stock identified therein (15)
10.16 Form of Subscription Agreement dated as of April 30, 2003, between
Internet Commerce Corporation and Blue Water Venture Fund II,
L.L.C. for the purchase of shares of Series D Prefernred Stock
(15)
10.17 Accounts Receivable Financing Agreement dated as of May 30, 2003
by and between SVB and the Company. *
10.18 First Loan Modification Agreement dated as of October 22, 2003 by
and between SVB and the Company. *
10.19 Intellectual Property Security Agreement dated as of May 30, 2003
by and between SVB and the Company. *
23 Consent of Deloitte & Touche LLP *
31.1 Certificate of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 *
45
31.2 Certificate of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- -----------------
* Filed herewith
(1) Incorporated by reference to ICC's registration statement on Form S-3
(File no. 333-80043), as filed with the Securities and Exchange Commission
on June 4, 1999.
(2) Incorporated by reference to ICC's Annual Report on Form 10-KSB for the
year ended July 31, 1998, as filed with the Securities and Exchange
Commission on October 29, 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 Quarterly Report on Form 10-QSB for the
quarter ended October 31, 1997, as filed with the Securities and Exchange
Commission on December 12, 1997.
(5) Incorporated by reference to Amendment No. 3 to ICC's registration
statement on Form S-3 (File no. 333-80043), as filed with the Securities
and Exchange Commission on October 18, 1999.
(6) Incorporated by reference to ICC's Current Report on Form 8-K dated June
30, 1999, as filed with the Securities and Exchange Commission on July 1,
1999.
(7) Incorporated by reference to ICC's Current Report on Form 8-K dated
November 24, 1999, as filed with the Securities and Exchange Commission on
December 1, 1999.
(8) Incorporated by reference to Amendment No. 1 to ICC's registration
statement on Form S-3 (File no. 333-93301), as filed with the Securities
and Exchange Commission on February 8, 2000.
(9) Incorporated by reference to ICC's proxy statement for the annual meeting
of stockholders for the year ended July 31, 1999, as filed with the
Securities and Exchange Commission on May 23, 2000.
(10) Incorporated by reference to ICC's Current Report on Form 8-K dated June
14, 2000, as filed with the Securities and Exchange Commission on June 15,
2000.
(11) Incorporated by reference to ICC's Current Report on Form 8-K dated August
2, 2000, as filed with the Securities and Exchange Commission on August
11, 2000.
(12) Incorporated by reference to ICC's Annual Report on Form 10-KSB for the
year ended July 31, 2000, as filed with the Securities and Exchange
Commission on October 13, 2000.
(13) Incorporated by reference to ICC's registration statement on Form S-3
(file No. 333-99059), as filed with the Securities and Exchange Commission
on August 30, 2002.
(14) Incorporated by reference to ICC's Annual Report on Form 10-K for the year
ended July 31, 2002, as filed with the Securities and Exchange Commission
on October 31, 2002.
(15) Incorporated by reference to ICC's Current Report on Form 8-K dated April
30, 2003, as filed with the Securities and Exchange Commission on May 2,
2003.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the last fiscal quarter
covered by this annual report.
(c) Exhibits
See index to exhibits on page 44.
(d) Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page F-1.
46
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, 2003 and 2002, 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, 2003. Our audits also included the financial statement
schedule listed at Item 15. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Internet Commerce Corporation as of
July 31, 2003, and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 2003, 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 142, "Goodwill and Other Intangible
Assets," effective August 1, 2001.
/s/ Deloitte & Touche LLP
New York, New York
October 27, 2003
F-2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
July 31,
-------------------------------
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,283,339 $ 2,087,915
Marketable securities 91,941 130,691
Accounts receivable, net of allowance for doubtful
accounts of $220,281 and $241,684, respectively 1,732,890 2,976,472
Prepaid expenses and other current assets 295,474 478,070
------------ ------------
Total current assets 4,403,644 5,673,148
Restricted cash 128,607 157,103
Property and equipment, net 556,812 1,151,864
Software development costs, net 127,841 326,588
Goodwill 1,211,925 2,194,067
Other intangible assets, net 2,151,000 3,107,000
Other assets 18,507 15,166
------------ ------------
Total assets $ 8,598,336 $ 12,624,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 918,337 $ 862,090
Accrued expenses 1,178,880 1,407,848
Accrued dividends - preferred stock 231,726 231,695
Deferred revenue 96,952 164,451
Capital lease obligation 148,189 181,870
Other current liabilities 129,985 203,454
------------ ------------
Total current liabilities 2,704,069 3,051,408
Capital lease obligation - less current portion 46,120 192,298
Other non-current liabilities 8,011 --
------------ ------------
Total liabilities 2,758,200 3,243,706
Commitments and contingencies
Stockholders' Equity:
Preferred stock - 5,000,000 shares authorized, including
10,000 shares of series A, 10,000 shares of series C, 250
shares of series D and 175 shares of series S:
Series A preferred stock - par value $.01 per share, none
issued and outstanding -- --
Series C preferred stock - par value $.01 per share, 44.76
votes per share; 10,000 shares issued and outstanding
(liquidation value of $10,231,726) 100 100
Series D preferred stock - par value $.01 per share, 769 votes
per share; 250 shares issued and outstanding (liquidation
value of $250,000) in 2003 3 --
Common stock:
Class A - par value $.01 per share, 40,000,000 shares authorized,
one vote per share; 13,797,566 and 11,679,964 shares issued and
outstanding, respectively 137,976 116,801
Class B - par value $.01 per share, 2,000,000 shares authorized,
six votes per share; none issued and outstanding -- --
Additional paid-in capital 87,489,583 85,401,277
Accumulated deficit (81,813,191) (75,808,873)
Accumulated other comprehensive income (loss) 25,665 (328,075)
------------ ------------
Total stockholders' equity 5,840,136 9,381,230
------------ ------------
Total liabilities and stockholders' equity $ 8,598,336 $ 12,624,936
============ ============
See notes to consolidated financial statements
F-3
INTERNET COMMERCE CORPORATION
Consolidated statements of operations
Year Ended July 31,
--------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenues:
Services $ 12,083,314 $ 11,221,796 $ 9,742,518
Technology license -- 3,000,000 --
------------ ------------ ------------
Total revenues 12,083,314 14,221,796 9,742,518
------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of
$118,762 and $325,834 in 2002 and 2001, respectively) 7,621,823 8,775,553 9,354,354
Impairment of software inventory 248,077 -- --
Impairment of capitalized software 148,479 -- --
Product development and enhancement 1,110,941 976,903 931,028
Selling and marketing (excluding non-cash compensation
of $29,690 and $94,294 in 2002 and 2001, respectively) 3,034,726 3,499,500 5,383,583
General and administrative (excluding non-cash compensation
of $139,415, $101,556 and $570,920 in 2003, 2002 and 2001,
respectively) 4,438,630 5,849,312 9,682,586
Non-cash charges for stock-based compensation, services
and legal settlements 139,415 250,008 991,048
Impairment of goodwill and acquired intangibles 982,142 1,710,617 16,708,479
------------ ------------ ------------
17,724,233 21,061,893 43,051,078
------------ ------------ ------------
Operating loss (5,640,919) (6,840,097) (33,308,560)
------------ ------------ ------------
Other income and (expense):
Interest and investment income 12,923 27,154 428,432
Investment gain (loss) (19,072) 121,022 116,599
Interest expense (39,326) (69,385) (73,569)
Impairment of marketable securities (317,924) -- --
Other income -- 213,753 51,859
------------ ------------ ------------
(363,399) 292,544 523,321
Loss before income taxes (6,004,318) (6,547,553) (32,785,239)
Income tax benefit -- -- 1,929,887
------------ ------------ ------------
Net loss (6,004,318) (6,547,553) (30,855,352)
Dividends on preferred stock (400,031) (364,987) (420,309)
Beneficial conversion feature relating to series D preferred
stock (106,730) -- --
Beneficial conversion feature for repricing and issuance of
warrants in warrant exchange offer -- (461,084) --
------------ ------------ ------------
Loss attributable to common stockholders $ (6,511,079) $ (7,373,624) $(31,275,661)
============ ============ ============
Basic and diluted loss per common share $ (0.53) $ (0.68) $ (3.57)
============ ============ ============
Weighted average number of common
shares outstanding - basic and diluted 12,303,367 10,867,447 8,767,752
============ ============ ============
F-4
Preferred Stock Common Stock
--------------------------------------------------------------------------------------------------
Series A Series C Series D Class A Class B
--------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
Balance - August 1, 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 deferred
compensation for
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 loss
----------------------------------------------------------------------------------------------------
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
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
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 the
deferred compensation
for restricted stock
Net loss
Unrealized loss -
marketable securities
Total comprehensive loss
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 Loss Stock Equity
------------------------------------------------------------------------------
Balance - August 1, 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 deferred
compensation for
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 loss (31,065,080)
---------------------------------------------------------------------------------
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 106,979 106,979
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
common stock and warrants 3,095,671 3,107,268
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 the
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 loss (6,665,900)
- ----------------------------------------------------------------------------------------------------------------
85,401,277 $(75,808,873) $(328,075) $ - $9,381,230
F-5
INTERNET COMMERCE CORPORATION
Consolidated Statements of Changes in Stockholders Equity and Other Comprehensive Income
Preferred Stock Common Stock
--------------------------------------------------------------------------------------------------
Series A Series C Series D Class A Class B
--------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
Balance - July 31, 2002 - $ - 10,000 $ 100 - $ - 11,679,964 $116,801 - $ -
Proceeds from private placement
of Series D preferred stock,
common stock and warrants
Common stock and warrants issued
for services 250 3 1,682,683 16,827
Common stock issued to directors 48,076 480
Proceeds from exercise of
employee stock options 71,703 716
Accrued dividends on preferred
stock 12,797 128
Common stock issued as payment
for dividends on preferred
stock
Forfeiture of cash related to
options issued in acquisition 302,343 3,024
Stock options issued for
consulting services
Warrants issued in connection
with accounts receivable
financing agreement
Net loss
Reclassification of net
unrealized loss on sale
Unrealized gain on
marketable securities
Impairment of marketable
securities
Total comprehesive loss
--------------------------------------------------------------------------------------------------
Balance - July 31, 2003 - $ - 10,000 $ 100 250 $ 3 13,797,566 $137,976 0 $ -
==================================================================================================
Accumulated Deferred
------------------------------------------------------------------------------
Additional Other Compensation Total
Paid-In Comprehensive Restricted Stockholders
Capital Deficit Loss Stock Equity
------------------------------------------------------------------------------
Balance - July 31, 2002 $ 85,401,277 $(75,808,873 $ (328,075) $ - $9,381,230
Proceeds from private placement
of Series D preferred stock,
common stock and warrants 1,830,734 1,847,564
Common stock and warrants issued
for services 49,520 50,000
Common stock issued to directors 83,950 84,667
Proceeds from exercise of
employee stock options 3,258 3,386
Accrued dividends on preferred
stock (400,031) (400,031)
Common stock issued as payment
for dividends on preferred
stock 396,977 400,001
Forfeiture of cash related to
options issued in acquisition 47,511 47,511
Stock options issued for
consulting services 42,248 42,248
Warrants issued in connection
with accounts receivable
financing agreement 34,139 34,139
Net loss (6,004,318) (6,004,318)
Reclassification of net
unrealized loss on sale 19,072 19,072
Unrealized gain on
marketable securities 16,744 16,744
Impairment of marketable
securities 317,924 317,924
----------
Total comprehesive loss (5,650,578)
-------------------------------------------------------------------------------
Balance - July 31, 2003 $87,489,583 $(81,813,191) $ 25,665 $ - $5,840,136
===============================================================================
F-6
Internet Commerce Corporation
Consolidated statements of cash flows
Year Ended July 31,
------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (6,004,318) $ (6,547,553) $(30,855,352)
Adjustments to reconcile net loss to net cash
used in operating activities:
Impairment of goodwill and intangible assets 982,142 1,710,617 16,708,479
Impairment of software inventory 248,077 -- --
Impairment of capitalized software 148,479 -- --
Impairment of marketable securities 317,924 -- --
Depreciation and amortization 1,678,166 2,132,467 3,693,664
Bad debt expense 43,501 223,107 261,640
Non-cash interest expense 5,705 -- --
Loss on disposal of fixed assets -- 10,453 6,370
Realized loss (gain) on sale of marketable
securities 19,072 (121,020) (116,599)
Non-cash charges for equity instruments issued
for compensation, services, change of control
and legal settlement 139,415 250,008 991,048
Deferred taxes -- -- (1,929,887)
Changes in:
Accounts receivable 1,200,081 (1,611,337) (485,326)
Prepaid expenses and other assets (40,388) (35,664) 253,854
Accounts payable 45,413 148,420 (300,042)
Accrued expenses (350,961) (285,000) 497,875
Deferred revenue (67,499) (142,314) (201,990)
Other liabilities (65,458) (24,735) 74,989
------------ ------------ ------------
Net cash used in operating activities (1,700,649) (4,292,551) (11,401,277)
------------ ------------ ------------
Cash flows from investing activities:
Payment for acquisitions, net of cash acquired -- -- (22,055)
Capitalization of software development costs (16,333) (175,034) (188,175)
Purchases of property and equipment (60,513) (49,535) (641,671)
Proceeds from sales of property and equipment -- 31,252 --
Proceeds from sales of marketable securities 55,494 537,535 270,720
Proceeds from maturity of certificate of deposits 28,496 119,532 247,228
------------ ------------ ------------
Net cash provided by (used in) investing
activities 7,144 463,750 (333,953)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and
warrants, net 250,000 -- --
Proceeds from issuance of common stock and
warrants, net 1,815,402 3,107,269 --
Proceeds from exercise of warrants -- 699,348 --
Proceeds from exercise of employee stock options 3,386 223,882 373,678
Payment of dividends -- (6,583) --
Payments of capital lease obligations (179,859) (330,687) (418,290)
------------ ------------ ------------
Net cash provided by (used in) financing activities 1,888,929 3,693,229 (44,612)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 195,424 (135,572) (11,779,842)
Cash and cash equivalents, beginning of period 2,087,915 2,223,487 14,003,329
------------ ------------ ------------
Cash and cash equivalents, end of period 2,283,339 2,087,915 2,223,487
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 33,621 $ 69,385 $ 73,569
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") 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 operation 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, 2003, ICC had cash and cash equivalents and marketable
securities of approximately $2,375,000. These resources, together
with the Company's accounts receivable financing agreement (Note 11)
are expected to provide the Company with sufficient liquidity to
continue in operation through July 31, 2004. However, if expenses
increase more than anticipated, or revenue does not increase as
anticipated because of competitive or other reasons, cash resources
may not be sufficient and the Company will require additional
financing. There can be no assurances that any financing will be
available or that the terms will be acceptable to the Company.
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its 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 includes 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 three to six
months. 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. The Company has a limited number of fixed fee data
mapping services
F-8
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
contracts. Under these arrangements the Company is required to
provide a specified number of maps for a fixed fee. Revenue from such
arrangements is recognized using the percentage-of-completion method
of accounting (see below).
Service Bureau revenue is 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 ("SOP 97-2"). 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 that revenue from software
arrangements involving multiple elements be allocated among 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. Furthermore, SOP 97-2 requires that revenue
be recognized as each element is delivered and the Company has no
significant performance obligations remaining. The Company's multiple
element arrangements generally consist of a software license and post
contract support. The Company allocates the aggregate revenue 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 these 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.
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 and electronic commerce consulting, EDI
education and training at seminars throughout 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 data mapping and 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
F-9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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 cycle and revenue
is recognized upon that acceptance.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees, deposits for EDI education and
training seminars 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
$326,598, $273,017 and $237,296 for the years ended July 31, 2003,
2002 and 2001, respectively. Costs associated with the
F-10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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, respectively. No amounts were capitalized in
fiscal 2003.
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 amounted to
$13,020 during the year ended July 31, 2003. The amounts amortized
during 2002 were insignificant and no amounts were amortized in
fiscal 2001 Development costs in the amount of $16,333, $122,437 and
$80,027 were capitalized under the provisions of SFAS 86 during the
fiscal years ended July 31, 2003, 2002 and 2001, respectively. During
2003, the Company recorded impairment charges of approximately
$149,000 for previously capitalized software development costs
related to in-process software development projects of its Service
Bureau. The Company decided not to complete these projects due to
unfavorable market conditions now and in the foreseeable future.
Stock-based compensation:
The Company accounts for stock-based compensation 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). SFAS
123 establishes a fair-value 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. Had
the compensation cost for the Company's stock options grants to
employees been determined based on the fair value at the grant dates
of awards consistent with the fair value method of SFAS 123, the
Company's net loss attributable to common stockholders and basic and
diluted loss per common share would have changed to the pro forma
amounts indicated below:
-----------------------------------------------------
2003 2002 2001
-----------------------------------------------------
Net loss, as reported $ (6,004,318) $ (6,547,553) $(30,855,352)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (5,153,242) (9,755,547) (14,959,286)
------------ ------------ ------------
Pro forma net loss $(11,157,560) $(16,303,100) $(45,814,638)
============ ============ ============
Basic and diluted loss per common share:
As reported $ (0.53) $ (0.68) $ (3.57)
Pro forma $ (0.91) $ (1.58) $ (5.23)
F-11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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 equity securities
underlying stock based compensation, the realizability of deferred
tax assets, the carrying value of goodwill, intangible assets and
long-lived 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 3).
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 141 "Business Combinations"
("SFAS 141") and SFAS 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.
F-12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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 of 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
3).
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).
Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standard Board ("FASB") issued
SFAS 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 adopted
this standard on August 1, 2002. The adoption of this standard did
not have a significant impact on the Company's consolidated financial
position or results of operations.
In August 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS 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 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 adopted SFAS 144 on August 1, 2002. The adoption of this
standard did not have a significant impact on the Company's
consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
supersedes 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. The Company adopted SFAS 146 on January 1, 2003.
The adoption of this standard did not have a significant impact on
the Company's consolidated financial position or results of
operations.
F-13
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others" which elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of Interpretation No.
45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company has
provided information regarding commitments and contingencies relating
to guarantees in Note 13. The adoption of this standard did not have
a significant impact on the consolidated financial position or
results of operations.
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables." EITF 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which the vendor will
perform multiple revenue generating activities. The EITF will be
effective for revenue arrangements entered into in fiscal years and
interim periods beginning after June 15, 2003. Management believes
that the adoption of this consensus will not have a significant
impact on the Company's consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of
FASB Statement No. 123" ( "SFAS 148"). SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation" to provide alternative
methods to account for the transition from the intrinsic value method
of recognition of stock-based employee compensation in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees"
to the fair value recognition provisions under SFAS 123. SFAS 148
provides two additional methods of transition and will no longer
permit the SFAS 123 prospective method to be used for fiscal years
beginning after December 15, 2003. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosure
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the pro-forma
effects had the fair value recognition provisions of SFAS 123 been
used for all periods presented. The adoption of SFAS 148 did not have
a significant impact on the Company's consolidated financial position
and results of operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation
of Variable Interest Entities". Interpretation No. 46 clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity investors
do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from
other parties. The Company adopted Interpretation No. 46 on January
31, 2003. The adoption of this standard did not have a significant
impact on the Company's consolidated financial position or results of
operations.
In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS 149"), which
amends and clarifies accounting for derivative instruments, and for
hedging activities under SFAS 133. Specifically, SFAS 149 requires
that contracts with comparable characteristics be accounted for
similarly. Additionally, SFAS 149 clarifies the circumstances in
which a contract with an initial net investment meets the
characteristics of a derivative and when a derivative contains a
financing component that requires special reporting in the statement
of cash flows. This Statement is generally effective for contracts
entered into or modified after June 30, 2003 and did not have a
significant impact on the Company's consolidated financial position
or results of operations.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
F-14
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This Statement will
become effective for financial instruments entered into or modified
after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. For
financial instruments created before the issuance date of this
Statement and still existing at the beginning of the interim period
of adoption, transition shall be achieved by reporting the cumulative
effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement
attribute required by this Statement. The adoption of this Statement
is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
On August 1, 2001, the Company adopted the provisions of SFAS 141,
"Business Combinations" ("SFAS 141") and SFAS 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 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 intangible assets with indefinite useful lives no
longer be amortized, but rather be tested at least annually for
impairment. 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.
Year Ended July 31,
-------------------------------------------------------------
2003 2002 2001
-------------------------------------------------------------
Reported net loss $ (6,004,318) $ (6,547,553) $ (30,855,352)
Add: Goodwill amortization -- -- 1,283,639
------------- ------------- --------------
Adjusted net loss $ (6,004,318) $ (6,547,553) $ (29,571,713)
============= ============= ==============
Reported basic and diluted loss per
common share $ (0.53) $ (0.68) $ (3.57)
Add: Goodwill amortization -- -- 0.15
------------- -------------- --------------
Adjusted basic and diluted loss per share $ (0.53) $ (0.68) $ (3.40)
============= ============== ==============
At July 31, 2003 and 2002, other intangible assets included the
proprietary data mapping technology acquired in the acquisition of
RTCI. The gross carrying value of the mapping technology was
$4,780,000 at July 31, 2003 and 2002, respectively. Accumulated
amortization relating to mapping technology was $2,629,000 and
$1,673,000 at July 31, 2003 and 2002, respectively. The data mapping
technology is being amortized over five years and amortization
expense has been recorded in cost of services.
The Company did not have any indefinite lived intangible assets that
were not subject to amortization as of July 31, 2003 and 2002. The
aggregate amortization expense for other intangible assets was
$956,000 for the each of the years ended July 31, 2003 and 2002.
F-15
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS (CONTINUED)
At July 31, 2003, estimated amortization expense for other intangible
assets for the remaining life of those assets are as follows:
Year Estimated Amortization Expense
---- ------------------------------
2004 $956,000
2005 $956,000
2006 $239,000
The changes in the carrying amount of goodwill for the years ended
July 31, 2002 and 2003, are as follows:
Professional
ICC.NET Service Bureau Services Total
----------------------------------------------------------------------------
Balance at August 1, 2001 $ 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
Impairment loss -- (982,142) -- (982,142)
----------------------------------------------------------------------------
Balance at July 31, 2003 $ 26,132 $ 1,185,793 $ -- $ 1,211,925
============================================================================
The goodwill of all reporting units is tested annually for impairment
as of August 1.
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in
revenues and operating income resulting primarily from the bankruptcy
of its largest customer. An impairment loss of $982,142 was
recognized as a result of this evaluation. The fair value of the
Service Bureau reporting unit was estimated using the net present
value of expected future cash flows.
Due to a continued decline in revenue throughout the course of fiscal
2002, continued operating losses and a significant reduction in
forecasted future operating profits, the Professional Services
reporting unit 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 reporting 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.
F-16
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
4. IMPAIRMENT OF SOFTWARE INVENTORY
In January 2003, the Company recorded an impairment charge of
approximately $248,000 for software inventory held by the
Professional Services segment based on historical and projected
sales, which indicated that its net carrying value was not
recoverable. The Company had previously recorded a write down
of $100,000 for software inventory in July 2002. Such software
inventory was classified as other current assets in the consolidated
balance sheet. The Company's carrying value of inventory at July 31,
2003 is not significant.
5. MARKETABLE SECURITIES
The following is a summary of available for sale securities:
Gross Unrealized
-----------------------
Cost Gains Losses Fair Value
--------- --------- --------- ----------
Equity investments - July 31, 2003 $ 66,275 $ 26,874 $ (1,209) $ 91,941
========= ========= ========= =========
Equity investments - July 31, 2002 $ 458,766 $ 9,601 $(337,676) $ 130,691
========= ========= ========= =========
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.
In January 2003, the Company recorded an impairment charge of
approximately $318,000 to write down available-for-sale marketable
securities due to an other than temporary decline in value.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Estimated July 31,
-----------------------------------------------
Useful Lives
(Years) 2003 2002
------------- ----------- -----------
Computers and office equipment 3 $ 3,071,911 $ 3,052,774
Furniture and fixtures 7 307,620 372,074
Purchased software 3 822,006 814,189
Leasehold improvements various 189,688 158,556
----------- -----------
4,391,225 4,397,593
Less accumulated depreciation and amortization (3,834,413) (3,245,729)
----------- -----------
$ 556,812 $ 1,151,864
=========== ===========
Depreciation and amortization expense related to property and
equipment, including property and equipment acquired under capital
leases, was approximately $589,000, $898,000 and $887,000 for the
years ended July 31, 2003, 2002 and 2001, respectively. At July 31,
2003, property and equipment acquired under capital leases had a cost
basis of $519,930.
F-17
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
7. ACCRUED EXPENSES
Accrued expenses consist of the following:
July 31,
-------------------------
2003 2002
---------- ----------
Employee compensation and severance $ 230,696 $ 405,701
Vacation 342,886 364,170
Professional fees 287,004 135,293
Lease abandonment 165,536 192,749
Other 152,758 309,935
---------- ----------
$1,178,880 $1,407,848
========== ==========
8. JOINT SERVICES AGREEMENT AND TECHNOLOGY LICENSE
In July 2002, the Company and Triaton GmbH ("Triaton") terminated a
joint services agreement between the parties executed in July 2000,
and amended in July of 2001. The Company and Triaton entered into a
new agreement that 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. Triaton 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 $1,500,000 in October 2002.
9. STOCKHOLDERS' EQUITY
2003 Private Placement of Common Stock and Preferred Stock:
During April and May 2003, the company completed a private placement
of common stock, convertible preferred stock and warrants to purchase
shares of common stock (the "2003 Private Placement") for aggregate
gross proceeds of approximately $2,085,000.
In the 2003 Private Placement the Company sold 1,682, 683 shares of
class A common stock and warrants to purchase 1,528,838 of class A
common stock providing gross proceeds of approximately $1,835,000 and
250 shares of series D convertible redeemable preferred stock
("series D preferred) and warrants to purchase 153,845 shares of
class A common stock for $250,000. All warrants are immediately
exercisable and have an exercise price of $1.47 per share. The
warrants are exercisable until the fifth anniversary of the date of
issuance. In addition, the warrants are redeemable at the Company's
option, if the closing bid price of the Company's class A common
exceeds 200% of the exercise price of the warrants for 30 consecutive
trading days. The redemption price is $0.10 per share for each share
issuable under the warrants.
The 250 shares of series D preferred are convertible into 192,307
shares of class A common stock. The allocation of the proceeds from
the sale of the series D preferred between the fair value of the
series D and the fair value of the detachable warrants resulted in a
beneficial conversion feature in the amount of $106,730. The discount
was immediately accreted and treated as a deemed dividend to the
holder of the series D preferred as all of the series D preferred
stock was eligible for conversion upon issuance.
F-18
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
In connection with the 2003 Private Placement, the Company incurred
fees of $325,750, of which $237,938 was payable in cash and $87,802
was paid by issuing warrants to purchase 110,680 shares of class A
common stock. These warrants have substantially the same terms as the
warrants issued in the 2003 Private Placement.
In connection with the 2003 Private Placement, the Company issued
48,076 shares of class A common stock and warrants to purchase 38,460
shares of class A common stock in settlement of certain outstanding
payables. The common stock and warrants were valued at $50,000, the
invoice amount of the services provided to the Company.
Approximately 21%, or $432,000, of the gross proceeds from the 2003
Private Placement were received from directors and officers and
entities with which the Company's directors are affiliated.
Subsequent to the completion of the Company's private placement
described above, the Company determined that in order to comply with
NASD Marketplace Rule 4350(i)(1)(A), the purchase price per share for
the shares of class A common stock purchased by directors and
officers in the private placement should be increased to market
value, and on June 17, 2003 the directors and officers agreed to do
so. As a result, two directors and three officers agreed to pay an
additional $0.58 per share, or an aggregate of $85,502, for the
shares of class A common stock they purchased in the private
placement. In August of 2003 the Company paid bonuses of
approximately $40,000 to reimburse the officers for their additional
$0.58 per share payment.
2001 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, 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
$0.10 per share issuable under the warrants.
In connection with the private placement, the Company incurred fees
of $152,511, 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. 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.
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, 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
F-19
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 recorded a deemed
dividend in the amount of $461,084 during the third quarter of fiscal
2002 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 warrant exchange offer, 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, series D 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,
2003 and 2002, there were 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.
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.
F-20
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
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 have no voting rights.
On July 1, 2002, the Company paid cash dividends of $6,583 to holders
of series A preferred stock.. On July 1, 2001, the Company issued
7,601 shares of class A common stock to holders of series A preferred
stock in payment of accrued dividends. On July 1, 2000, the Company
paid cash dividends of $181,772 to holders of series A preferred
stock.
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, 2003 and 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 stock.
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 at the option of the Company. 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.
On January 1, 2003, 2002 and 2001, the Company issued 302,343, 98,839
and 111,142 shares of class A common stock in payment of the
dividends on series C preferred stock, respectively. At July 31,
2003, 2002 and 2001, the Company had accrued $231,726, $231,695 and
$272,131 for dividends payable, respectively.
F-21
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
The total liquidation value of series C preferred stock was
$10,000,000 plus accrued dividends of $231,726 at July 31, 2003.
Series D Preferred Stock:
Series D preferred stock is convertible at the option of the holder
into 192,307 shares of class A common stock.
Series D preferred stock is redeemable, in whole or in part, by the
Company at the option of the Company at any time after April 30, 2005
if the price of class A common stock is greater than or equal to
$2.60 per share for thirty consecutive trading days. The redemption
price for each share of series D preferred stock is $1,000 plus any
accrued and unpaid dividends. Series D preferred shall have
preference as to assets over all other classes or series of common
and preferred stock of the Company, except for series C preferred, in
the event of any liquidation, dissolution, or winding up of the
Company. The holders of series D preferred are entitled to receive an
amount in cash equal to $1,000 per share plus any accrued and unpaid
dividends before any distribution is made to holders of common and
preferred stock, except for series C preferred stock.
The holders of the outstanding shares of series D preferred stock are
entitled to receive dividends at the discretion of the Board of
Directors.
Series D 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 D preferred stock is convertible on the
record date.
Warrants:
As of July 31, 2003, the following warrants to purchase class A
common stock were outstanding:
Number of Shares Exercise Price Expiration Date
---------------- -------------- ---------------
Consulting Warrants 18,000 (a) $ 9.94 March 31, 2004
C & W Warrants 400,000 (b) $ 22.21 January 12, 2005
2001 Private Placement Warrants 109,091 (c) $ 3.58 October 28, 2006
2001 Private Placement Commission Warrants 25,000 (d) $ 3.58 October 28, 2006
2002 Warrant Exchange Offer Warrants 263,715 (e) $ 3.50 April 24, 2007
ING Warrants 60,000 (e) $ 3.50 July 11, 2007
2003 Private Placement Warrants 1,307,671 (e) $ 1.47 April 30, 2008
2003 Private Placement Warrants 230,774 (e) $ 1.47 May 1, 2008
2003 Private Placement Commission Warrants 89,810 (f) $ 1.47 April 30, 2008
2003 Private Placement Commission Warrants 20,870 (f) $ 1.47 May 1, 2008
Silicon Valley Bank Warrants 40,000 (g) $ 1.39 May 30, 2010
a) Upon exercise of each warrant, holder is entitled to 1.36891 shares of
class A common stock.
b) Issued to C&W in a private placement. Upon exercise, holder is entitled to
one share of class A common stock.
c) Redeemable by the Company at $0.10 per warrant under certain conditions.
d) 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-22
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
e) Redeemable by the Company at $0.10 per warrant under certain conditions.
f) Issued to solicitation agents for their role in the April and May 2003
private placement. Redeemable by the Company at $0.10 per warrant under
certain conditions.
g) Issued in connection with the Company's Accounts Receivable Financing
Agreement (Note 11).
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 January 22, 2003, 47,760 assumed RTCI warrants expired. The
warrants were exercisable for an aggregate of 47,760 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.
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.
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 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
9. STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value at the date of grant for options
granted during the years ended July 31, 2003, 2002 and 2001 was
$1.04, $2.37 and $3.81 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,
-----------------------------------------
2003 2002 2001
-------- ------ --------
Risk-free interest rate 2.09% 3.77% 4.73%
Expected lives 3 3 3
Expected volatility 136% 140% 150%
Expected dividend yield 0% 0% 0%
The following table summarizes the Company's stock options at July
31, 2003, 2002 and 2001, as well as changes during the years then
ended:
Year ended July 31,
----------------------------------------------------------------------------------
(Shares in thousands) 2003 2002 2001
--------------------------- -------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- --------------------------- --------------------------
Options outstanding at
beginning of year 5,422.3 $ 9.62 4,517.7 $ 12.93 4,088.6 $ 18.39
Granted 342.0 $ 1.35 1,672.1 $ 3.08 1,145.0 $ 4.62
Acquisitions -- $ -- -- $ -- 349.1 $ 6.53
Forfeited (489.5) $ 11.58 (698.0) $ 16.03 (895.8) $ 26.79
Exercised (12.8) $ .26 (69.5) $ 3.22 (169.2) $ 2.08
------- --------- ------- --------- ------- ---------
Options outstanding at end of year 5,262.0 $ 8.92 5,422.3 $ 9.62 4,517.7 $ 12.93
======= ========= ======= ========= ======= =========
Options exercisable at end of year 4,406.2 $ 9.69 4,048.4 $ 7.53 2,966.0 $ 11.39
======= ========= ======= ========= ======= =========
The following table presents information relating to stock options
outstanding as of July 31, 2003:
(Shares in thousands)
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Remaining Exercise Exercise
Range of Exercise Prices Contractual Price Price
Shares Life Shares
---------------------------------------------------------------------------- ----------------------------
$ 0.26 - $ 1.30 635.5 5.5 $ 0.70 508.1 $ 0.60
$ 1.41 - $ 2.13 122.0 4.8 $ 1.67 94.7 $ 1.58
$ 2.50 - $ 4.22 2,479.6 7.3 $ 2.87 2,020.8 $ 2.84
$ 5.13 - $ 6.29 335.3 7.5 $ 5.16 303.6 $ 5.16
$ 11.50 - $ 17.00 573.6 6.1 $ 12.12 363.0 $ 12.15
$ 19.00 - $ 23.38 834.0 6.7 $ 19.21 834.0 $ 19.21
$ 34.50 - $ 40.00 154.0 6.3 $ 37.24 154.0 $ 37.24
$ 60.00 - $ 80.00 128.0 6.1 $ 68.25 128.0 $ 68.25
------------------------------------- ---------------------------
5,262.0 6.8 $ 8.92 4,406.2 $ 9.69
======= =======
The Company had 968,921 options available for grant under the Plan as
of July 31, 2003.
F-24
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
9. STOCKHOLDERS' EQUITY (CONTINUED)
Restricted stock:
On March 10, 2003, options and stock were awarded to a non-employee
member of the board of directors as compensation for consulting
services. This individual was awarded 20,000 shares of class A common
stock, valued at $18,000, which was recorded as a non-cash charge for
stock-based compensation during the year ended July 31, 2003. This
individual was also granted options to purchase 100,000 shares of
class A common stock. Options to purchase 60,000 shares at an
exercise price of $1.00 per share vest six months from the date of
issuance, and options to purchase 40,000 shares at an exercise price
of $1.25 per share vest one year from the date of issuance. The
options have a fair value of $67,000 of which $42,000 has been
recorded as a stock-based non-cash charge for services during year
ended July 31, 2003.
Each non-employee member of the board of directors receives annual
compensation of $25,000 for their current term of office, payable
quarterly, in class A common stock of he Company. The Company has
recorded a non-cash compensation charge of $79,167 in 2003 and has
issued 51,703 shares of class A common stock in 2003 which were fully
vested upon issuance.
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 Company's acquisition of
RTCI. Deferred stock-based compensation related to the restricted
stock of $730,957 was recorded at the time of the acquisition. 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 the 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 200,000 shares of class A common stock and warrants to
purchase 60,000 shares of class A common stock ING Capital. 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 Agreement
and Plan of Merger among ICC and RTCI.
10. INCOME TAXES
The Company's effective tax rate varied from the statutory federal
income tax rate as follows:
For the year ended July 31,
2003 2002 2001
---- ---- ----
Expected tax rate (benefit) (35.0)% (35.0)% (34.0)%
Increase (decrease) in taxes resulting from:
Non-deductible amortization and write-off of intangibles 5.7% 9.1% 15.7%
Other permanent differences 1.1% 1.5% 1.9%
State and local income tax (benefit), net of federal effect (4.0)% 25.9% (4.5)%
F-25
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
10. INCOME TAXES (CONTINUED)
Other (1.1)% (6.7)% --
Increase in valuation allowance 33.3% 5.2% 15.0%
----- ----- -----
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, 2003 and
2002 are as follows:
July 31,
2003 2002
------------ ------------
Deferred tax assets:
Accrued expenses $ 267,915 $ 262,768
Deferred revenues 30,682 65,780
Deferred rent 29,389 57,632
Property and equipment 83,767 199,217
Marketable securities 116,903 131,233
Credit for increasing research activity
carryforwards 85,275 --
Federal, state and local net operating loss
carryforwards 30,077,973 28,430,956
------------ ------------
30,691,904 29,147,586
Deferred tax liabilities:
Purchased intangibles (860,400) (1,242,800)
Capitalized software development costs (56,944) (130,636)
------------ ------------
(917,344) (1,373,436)
Net deferred tax asset before valuation
allowance 29,774,560 27,774,150
Valuation allowance (29,774,560) (27,774,150)
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, 2003 was $2,000,410.
The Company has a net operating loss carryforward for tax purposes of
approximately $75 million as of July 31, 2003. This carryforward
expires from 2007 to 2023.
The Internal Revenue Code and Income Tax Regulations contain
provisions which limit the use of available net operating loss
carryforwards in any given year should significant changes (greater
than 50%) in ownership interests occur. Due to the initial public
offering in 1995, the net operating loss carryover of approximately
$1.9 million incurred prior to the initial public offering is subject
to an annual limitation of approximately $400,000 until that portion
of the net operating loss is utilized or expires. Due to the private
placement of series A preferred stock, the net operating loss
carryover of approximately $18 million incurred prior to the private
placement is subject to an annual limitation of approximately $1
million until that portion of the net operating loss is utilized or
expires. Also, due to a 100% ownership change of RTCI, the acquired
net operating loss of approximately $6.5 million incurred prior to
the ownership change is subject to an annual limitation of
approximately $1.4 million until that portion of the net operating
loss is utilized or expires.
F-26
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
11. ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On May 30, 2003, the Company executed an Accounts Receivable
Financing Agreement ("Financing Agreement") with Silicon Valley Bank
("Bank") with a term of 1 year. Under the Financing Agreement, the
Company may borrow, subject to certain conditions, up to 80% of its
outstanding accounts receivable up to a maximum of $2,000,000.
Interest accrues at the prime rate plus .35% plus a collateral
handling fee equal to .20% on the average daily outstanding financed
receivable balance. Interest is payable monthly. The Bank has been
granted a security interest in substantially all of the Company's
assets. In connection with the Financing Agreement, the Company
issued the bank warrants to purchase 40,000 shares of the Company's
class A common stock. The warrants are immediately exercisable at an
exercise price of $1.39, equal to the fair market value of the
Company's class A common stock at the date of closing of the
Financing Agreement. The warrants are exercisable for a seven-year
period. The fair value of the warrants in the amount of approximately
$34,000 is being amortized to interest expense over the term of the
Financing Agreement. During the year ended July 31, 2003 the Company
recorded interest expense in the amount of approximately $5,700 for
the amortization of the fair value of the warrants. At July 31, 2003,
there were no amounts outstanding under the financing arrangement. On
October 22, 2003, the Company and Silicon Valley Bank amended the
Financing Agreement to extend the term of the agreement to August 31,
2004.
12. COMMITMENTS AND CONTINGENCIES
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, 2003 as the Company has incurred losses since the
inception of the plan.
Obligations under operating leases:
The Company has non-cancelable operating lease commitments for office
space expiring on various dates through July 2005. Rent expense under
these leases was approximately $1,047,000, $1,319,000 and $1,559,000
for the years ended July 31, 2003, 2002 and 2001, respectively.
Certain leases contain escalation clauses for operating expenses.
At July 31, 2003, minimum future rental payments due under
non-cancelable operating leases are as follows:
2004 1,192,916
2005 437,131
---------------
$1,630,047
===============
At July 31, 2003, the Company has ceased utilizing certain office
space leased under a non cancelable operating lease. The future lease
payments for this space in the amount of $166,000, have been recorded
as a liability at July 31, 2003.
Obligations under capital leases:
The Company has various non-cancelable capital leases for computer
equipment and software. At July 31, 2003, minimum future lease
payments under non-cancelable capital leases were as follows:
F-27
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
2004 $ 159,536
2005 47,229
---------
206,765
Amount representing interest 12,456
---------
Present value of future minimum lease payments 194,309
Less current portion (148,189)
---------
Capital lease obligation - less current portion $ 46,120
=========
Representations and Warranties:
Guarantees and Indemnifications - As part of its standard license
agreements, the Company agrees to indemnify its customers against
liability if the Company's products infringe a third party's
intellectual property rights. Historically, the Company has not
incurred any significant costs related to performance under these
indemnities. As of July 31, 2003, the Company was not subject to any
litigation alleging that the Company's products infringe the
intellectual property rights of any third parties.
Letters of credit:
The Company has provided cash collateral for letters of credit in the
aggregate amount of $128,607 and $157,103, at July 31, 2003 and 2002,
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.
Separation Agreement:
In March 2001, ICC entered into a Separation Agreement with its
former President and Chief Executive Officer which required the
Company to pay $437,500, payable in equal monthly installments of
$29,167 commencing on May 1, 2001. The final payment under this
agreement was made in August of 2002.
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 number and credit
worthiness of its customers. Receivables are stated at estimated net
realizable value, which approximates fair value.
For the year ended July 31, 2003, no single customer accounted for
more than 10% of revenue. 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 more than 10% of accounts receivable
at July 31, 2003. The Company had one customer that accounted for
approximately 52% of accounts receivable at July 31, 2002. During
October 2002, the full amount of this receivable was collected.
F-28
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements
13. CONCENTRATION OF CREDIT RISK (CONTINUED)
Revenue by geographic region, based on customer location is as
follows:
North
Year ended July 31, America Europe Other Total
--------------------- ----------- ----------- ---------- -----------
2003 $12,054,455 $ 22,947 $ 5,912 $12,083,314
2002 11,171,976 3,024,118 25,702 14,221,796
2001 8,665,395 1,072,860 4,263 9,742,518
14. BUSINESS SEGMENT INFORMATION
The Company has three operating segments as follows:
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
In 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 for each period presented has been restated 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 years ended July 31, 2003 and
2002:
Service Professional
ICC.NET Bureau Services Total
------------- ------------ ------------- ------------
Year Ended - July 31, 2003
Revenues from external customers $ 8,866,921 $ 1,487,946 $ 1,728,447 $ 12,083,314
============ ============ ============ ============
Operating loss (1) $ (3,665,955) $ (1,132,102) $ (842,862) $ (5,640,919)
Other income, net (338,978) -- (24,421) (363,399)
------------ ------------ ------------ ------------
$ (4,004,933) $ (1,132,102) $ (867,283) $ (6,004,318)
============ ============ ============ ============
Supplemental segment information:
Amortization and depreciation $ 1,469,858 $ 86,775 $ 119,106 $ 1,675,739
Impairment of software inventory -- -- 248,077 248,077
Impairment of capitalized software -- 148,479 -- 148,479
Impairment of marketable securities 317,924 -- -- 317,924
Impairment of acquired intangibles -- 982,142 -- 982,142
Non-cash charges for stock-based
compensation and services 139,415 -- -- 139,415
As of July 31, 2003
Property and Equipment, net $ 283,855 $ 42,801 $ 230,156 $ 556,812
Capitalized software, net -- 127,842 -- 127,842
Acquired identified intangibles, net 2,151,000 -- -- 2,151,000
Goodwill, net 26,132 1,185,793 -- 1,211,925
------------ ------------ ------------ ------------
Long lived assets, net $ 2,460,987 $ 1,356,436 $ 230,156 $ 4,047,379
============ ============ ============ ============
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
============ ============ ============ ============
(1) Commencing in the second fiscal quarter of 2003, certain costs for
executive management, human resources, selling and marketing, accounting
and finance have been allocated to the Company's operating segments based
on the level of services performed for each segment. For cost reduction
purposes, these functions were centralized and are now performed by
ICC.NET personnel. For the year ended July 31, 2003, ICC.NET allocated
$333,000 of these costs to the Service Bureau and Professional Services
segments in the amounts of $135,000 and $198,000, respectively.
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,
2003 2002 2001
-------------- ----------------- -----------
Equipment acquired under capital leases -- $ 121,367 $ 44,945
Issuance of common stock for dividends on preferred stock 400,031 400,000 422,784
Private placement commissions 87,802 117,511 --
Common stock and warrants 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. 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 2003
Revenues, net $ 3,050 $ 2,837 $ 3,094 $ 3,102
Total costs and expenses 4,013 4,400 4,162 5,149
------- ------- ------- -------
Operating loss (963) (1,563) (1,068) (2,047)
Interest and investment income, net (18) (324) (6) (15)
Income tax benefit -- -- --
------- ------- ------- -------
Net loss $ (981) $(1,887) $(1,074) $(2,062)
======= ======= ======= =======
Basic and diluted loss per common share $ (0.09) $ (0.17) $ (0.11) $ (0.16)
======= ======= ======= =======
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)
======= ======= ======= =======
F-31
INTERNET COMMERCE CORPORATION
Schedule II. Valuation and Qualifying Accounts
Balance at Additions
Beginning of Charged to Additions Balance at End
Period Expense Acquired Deductions of Period
------------ ----------- ---------- ---------- --------------
Year ended July 31, 2003
Allowance for doubtful accounts $ 241,684 $ 43,501 $ (64,904) $ 220,281
Allowance on deferred tax asset $27,774,150 $ 2,000,410 $ -- $ -- $29,774,560
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
F-32
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(i).6 Certificate of Designations-- Series D Preferred Stock (8)
3(ii).1 Amended and Restated 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)
4.7 Form of Warrant Agreement issued in the April 30, 2003 and May 1,
2003 private placement (15)
4.8 Form of Registration Rights Agreement dated April 30, 2003, among
Internet Commerce Corporation and the purchasers of shares of
class A common stock identified therein (15)
33
4.9 Form of Registration Rights Agreement dated April 30, 2003,
between Internet Commerce Corporation and Blue Water Venture Fund
II, L.L.C. (15)
4.10 Warrant Agreement dated May 30, 2003 by and between Silicon Valley
Bank, a California-chartered bank ("SVB") and the Company. *
4.11 Registration Rights Agreement dated as of May 30, 2003 by and
between SVB and the Company. *
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 Master Agreement between Cable & Wireless PLC and ICC executed on
November 24, 1999 (7)
10.5 Amended and restated Stock Option Plan (9)
10.6 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)
10.7 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)
10.8 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)
10.9 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)
10.10 Joint Services Agreement, between ICC and Hightech International
Services GmbH (a wholly-owned subsidiary of ThyssenKrupp Services
GmbH) executed on July 28, 2000 (14)
10.11 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)
10.12 License agreement with Triaton dated July 2002 (13)
10.13 Subscription agreement dated October 29, 2001 by and between ICC
and Amaranth Trading LLC (14)
10.14 Form of Subscription Agreement dated October 29, 2001 by and among
ICC and purchasers identified therein (14)
10.15 Form of Subscription Agreement dated as of April 30, 2003, among
Internet Commerce Corporation and the purchasers of shares of
class A common stock identified therein (15)
10.16 Form of Subscription Agreement dated as of April 30, 2003, between
Internet Commerce Corporation and Blue Water Venture Fund II,
L.L.C. for the purchase of shares of Series D Prefernred Stock
(15)
10.17 Accounts Receivable Financing Agreement dated as of May 30, 2003
by and between SVB and the Company. *
10.18 First Loan Modification Agreement dated as of October 22, 2003 by
and between SVB and the Company. *
10.19 Intellectual Property Security Agreement dated as of May 30, 2003
by and between SVB and the Company. *
23 Consent of Deloitte & Touche LLP *
31.1 Certificate of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 *
34
31.2 Certificate of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 *
32.1 Certification of the Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 *
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
- -----------------
* Filed herewith
(1) Incorporated by reference to ICC's registration statement on Form S-3
(File no. 333-80043), as filed with the Securities and Exchange Commission
on June 4, 1999.
(2) Incorporated by reference to ICC's Annual Report on Form 10-KSB for the
year ended July 31, 1998, as filed with the Securities and Exchange
Commission on October 29, 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 Quarterly Report on Form 10-QSB for the
quarter ended October 31, 1997, as filed with the Securities and Exchange
Commission on December 12, 1997.
(5) Incorporated by reference to Amendment No. 3 to ICC's registration
statement on Form S-3 (File no. 333-80043), as filed with the Securities
and Exchange Commission on October 18, 1999.
(6) Incorporated by reference to ICC's Current Report on Form 8-K dated June
30, 1999, as filed with the Securities and Exchange Commission on July 1,
1999.
(7) Incorporated by reference to ICC's Current Report on Form 8-K dated
November 24, 1999, as filed with the Securities and Exchange Commission on
December 1, 1999.
(8) Incorporated by reference to Amendment No. 1 to ICC's registration
statement on Form S-3 (File no. 333-93301), as filed with the Securities
and Exchange Commission on February 8, 2000.
(9) Incorporated by reference to ICC's proxy statement for the annual meeting
of stockholders for the year ended July 31, 1999, as filed with the
Securities and Exchange Commission on May 23, 2000.
(10) Incorporated by reference to ICC's Current Report on Form 8-K dated June
14, 2000, as filed with the Securities and Exchange Commission on June 15,
2000.
(11) Incorporated by reference to ICC's Current Report on Form 8-K dated August
2, 2000, as filed with the Securities and Exchange Commission on August
11, 2000.
(12) Incorporated by reference to ICC's Annual Report on Form 10-KSB for the
year ended July 31, 2000, as filed with the Securities and Exchange
Commission on October 13, 2000.
(13) Incorporated by reference to ICC's registration statement on Form S-3
(file No. 333-99059), as filed with the Securities and Exchange Commission
on August 30, 2002.
(14) Incorporated by reference to ICC's Annual Report on Form 10-K for the year
ended July 31, 2002, as filed with the Securities and Exchange Commission
on October 31, 2002.
(15) Incorporated by reference to ICC's Current Report on Form 8-K dated April
30, 2003, as filed with the Securities and Exchange Commission on May 2,
2003.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the last fiscal quarter
covered by this annual report.
(c) Exhibits
See index to exhibits on page 44.
(d) Financial Statement Schedule
See index to Consolidated Financial Statements and Schedule on page F-1.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: October 29, 2003
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
36
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ G. Michael Cassidy President, Chief Executive October 29, 2003
- -------------------------- Officer and Director
G. Michael Cassidy (Principal Executive Officer)
/s/ Walter M. Psztur Chief Financial Officer October 29, 2003
- -------------------------- (Principal Financial
Walter M. Psztur and Accounting Officer)
/s/ Richard J. Berman Director October 29, 2003
- --------------------------
Richard J. Berman
/s/ Spencer I. Browne Director October 29, 2003
- --------------------------
Spencer I. Browne
/s/ Fred Ciporen Director October 29, 2003
- --------------------------
Fred Ciporen
/s/ Kim D. Cooke Director October 29, 2003
- --------------------------
Kim D. Cooke
/s/ Charles C. Johnston Director October 29, 2003
- --------------------------
Charles C. Johnston
/s/ Arthur R. Medici Director October 29, 2003
- --------------------------
Arthur R. Medici
37