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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 2002
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained herein, and will not be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
As of October 29, 2002 the issuer had outstanding 11,697,967 shares of
Class A Common Stock. The aggregate market value of the Class A Common Stock
held by nonaffiliates as of October 29, 2002 was approximately $31,004,647,
based on a closing price for the Class A Common Stock of $3.04 on the Nasdaq
National Market on that date.
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INTERNET COMMERCE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I ..................................................................... 1
Item 1. Business ................................................. 1
Item 2. Description of Properties ................................ 13
Item 3. Legal Proceedings ........................................ 13
Item 4. Submission of Matters to a Vote of Security Holders ...... 13
PART II .................................................................... 14
Item 5. Market for Internet Commerce Corporation's Common Equity
and Related Stockholder Matters .......................... 14
Item 6. Selected Consolidated Financial Data ..................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 33
Item 8. Financial Statements and Supplementary Data .............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ...................... 39
PART III ................................................................... 39
Item 10. Directors and Executive Officers of Internet Commerce
Corporation .............................................. 39
Item 11. Executive Compensation ................................... 39
Item 12. Security Ownership of Certain Beneficial Owners
and Management ........................................... 39
Item 13. Certain Relationships and Related Transactions ........... 39
PART IV .................................................................... 40
Item 14. Financial Statements, Financial Statement Schedules,
Exhibits and Reports on Form 8-K ......................... 42
Signatures ........................................................ 43
Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002...........................................45
PART I
Item 1. Business
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this annual report regarding our
financial position, business strategy and plans and objectives of management for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this annual
report, the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
statements reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various factors
including, without limitation, those described below the heading "Overview",
those described starting on page 33 of this annual report under the heading
"Risk Factors"and in our registration statements and periodic reports filed with
the Securities and Exchange Commission under the Securities Act and the Exchange
Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described in this
annual report as anticipated, believed, estimated, expected or intended.
Overview
Internet Commerce Corporation, a leader in the e-commerce
business-to-business communication services market, provides complete electronic
commerce ("EC") infrastructure solutions.
Our business operates in three segments. These three segments are:
o ICC.NET (formerly named CommerceSense(R)) - Our ICC.NET
service, the Company's global Internet-based value added
network or VAN, uses the Internet and our proprietary
technology to deliver our customers' documents and data files
to members of their trading communities, many of which may
have incompatible systems, by translating the documents and
data files into any format required by the receiver. We
believe that our ICC.NET service has significant advantages
over traditional VANs, and email-based and other
Internet-based software systems, because our service is
provided at a lower cost, with greater transmission speed and
offers more features. During the fourth fiscal quarter of
2002, the Company completed the integration of its data
mapping and XML services groups into its ICC.NET business
segment. These products and services had previously been
included in our Professional Services segment. This action was
taken to more closely align these data transfer components
as they are now primarily utilized to support our ICC.NET VAN
service. ICC.NET provides the following services:
o Traditional VAN services -- our ICC.NET service provides
the full suite of traditional VAN services, but uses the
Internet to provide cost savings and increased
capabilities for our customers;
o Electronic data interchange ("EDI") for web-based
retailers -- our ICC.NET service provides an electronic
document and data file delivery link between web-based
retailers and their vendors that require that documents
and data files be transmitted using EDI format;
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o EDI-to-fax service -- our ICC.NET service can translate
electronic documents into fax format and send the
documents by fax to our customers' trading partners that
are not equipped to receive electronically transmitted
documents;
o Data Mapping -- our data mapping capabilities maximize
the value of our network by providing in-line data
translation facilities to our customers.
o Large-scale electronic document management and delivery
-- our ICC.NET service can transmit large-scale non-EDI
electronic documents and data files and provide
real-time delivery, archiving, security, authentication
and audit services;
o Point-of-Sale service --The exchange of Point of Sale
data is growing in the retail industry to improve supply
chain efficiency. Up to now, the cost of moving large
amounts of Point of Sale information electronically has
been prohibitive. ICC offers a Point of Sale service
that allows retailers and their suppliers to exchange
this data quickly and effectively utilizing the ICC.NET
Service; and
o ICC.CATALOG - Our web-based electronic vendor product
catalog service that transforms static vendor product
information into a pro-active purchasing tool through
the direct creation of EDI compliant purchase orders
that can be transmitted over the ICC.NET service; by
synchronizing trading partner data in real-time,
including graphic images of all products; and by
offering sophisticated navigation and advanced search
capabilities to streamline product comparison and
ordering information.
o Service Bureau - Our service bureau manages and translates the
data of small and mid-sized companies that exchange EDI data
with large companies and provides the following services:
o Receives electronic purchase orders from large retailers
and converts the purchase orders into hard copies or
other alternative formats and delivers those documents
to their suppliers that are our customers;
o Converts paper or other alternatively formatted invoices
from our customers into EDI format that is transmitted
to their trading partners; and
o ScanPak Professional provides UPC (Universal Product
Code) services for ASN (Advanced Ship Notice) Casing &
UCC (Uniform Code Council) 128 labels.
o Professional Services - Our professional services segment
facilitates the development and operation of comprehensive
business-to-business e-commerce solutions. We provide the
following professional services:
o EC infrastructure solutions by providing mission
critical e-commerce consulting, software, outsourced
services and technical resource management;
o HIPAA (Health Insurance Portability and Accountability
Act) impact and data gap analysis for health care
providers and payers. We can design, build, test and
rollout systems to ensure compliance with Federally
mandated standards for health care data. Through
strategic partnerships, including Emanio, Inc., we offer
third-party translators, combined with our ICC.NET data
mapping capabilities; and
o A series of product-independent EDI seminars for
e-commerce users. The seminars are hosted by leading
universities and training facilities in the United
States. We also develop in-house EDI training programs
and offer public seminars for understanding and
implementing HIPAA regulations.
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We are subject to various risk factors that are described under the
heading "Risk Factors" starting on page 27 of this annual report.
Corporate Background
The Company was incorporated under the name Infosafe Systems, Inc. in
November 1991 in the State of Delaware. Our principal executive offices are
located at 805 Third Avenue, New York, NY 10022. Our telephone number at that
address is (212) 271-7640. References in this annual report to the "Company,"
"ICC," "we" or "us" mean Internet Commerce Corporation, a Delaware corporation,
and its subsidiary on a consolidated basis, unless the context otherwise
requires.
Industry Background
Although the Internet has become an important new sales channel, we
believe that its primary value will be in achieving business efficiencies and
cost savings by expanding global business-to-business connectivity.
In an increasingly global economy, we believe that improvements in speed
and efficiency in the supply chain between businesses are important and that
improvements in the capacity of a business to purchase and sell goods and
services or raw materials within its business community become an important
factor in its ability to compete. Thus, for example, in a just-in-time economy,
timeliness, and not price, may be the most important component in creating a
competitive advantage.
The speed and efficiency of the supply chain are hindered by
incompatibilities in technologies and methodologies used to communicate business
information among trading communities, which slow down the flow of information
and create bottlenecks. These incompatibilities stem from the diversity of
trading partners, which may range from members of the Fortune 1000 to sole
proprietors providing niche products. Trading partners may therefore have
different communications capabilities and requirements. Some trading partners
may rely on paper or fax to communicate, others may exchange data in proprietary
file formats through direct dial-up connections or over the Internet, while the
largest trading partners use electronic methods, such as EDI, over VANs.
Development of Our Business
Through July 2000, our business was entirely focused on our ICC.NET
service. Our ICC.NET service is currently in use by our customers for the secure
exchange of business-to-business electronic forms and data files.
In addition to our continued development and enhancements of our ICC.NET
service, we made two acquisitions during fiscal 2001. These acquisitions have
enabled us to offer a more complete range of services to allow our customers to
expand their EC trading communities and bridge their legacy systems to the
Internet.
In August 2000, we acquired Intercoastal Data Corporation, referred to as
IDC, through which we acquired our service bureau segment. IDC is engaged in the
development, marketing, sale and other exploitation of business-to-business EDI
standard-based applications for standard-based EDI exchange over VANs, private
networks, exchanges, extranets and the Internet. In November 2000, we completed
the acquisition of Research Triangle Commerce, Inc., referred to as RTCI,
through which we acquired our professional services segment. RTCI is an EC
infrastructure solutions company serving the business-to-business e-commerce
market. RTCI assists its clients to conduct business electronically through a
continuum of services, including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Data transformation mapping has subsequently been integrated into the ICC.NET
service offerings.
In our fiscal quarter ended July 31, 2002, we achieved approximately
$587,000 of positive cash flow from operations, including $1,500,000 under our
amended agreement with Triaton. We also received $1,500,000 under this amended
agreement in October 2002 but do not expect any revenues or significant receipts
from Triaton in the future. While we anticipate that we will achieve positive
cash flow from operations in the year ending July 31, 2003, we do not anticipate
positive cash flow from operations in the first or second quarters of that
fiscal year, and there
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can be no assurance that we will be successful in achieving positive cash flow
for the entire year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" and "Risk
Factors" elsewhere in this annual report.
Business Strategy
We believe that our ICC.NET service provides a platform with many
applications that allows our customers to fulfill a substantial portion of their
electronic document and data delivery requirements with significantly less
administrative effort and cost. We believe that ICC.NET will allow our customers
to send us the majority of their important documents and data files which we
will then be able to transmit to each of the intended recipients in any form
requested by the recipient. Our customers will thus be able to integrate a
substantial portion of their document and data file delivery methods into a
single, seamless process.
A large company that uses EDI to communicate with its vendors is referred
to as a hub; its trading partners, vendors or customers, are referred to as
spokes. We intend to continue to market ICC.NET as a one-stop electronic
document and data delivery service to the 2,500 largest hub companies in the
United States. Due to the cost to the spoke companies of implementing EDI and
using VANs and other electronic document delivery methods, large hub companies
are currently connected electronically to only a small percentage of their
potential spoke companies.
We intend to continue to market ICC.NET to new customers with an
increasing focus on industries in which ICC.NET has achieved significant
penetration and revenues. Those industries include book retailing and
publishing, pharmaceutical manufacturing, automotive, footwear manufacturing,
office supplies, transportation logistics, financial services, manufacturing,
retail, grocery and soft goods manufacturing.
We believe that a significant number of these hub companies intend to
expand the use of electronic commerce to more of their spoke companies. Small
spoke companies using our ICC.NET service require only an Internet connection
and a web browser to receive and transmit documents electronically and, we
believe, will also be able to receive electronic documents using our ICC.NET fax
service. As a result, large hub companies may now be able to request or
encourage electronic commerce with their small spoke companies. In turn, many of
these spoke companies may become the hub companies for their suppliers, which
should further broaden the reach of our ICC.NET service.
Additionally, we will focus on marketing ICC.NET to other members of the
trading communities of our existing customers and we will pursue opportunities
to cross-sell our services to the customers in our three business segments.
Our current customers conduct their business internationally, and we are
servicing these customers and pursuing new international customers in Europe and
other places outside the United States. See "International" below.
We intend to encourage the use of our ICC.NET service through exceptional
customer service. We currently offer technical support to our customers
twenty-four hours a day, seven days a week. Due to the multiple redundancies of
all of our systems and the stability of the Securities Industry Automation
Corporation, or SIAC, which is the location of our data center, our ICC.NET
service has been fully operational more than 99% of the time. SIAC manages all
computing operations for the New York Stock Exchange and the American Stock
Exchange.
We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that period-to-period
comparisons of our operating results for any particular period will not
necessarily indicate our future performance.
Services and Products
ICC.NET, our global Internet-based value added network, or VAN, provides
complete supply chain connectivity solutions for electronic data interchange, or
EDI, and e-commerce and offers users a sophisticated vehicle to send and receive
files of any format and size securely. We also offer a broad range of consulting
services, and associated mapping and XML technology, custom application
development, comprehensive e-commerce
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education and an EDI service bureau. The following summarizes the principal
services and products offered by our three operating segments, namely our
ICC.NET service, professional services and service bureau.
ICC.NET Service
We believe that our ICC.NET service provides a solution to the
communication difficulties caused by the differences in data formats, networks
and communications methods used by the members of trading communities by
bridging the incompatibility gap and enabling seamless electronic business
communication. Our ICC.NET service can translate incompatible files into a
format any user is capable of receiving and uses the Internet to transmit the
data file by EDI, fax or other formats. We believe that users of our ICC.NET
service can thus improve their productivity and reduce their costs by enabling
electronic business-to-business transactions between parties with different
systems.
We believe that our ICC.NET service improves the basic infrastructure of
business-to-business electronic communications by providing intelligent
messaging and routing using the Internet, which, we believe, improves the
security, reliability, ease of use and acceptability of using the Internet for
business-to-business electronic commerce. ICC.NET performs these functions
without requiring that the user purchase software and at prices that we believe
are less than the prices currently charged by more established VANs.
We designed our ICC.NET service to avoid what we believe are
inefficiencies in traditional VAN services, software products and phone and
manual fax processes, which we believe are more expensive, slower and more
difficult to use than our ICC.NET service. ICC.NET incorporates proprietary
technology and is immediately accessible using a standard Internet connection
and a web browser.
Our ICC.NET service uses the Internet to deliver more features than
traditional VANs, including the following:
o Documents are delivered up to 100 times faster, depending upon the
speed of the customer's Internet connection;
o Our customers can more effectively track, monitor and process
business documents and other data files using our real-time document
management java-applet screen displays;
o Our ICC.NET service allows us consistently to provide confirmed
delivery of documents and other data files;
o Documents can be delivered either in real-time or retrieved when
convenient for the customer. Real-time delivery reduces the
potential for document corruption, bottlenecks and other problems
associated with batch delivery modes, which are traditionally
store-and-forward and in some cases can take several hours to be
delivered;
o Our ICC.NET service can handle data transmissions other than
standard business documents, such as images, engineering drawings,
architectural blueprints, audio and some types of video; and
o Our customers enjoy flexibility in creating different document types
and formats for various business applications. For example, our
customers can add their business logo to their documents and can use
their own format for each document type.
In addition, we believe our ICC.NET service offers advantages over e-mail
and other Internet-based electronic commerce systems, such as a full range of
VAN services, translation of a wide variety of data into customer-specified
formats, management of business documents or data files of virtually any size
and of a wide variety, including purchase orders, invoices, statements,
inventory tracking and shipping documents, images, engineering drawings,
architectural blueprints, audio and some types of video. Our ICC.NET service
also provides a complete audit trail of content delivery and customer selection
from a variety of security methods.
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We believe that ICC.NET is one of the only Internet-based data
transmission services that is approved to interconnect with approximately sixty
traditional VANs, private networks and exchanges that currently provide EDI
services for approximately 90% of companies we estimate are capable of using
EDI. As a result, we can handle EDI traffic between our customers and any of
their trading partners that choose to continue to use a traditional VAN and a
customer that uses a traditional VAN and its trading partners that do not. The
ability to interconnect provides our customers with the possibility of maximum
penetration into their trading partner community.
EDI Mapping Factory(R). We are a provider of EDI mapping services. Our EDI
Mapping Factory(R) provides off-site mapping using a variety of translators on
multiple platforms. Our experience includes mapping for ANSI ASC X12and
UN/EDIFACT Transaction Sets, XML and other standards, including support for SAP
IDOCs. We provide expert data mapping services for HIPAA compliance initiatives.
We can also provide data transformation services for database conversions,
client specified files and other tasks involving the care and movement of data.
Our systems and technicians can handle many operating system environments,
including Windows, NT, UNIX, AS/400 and mid-range systems.
XML Services. The industry standardization of XML continues to evolve
slowly, with no clear winners for a single business-to-business, or B2B,
standard. New proposed standards continue to emerge periodically, and
consolidation may be some time away. Our experience with XML, in it's many
forms, allows us to provide the flexibility and interoperability our customers
require in this changing environment. We provide a complete spectrum of
services, from design, through inline translation between XML, EDI, and flat
file formats, and full end-to-end B2B solutions. We have participated in the
development of several standards for the use of XML in B2B and EDI environments,
and remain in the forefront of this technology.
EDI for web-based retailers. We provide an electronic document and data
file delivery link between web-based retailers and their vendors. We believe
that many larger vendors require that product orders and other documents be
transmitted using EDI. Web retailers can use our ICC.NET service to comply with
this requirement and thus can reduce their costs and improve their ability to
locate, order, track and deliver products. Our ICC.NET service can process
purchase orders, invoices, order status reports and other files transmitted
between web-based shopping portals of electronic retailers and their vendors,
distributors and manufacturers and can also manage critical logistics delivery
files.
EDI for the health care industry. We offer services for the implementation
of EDI healthcare transactions mandated by the administrative simplification
regulations of the Health Insurance Portability and Accountability Act (HIPAA).
Standards developed by ANSI (American National Standards Institute) apply to
health plans, clearinghouses and healthcare providers that transmit information
electronically. By combining our expertise in traditional EDI and HIPAA
requirements with our client's knowledge of its operations and systems, we offer
solutions that enable our clients to comply with the HIPAA regulations. We have
also formed partnerships aimed at HIPAA compliance that couple third-party
translators with our data mapping capabilities. Our ICC.NET service can
facilitate the exchange of healthcare eligibility and enrollment forms, care
review, patient information and claim status and payments.
Large-scale electronic document management and delivery. Our ICC.NET
service can electronically transmit large-scale EDI and non-EDI electronic
documents and other large files, which may include catalogs, Point of Sale data,
engineering drawings, graphics and some types of video. ICC.NET allows customers
to manage and distribute large files in real-time and provides archiving,
security, authentication and audit services. ICC.NET will support both a
publish/subscribe configuration, in which a customer can publish any number of
files for subscribers authorized by the customer to view and/or download, and a
point-to-point-delivery configuration that operates like our ICC.NET VAN
service. ICC's Point of Sale service allows retailers and their suppliers to
exchange information quickly and effectively.
ICC.CATALOG. In 2002, we launched a web-based electronic product catalog
("ICC.CATALOG") service for use in the retailer-vendor business community. The
ICC.CATALOG enables vendors that supply goods to retailers to create, store and
maintain a web-based online database of their product information. Users can
electronically access and selectively download the product information, and
generate EDI compliant purchase orders. Both the retailer and the vendor can
access the service worldwide using the Internet and can perform real-
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time updates. ICC.CATALOG complies with industry standards and is designed to
reduce the costs of both retailers and vendors through ease of use, advanced
features, functions and low cost pricing. The ICC.CATALOG integrates seamlessly
with our ICC.NET service.
EDI to fax service. Traditional EDI users convert electronic documents
into a faxable format and fax the documents manually to their trading partners
that cannot receive electronically transmitted documents in EDI. Our ICC.NET
IP-based worldwide fax service allows our customers to send a document
electronically, which we then electronically convert and fax to any of our
customer's trading partners that cannot receive electronically transmitted
documents.
AS2 Connectivity. We continue to invest in leading edge technology to meet
the changing requirements of our customers. An example of this is AS2, which is
one of the newest standards associated with moving information across the
Internet. We have incorporated AS2 technology into our service offerings so that
our customers can utilize the technology without a huge up front investment in
software. By using ICC's AS2 solution our customers avoid the hidden support
costs associated with purchasing an AS2 software product.
The Service Bureau
The ICC Service Bureau allows vendors to comply with its customers'
electronic commerce needs. ICC's fees can be more cost effective than
establishing an in-house EDI department.
The ICC Service Bureau is focused on the retail industry and is capable of
exchanging business transactions with most major retailers. Customers can view
account activity on-line through the use of the Internet.
The primary features of the Service Bureau include:
o Purchase Order, Invoice and Product Activity Data Processing
o UPC Maintenance
o UPC and UCC 128 Label Service and Ship Notices
o Automated packing process using ScanPak Professional
Our service bureau also offers an assortment of software products. Our
principal software products are:
o ScanPak Professional is a Windows-based warehouse management tool
providing an automated Advanced Ship Notice and UCC/EAN-128 label
solution. ScanPak Professional allows our customers to scan
merchandise and automatically generate bar code labels for each case
as it is packed. Keyboard use at packing stations can be eliminated.
This product electronically matches the contents of each case
against purchase orders. From the casing information created by
ScanPak, our customers can generate and transmit accurate EDI ship
notices to retailers or third party EDI software products. ScanPak
Professional interfaces with ICC.NET and other third party EDI
software products.
o EZ-EDI(TM) translator package receives electronic purchase orders
via the major networks, prints purchase orders, holds the orders in
an open orders file for possible changes and sends electronic
invoices back to the retailer. It allows our customers to manage
their orders with ease - changing quantities and prices as needed,
adding manual orders, backordering and deleting orders that cannot
be filled.
o UPC Manager(TM) allows our customers to create an 832 EDI document
(sales catalog) and provides an automatic link to network UPC
catalogs. UPC Manager(TM) allows our customers to add, change and
delete information in their in-house UPC catalogs, the local
repository of their UPC product information. UPC Manager(TM)
automatically generates proper UPC numbers for
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products that do not have UPC numbers assigned and accepts current
UPC numbers for products with them. Tracking active, inactive UPC
numbers for the appropriate time intervals, UPC Manager(TM) also
provides extensive error checking on in-house catalog data to ensure
that information sent to the networks is valid.
Software sales have not been a significant source of revenue during the
years ended July 31, 2002 and 2001.
Professional Services
Our professional services facilitate the development and operations of
comprehensive business-to-business electronic commerce solutions. We specialize
in electronic commerce, or EC, solutions involving EDI and EAI (Enterprise
Application Integration) by providing mission critical EC consulting, EC
software, outsourced EC services, technical resource management and HIPAA gap
analysis
Custom Solutions. Our Custom Solutions group provides programming
solutions designed to fit our customers' specific needs. We can build web-based
applications for both customer end-users and servers. We provide a comprehensive
and integrated design or redesign of our customers' entire internal EC/EDI
environment.
Consulting Services. Our Consulting Services group brings industry
specific experience and high-level expertise to our customers. We have the EC
consulting experience to support our customers' information technology
functions. We have also initiated a special focus on the healthcare industry
involving the analysis, design and construction of solutions that address HIPAA
compliance.
Education. We offer EC and EDI education and training resources through a
series of product-independent seminars hosted by leading universities around the
United States. These seminars address the basic components of EDI, software,
networks, standards, trading partner issues, business management issues and
specific industry-related issues. Custom courses can be arranged for our
customers at their locations. We also offer public and private seminars that
focus on healthcare EDI and HIPAA requirements. Building on our core education
program, these seminars emphasize the use of EDI within the healthcare industry
by addressing standards and using exercises to upgrade knowledge of claim
processing and remittance transactions.
Financial information about our business segments can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and in Note 14 of the notes to our consolidated
financial statements included elsewhere in this annual report. Our revenue by
geographic region is set forth in Note 13 of the notes to our consolidated
financial statements.
International
Triaton GmbH (formerly Hightech International Services GmbH), a subsidiary
of Thyssen Krupp Information Services GmbH, licensed our ICC.NET service under
the joint services agreement dated July 28, 2000. In July of 2002 the joint
services agreement was terminated and we entered into a new licensing agreement
with Triaton. Under the new agreement, Triaton was granted a non-exclusive
license to use ICC's electronic data interchange system in its most recent
version anywhere in the continent of Europe, Great Britain and Ireland for a
five-year term in exchange for a licensing fee of $3,000,000. Triaton has the
right to provide and use the ICC.NET service with its customers. ICC will not
report any additional revenues under the amended agreement with Triaton, except
that at Triaton's request, ICC shall provide sales support, customer support and
software support services on its standard terms and conditions.
We also have an agreement with Cable & Wireless to resell our services in
the United States and Europe. No significant sales have been realized through
our relationship with Cable & Wireless.
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We have also entered into reseller agreements in Brazil and the United
Kingdom. Our Brazilian partner, Advanced Trade Technologies and Services
Limited, or ATTS, will be reselling the full line of ICC services and products
including service bureau, software, consulting services, ICC.CATALOG and ICC.NET
in South America. Freshlook LLC is focusing on reselling all ICC.NET services in
the UK and Ireland.
Competition
Our principal competitors include: Inovis Inc. (formerly a subsidiary of
Peregrine Systems, Inc.); GXS, Global eXchange Services Inc., owned by Francisco
Partners LP; International Business Machines Corporation Global Services;
Sterling Commerce, Inc., a subsidiary of SBC Communications Inc.; EasyLink
Corp.; and KleinSchmidt Inc. Each of these competitors has an established VAN
that has provided EDI for several years and has long-established relationships
with the users of EDI, including many of our prospective customers.
Our market is characterized by rapidly changing technology, customer
demands and intense competition. The Internet's recent growth and the intense
competition in our industry resulted in significant changes during 2002.
Traditional VAN's such as GXS, Sterling and Inovis have either been sold by
their parent companies or are currently for sale. GXS was recently acquired by
Francisco Partners, Inovis was spun off from Peregrine Systems, Inc. and
acquired by Golden Gate Capital Inc., and we believe that SBC is attempting to
sell Sterling Commerce. We believe that much of this activity is attributed to
the impact of the Internet on traditional VAN's.
New competition is emerging in the form of Web Services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. Competitors providing these alternatives include
Cyclone Corporation and IPNet Solutions, Inc. They offer software solutions
that utilize the Internet to transmit data between trading partners. We believe
that the high cost of implementation and the ongoing costs of supporting a
company's trading partners are a barrier to the wider acceptance of their
product offerings in the marketplace.
Many of our current and potential competitors have significant existing
customer relationships and vastly larger financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
responsed more quickly to changing technology and changes in customer
requirements or be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
customers and employees, or be able to devote greater resources to the
development, promotion and sale of their services than we can. As a result, we
may not be successful in competing against our competitors.
We rely on many of our competitors to interconnect with our service to
promote an "open community" so all businesses can take advantage of the
efficiencies of EDI no matter what network they choose as their provider. In
September 2001, and January 2002, two of our competitors, GXS and Sterling
Commerce, terminated existing interconnection agreements with us and we made
alternative arrangements to serve our customers.
The addition of our catalog service adds Quick Response Systems
Corporation, or QRS, to our list of competitors. QRS and Global exchange
Services have dominated the catalog service industry for more than ten years,
but our catalog pricing and functionality has the potential to create
competitive advantages for our service.
Patents and Trademarks
Patents
On August 26, 1997, ICC was granted patent No. 5,661,799, entitled
Apparatus and Storage Medium for Decrypting Information. The essential
components of this patent include 1) the decryption of encrypted information
without requiring that decryption keys be transmitted from one place to another,
2) the decryption of encrypted information which employs different keys for
different segments of information and 3) the disabling of a system for the
decryption of encrypted information if a user is no longer authorized to
retrieve information.
On January 7, 1997, ICC was granted patent No. 5,592,549, entitled Method
and Apparatus for Retrieving Selected Information from a Secure Information
Source. The important components to this "Branding Patent" are: 1) decryption of
an electronic item or product, such as a document or software, 2) the attachment
of an identifying serial number and 3) the logging of the item number and serial
number. By attaching a "brand" at the time the document is decrypted from a
secure data source, an "audit trail" of the decrypted information can be
maintained.
In December 1995, ICC was granted patent No. 5,473,687, entitled Method
for Retrieving Secure Information from a Database, covering its technology for
providing a secure method for the commercial distribution and use of digital
information on a rental basis using a technique to discourage long-term use
without endangering the computer or the operating system.
9
In February 1995, ICC was granted patent No. 5,394,469, entitled Method
and Apparatus for Retrieving Secure Information From Mass Storage Media, for its
system to retrieve and monitor the use of protected information from various
digital media.
We rely upon this encryption and authentication technology to provide
secure transmission of confidential information. If our security measures do not
prevent security breaches, we could suffer operating losses, damage to our
reputation, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
that render current encryption technology outdated may result in a breach of our
encryption and authentication technology and could enable an outside party to
steal proprietary information or interrupt our operations.
Uncertain Patent Protection
Although ICC has obtained the patent rights described above, we believe
that the protection of our rights in our ICC.NET service will depend primarily
on our proprietary software and messaging techniques that constitute "trade
secrets." ICC has made no determination as to the patentability of these trade
secrets. ICC will continue to evaluate, on a case-by-case basis, whether
applying for additional patents in the future is in our best interest. There can
be no assurance that our technology will remain a secret or that others will not
develop similar technology and use such technology to compete with us.
In addition, there can be no assurance that any issued patents owned by
ICC or our trade secrets will afford us adequate protection or not be
challenged, invalidated, infringed or circumvented, or that patent applications
relating to our products or technologies that we may file or license in the
future, including any patent as to which a notice of allowance was issued, will
result in patents being issued, or that any rights granted thereunder will
provide competitive advantages to ICC. Although we believe that our technology
does not infringe upon the proprietary hardware or software of others, it is
possible that others may have or be granted patents claiming products or
processes that are necessary for or useful to the development of our ICC.NET
service and that legal actions could be brought against us claiming
infringement.
Trademarks
ICC's trademarks ICC.NET, INFOSAFE, PROTECTED BY INFOSAFE, COMMERCESENSE,
COPYSAFE, DESIGN PALETTE, EDI ASSISTANT and EDI MAPPING FACTORY have been
registered with the United States Patent and Trademark Office. The applications
to register AUDINET, B2B4B2C, B to B for B to C, E-COMMERCE MADE EASY, XML
ASSISTANT, XML MAGIC and XML WIZARD have now been allowed as trademarks and
await registration. We intend to apply for additional name and logo marks in the
United States and in foreign jurisdictions. No assurance can be given that
registrations will be issued on the allowed applications or that interested
third parties will not petition the United States Patent and Trademark Office to
cancel our registration.
Sales and Marketing
We employ a variety of marketing initiatives to enhance awareness of our
ICC.NET and other services and products in the electronic commerce community and
to increase our sales domestically and internationally.
Direct Marketing through Sales Force. Direct sales to large corporations
by our own sales force form the core of our sales strategy. Our sales force
currently consists of professional sales staff and support personnel located
across the United States to serve our diverse geographic customer-base. Our
sales force consists of field sales representatives who provide direct
assistance with sales calls at customer sites and must meet target quotas. Our
representatives are supported by technical personnel based in the field. All
field sales personnel report to our Vice President of Sales.
Indirect Marketing through Hub Companies. We believe that smaller spoke
companies comprise a significant potential market that may be reached without
any direct marketing on our part, because the low cost of
10
our ICC.NET service should allow these smaller spoke companies to consider using
our service if requested to do so by their hub companies.
Seminars and Tradeshows. We conduct seminars, consisting of a traveling
road show providing targeted group demonstrations and selling activities to
pre-qualified audiences invited to events in their own localities by direct mail
and advertising supported by telemarketing confirmation. ICC maintained its
participation in industry tradeshows and has personnel who focus solely on this
area. We plan to staff national shows with sales, support and executive
personnel from our headquarters.
Industry Initiatives. To broaden our market appeal and customer
penetration, ICC has initiated a variety of special products, each aimed at
increasing traffic across our ICC.NET network. For example, we offer retail
customers the ICC.CATALOG, a web-based facility that enables suppliers and
vendors to enhance their e-commerce capabilities and realize improved
efficiencies and economies. In the healthcare arena, ICC offers a complete suite
of solutions focused on the federally mandated Healthcare Insurance Portability
and Accountability Act. These solutions include strategic and tactical
consulting, integrated third party software, mapping and transaction transport.
Among our other focused initiatives are scan-based trading, Point-of-Sale and
telecommunications industry offerings.
Web-based and Print Advertising. We use both web-based and traditional
print advertising. Our web site embodies a variety of promotional features. ICC
maintains a print advertising media campaign to generate sales leads and
increase brand recognition.
Strategic Relationships. We have relationships with general consulting
firms that recommend our products and services. In addition, ICC is integrated
into and sold by various enterprise requirement planning (ERP), purchasing,
accounting, procurement and EDI translation software product vendors. ICC is
also the underlying EDI and VAN services provider for vertically oriented
portals and exchanges in the automotive, home furnishings, retail, electronics
and EDI outsource industries. We believe that an interface with our
Internet-based electronic commerce system will appeal to complementary providers
of software and services by highlighting the cutting-edge character of their
offerings and enabling them to provide a complete solution to their customers.
Technical Support
We provide technical support twenty-four hours a day, seven days a week
for all our ICC.NET customers. For new users of our ICC.NET service, we provide
education about the application and correctly configure the users' computer
systems. We also provide ongoing assistance for previously installed users. Due
to the multiple redundancies of all of our systems and the stability of SIAC,
our ICC.NET service has been fully operational more than 99% of the time.
Customers
We currently provide services to approximately 1,100 customers.
Approximately 600 of these customers use our ICC.NET service and represent a
variety of industries, including pharmaceutical, publishing, office supplies,
e-tailing, manufacturing and retail. Customers in these and other industries
include American Power Conversion Corporation, AOL Timer Warner, Avery Dennison,
Barnes & Noble, Inc., BMG Entertainment, Brother International Corporation, CIT
Group, Inc., Colgate-Palmolive, Dot Foods, Hastings Entertainment, Inc., Linens
n' Things, Inc., Mack Trucks, Inc., The McGraw-Hill Companies, Inc., New Balance
Athletic Shoes, Inc., Nordstrom.com, Random House Inc., Revlon, Inc., Sector
Communications, Inc., a SIAC company, Simon & Schuster, Inc., TravelCenters of
America, Inc. and Verizon Wireless.
The customer base of our professional services segment changes frequently
due to the nature of professional service contracts. Current customers include
Preferred Care, Atlantic Tech Services, Health Network America, and Lockheed
Martin.
Our service bureau has approximately 500 customers.
11
One customer accounted for 22% of our consolidated revenues, or 30% of the
revenues of our ICC.NET business segment, during the year ended July 31, 2002.
This customer also accounted for 11% of our consolidated revenues and 22% of our
ICC.NET segment revenues in the year ended July 31, 2001. This customer is not
expected to be a significant customer in the future. No single customer
accounted for a material portion of our revenues during the year ended July 31,
2000.
Research and Development
Research and development costs related to the enhancement and improvement
of our ICC.NET service amounted to $977,000, $931,000, and $702,000 for the
years ended July 31, 2002, 2001 and 2000, respectively.
Employees
At July 31, 2002, ICC had 115 full-time employees.
12
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New York
under a lease that expires on December 31, 2004 and provides for annual base
rent of approximately $500,000. The lease covers approximately 12,300 square
feet.
Our development and network administration groups and our technical
support call center are located in East Setauket, New York under a lease that
expires on June 30, 2004 and provides for annual base rent of approximately
$180,000. The lease covers approximately 8,900 square feet.
Our service bureau is located in Carrollton, Georgia under a lease that
expires on July 31, 2005 and provides for annual base rent of approximately
$80,000. The lease covers approximately 8,000 square feet.
We lease general office space in Cary, North Carolina under a lease that
expires on October 31, 2004 and provides for annual base rent of approximately
$550,000. The lease covers approximately 27,000 square feet. Effective August 1,
2002, ICC entered into an agreement with the landlord of the Cary facility that
reduced the rent on approximately 13,000 square feet, while the landlord pursues
its release to new tenants. The agreement reduced the annual base rent for such
property to approximately $420,000. Subsequently the abandoned 13,000 square
feet has been leased to new tenants. In addition, approximately 3,600 square
feet of the remaining space has been subleased.
Our data center is located at the facilities of The Securities Industry
Automation Corporation (SIAC) under an agreement that expires in December 2002.
The agreement shall be renewed automatically for an additional one-year term.
We believe that these facilities should be adequate for our present and
reasonably foreseeable operating requirements.
Item 3. Legal Proceedings
None; the lawsuit by Thomas Lipscomb against us previously disclosed was
dismissed in our favor.
Item 4. Submission of Matters to a Vote of Security Holders
No meetings of stockholders took place during the fourth quarter of the
year ended July 31, 2002.
13
PART II
Item 5. Market for Internet Commerce Corporation's Common Equity and Related
Stockholder Matters
(a) Market Information
Since September 20, 2000, ICC's class A common stock has been traded on
the Nasdaq National Market under the symbol ICCA. ICC's class A common stock was
previously traded on The Nasdaq SmallCap Market under the symbol ICCSA. ICC's
Units, each consisting of one share of class A common stock, one class A warrant
and one class B warrant, were traded in the over-the-counter market on the OTC
Bulletin Board until February 2002 under the symbols ICCSU, ICCSW and ICCSZ,
respectively. The following table sets forth the high and low closing prices of
ICC's securities for the periods indicated. These quotations represent prices
between dealers in securities, do not include retail mark-ups, mark-downs or
commissions and do not necessarily represent actual transactions.
The Units, Class A Warrants and Class B Warrants expired in February 2002.
No trading information was available during the first, second and third fiscal
quarters of 2002 prior to their expiration.
Fiscal Year Ended July 31:
- --------------------------
2002 2001
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
- --------------------
First Quarter $ 4.00 $ 1.50 $18.00 $ 4.50
Second Quarter $ 4.80 $ 2.45 $ 7.32 $ 2.50
Third Quarter $ 4.50 $ 2.55 $ 7.00 $ 2.00
Fourth Quarter $ 3.55 $ 1.55 $ 4.83 $ 2.50
Units
- -----
First Quarter $ N/A $ N/A $21.00 $21.00
Second Quarter $ N/A $ N/A $ 9.00 $ 7.00
Third Quarter $ N/A $ N/A $ 7.63 $ 4.00
Fourth Quarter $ -- $ -- $ 6.25 $ 6.25
Class A Warrants
- ----------------
First Quarter $ N/A $ NA $13.75 $ 3.75
Second Quarter $ N/A $ N/A $ 6.50 $ 1.13
Third Quarter $ N/A $ N/A $ 2.75 $ 1.15
Fourth Quarter $ -- $ -- $ 1.25 $ 0.51
Class B Warrants
- ----------------
First Quarter $ N/A $ N/A $ 5.75 $ 1.63
Second Quarter $ N/A $ N/A $ 2.50 $ 0.75
Third Quarter $ N/A $ N/A $ 1.50 $ 0.25
Fourth Quarter $ -- $ -- $ 0.25 $ 0.25
(b) Holders
As of July 31, 2002, there were approximately 179 record holders of our
class A common stock. Many of our shares of class A common stock are held by
brokers and other institutions on behalf of stockholders, so we are unable to
estimate the number of stockholders represented by these record holders.
14
(c) Dividends
ICC has not paid any cash dividends on its common stock and does not
intend to declare or pay cash dividends on the common stock in the foreseeable
future. The holders of the outstanding shares of series A preferred stock are
entitled to a 4% annual dividend payable in cash or in shares of class A common
stock, at the option of ICC. These dividends are payable on each July 1. In July
2002, ICC paid cash dividends of $6,582.97 in payment of the dividend due on
July 1, 2002. In July 2001, ICC issued 7,601 shares of class A common stock in
payment of the dividend due on July 1, 2001. The holders of the outstanding
shares of series C preferred stock are entitled to a 4% annual dividend payable
in cash or in shares of class A common stock, at the option of ICC. These
dividends are payable on each January 1. ICC issued 98,839 shares of class A
common stock in payment of the dividend due January 1, 2002, and ICC issued
111,142 shares of class A common stock in payment of the dividend due on January
1, 2001.
Recent Sales of Unregistered Securities
On July 11, 2002, we entered into a Settlement Agreement with ING Merger,
LLC and ING Capital, LLC, a wholly owned subsidiary of ING Merger, pursuant to
which we issued to ING Capital 200,000 shares of class A common stock and
warrants to purchase 60,000 shares of class A common stock. The warrants are
exercisable for five years at an exercise price per share of $3.50. The issuance
of these securities was exempt from registration under Section 4(2) of the
Securities Act.
In May 2002, we issued a total of 22,218 shares of class A common stock to
six non-employee directors of ICC in payment of directors fees. The issuance of
these securities was exempt from registration under section 4(2) of the
Securities Act.
We commenced a warrant exchange offer on April 23, 2002 that ended on May
31, 2002. The offer was extended to investors who participated in our private
placement on October 29, 2001 and to holders of warrants issued as fees in
connection with the private placement. The offer reduced the exercise price of
the warrants issued in the private placement to $2.50 per share for those
investors that agreed to exercise those warrants. In addition, for each share of
class A common stock purchased pursuant to the warrant exercise, a new five-year
warrant to purchase an equivalent number of shares of class A common stock was
issued. These new warrants have an exercise price of $3.50 per share and
otherwise contain the same terms as the warrants issued in the private
placement. We received $659,288 in gross proceeds and issued a total of 263,715
shares of class A common stock and warrants to purchase the same number of
shares of class A common stock. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act.
On October 29, 2001, we sold in a private placement 1,159,716 shares of
class A common stock and warrants to purchase 347,915 shares of class A common
stock for gross proceeds of $3,189,219. The warrants expire in October 2006 and
are exercisable at $3.58 per share. The warrants are redeemable at our option
for $0.10 per warrant commencing in April 2003 if the closing bid price of our
class A common stock is at least 200% of the exercise price of the warrants for
30 consecutive trading days. In connection with the private placement, we
incurred fees of $152,111, of which $35,000 was paid in cash and $117,511 was
paid by issuing warrants to purchase 50,000 shares of class A common stock.
These warrants have substantially the same terms as the warrants issued in the
October 2001 private placement. The issuance of these securities was exempt from
registration under Section 4(2) of the Securities Act
15
Item 6. Selected Consolidated Financial Data
Our selected consolidated statement of operations data for each of the
years in the five-year period ended July 31, 2002 is presented below. Our
selected balance sheet data is presented below as of July 31, 2002, 2001, 2000,
1999 and 1998. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with, our
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report.
Year Ended July 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 14,222 $ 9,743 $ 1,303 $ 105 $ 19
-------- -------- -------- -------- --------
Expenses:
Cost of services 8,776 9,354 2,514 452 11
Product development and enhancement 977 931 702 517 576
Selling and marketing 3,499 5,384 3,273 420 --
General and administrative 5,849 9,683 4,814 3,581 2,307
Non-cash charges for stock-based
compensation, services and legal
settlements 250 991 5,161 3,267 --
Impairment of goodwill and acquired
intangibles 1,711 16,708 -- -- --
Impairment of assets -- -- -- -- 178
-------- -------- -------- -------- --------
Total operating expenses (21,062) (43,051) (16,464) (8,237) (3,072)
-------- -------- -------- -------- --------
Operating loss (6,840) (33,308) (15,161) (8,132) (3,053)
-------- -------- -------- -------- --------
Other income (expense), net 292 523 675 (1,490) 56
-------- -------- -------- -------- --------
Loss before income taxes (6,548) (32,785) (14,486) (9,622) (2,997)
Income tax benefit -- 1,930 -- -- --
-------- -------- -------- -------- --------
NET LOSS (6,548) (30,855) (14,486) (9,622) (2,997)
Dividends on preferred stock (365) (420) (458) (191) --
Dividends to preferred stockholders for
beneficial conversion feature -- -- (4,549) (1,222) --
Beneficial conversion feature from
repricing and issuance of warrants (461) -- -- -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $ (7,374) $(31,275) $(19,493) $(11,035) $ (2,997)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.68) $ (3.57) $ (4.49) $ (7.62) $ (2.79)
======== ======== ======== ======== ========
Weighted average common shares
outstanding - basic and diluted 10,867 8,768 4,337 1,447 1,076
======== ======== ======== ======== ========
July 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 2,088 $ 2,223 $ 14,003 $ 114 $ 178
Working capital (deficit) 2,622 646 17,831 3,119 (915)
Total assets 12,625 15,674 22,332 6,540 1,535
Capital lease obligations 374 255 231 358 197
Total liabilities 3,244 4,487 2,242 1,486 1,398
Stockholders' equity 9,381 11,187 20,090 5,055 132
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Specifically, all statements other than statements of
historical facts included in this Report regarding our financial position,
business strategy and plans and objectives of management for future operations
are forward-looking statements. These forward-looking statements are based on
the beliefs of management, as well as assumptions made by and information
currently available to management. When used in this Report, the words
"anticipate," "believe," "estimate," "expect," "may," "will," "continue" and
"intend," and words or phrases of similar import, as they relate to our
financial position, business strategy and plans, or objectives of management,
are intended to identify forward-looking statements. These statements reflect
our current view with respect to future events and are subject to risks,
uncertainties and assumptions related to various factors including, without
limitation, those described below the heading "Overview", those described
starting on page 33 of this annual report under the heading "Risk Factors" and
in our registration statements and periodic reports filed with the SEC under the
Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described in this
annual report as anticipated, believed, estimated, expected or intended.
Overview
We are a leader in the e-commerce business-to-business communication
services market that provides complete e-commerce infrastructure solutions. Our
business operates in three segments: namely, our ICC.Net service, our service
bureau and our professional services.
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, and email-based and
other Internet-based systems, because our service is provided at lower cost,
with greater transmission speed and offers more features. Our service bureau
manages and translates the data of small and mid-sized companies that exchange
EDI data with large companies. Our professional services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001 we made two acquisitions that enable us to offer a
more complete range of services to allow our customers to expand their
e-commerce trading communities and bridge their legacy systems to the Internet.
In August 2000, we acquired IDC, an EDI service bureau. IDC delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments.
In November 2000, we acquired RTCI, thereby expanding our professional
services capability. RTCI was an e-commerce infrastructure solutions company
serving the business-to-business e-commerce market. RTCI assists its clients to
conduct business electronically through a continuum of services including
eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking.
RTCI developed a business model that offered remote service delivery, fixed and
value-based pricing and reusable solutions. Subsequent to the acquisition in
fiscal 2001, due to a reduction of the workforce of RTCI, a steep decline in
value of companies similar to RTCI, continued operating losses and a significant
reduction in the forecasted future operating profits of our professional
services segment, management determined that triggering events had occurred
related to certain intangible assets. Projected cash flow analysis related to
those assets determined that the assets had been impaired. These intangible
assets were written down to fair value during the fourth quarter of 2001 based
on the related discounted expected future cash flows.
17
Due to a continued decline in its revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted future
operating profits, the Professional Services segment was tested for impairment
during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was
recognized as a result of this evaluation. The fair value of the Professional
Services segment unit was estimated using net present value of expected future
cash flows.
During the fourth quarter of fiscal 2002 the Company integrated its data
mapping and XML services and personnel into the ICC.NET business segment. These
products and services had previously been part of the Company's Professional
Services segment. These products and services are primarily utilized to support
customers of the ICC.NET VAN service. The reorganization was undertaken to more
closely align these data transfer services with the customers they serve. The
segment information presented below in the results of operations has been
restated, for each period presented, to reflect this reorganization as if it had
occurred August 1, 2001.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 50
business-to-business networks for the benefit of our customers. Two of the
largest, GE Global Exchange Services ("GXS") and Sterling Commerce, networks
which we believe to account for approximately 60% of the estimated EDI users,
have chosen to discontinue their interconnect arrangements with the Company. GXS
discontinued its interconnection with our service in September 2001 and Sterling
Commerce discontinued its interconnection with our service in April 2002. We
have entered into arrangements with Peregrine Systems, Inc. and IBM Corporation
so our customers can continue to communicate through us with their trading
communities. As a result of these new interconnection arrangements, we will
incur additional costs and may lose existing customers if the arrangements we
have provided are inadequate for their business purposes. We believe, however,
that the arrangements we have made satisfy our existing customers and that
our business and financial condition will not be materially or adversely
affected as a result of these new arrangements.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
In December 2001, the Securities and Exchange Commission ("SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in Note 2 of the notes to the consolidated
financial statements included elsewhere in this annual report. In many cases,
the accounting treatment of a particular transaction is specifically dictated by
generally accepted accounting principles with no need for management's judgment
in their application. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially different
result. We have identified the following to be critical accounting policies of
the Company:
Revenue Recognition: The Company derives revenue from subscriptions to its
ICC.NET service, which include transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the services
are rendered. The Company also derives revenue through implementation fees,
interconnection fees and by providing data mapping services to its customers.
Implementation fees are recognized over the life of the subscription period.
Interconnection fees are fees charged to connect to another VAN service and are
recognized when the data is transmitted to the connected service. Revenue from
data mapping services is recognized when the map has been completed and
delivered to the customer.
18
The Company also derives revenue from its service bureau. Service bureau
revenues are comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC
services, including UPC number generation, UPC catalog maintenance and UPC label
printing. The service bureau also derives revenue from software licensing and
provides software maintenance and support. Revenue from the EDI services and UPC
services is recognized when the services are provided. The Company accounts for
its EDI software license sales in accordance with the American Institute of
Certified Public Accountants' Statement of Position 97-2, "Software Revenue
Recognition", as amended. Revenue from software licenses's recognized when all
of the following conditions are met: (1) a non-cancelable non-contingent license
agreement has been signed; (2) the software product has been delivered; (3)
there are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts is recognized ratably over the life of the
contract. The service bureau's software license revenue was not significant in
any of the periods presented.
In addition, SOP 97-2, generally requires revenue from software
arrangements involving multiple elements to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation, or training and
recognized as the element is delivered and the Company has no significant
remaining performance obligations. The Company's multiple element arrangements
generally consist of a software license and post contract support. The Company
allocates the aggregate revenues from multiple element arrangements to each
element based on vendor specific objective evidence. The Company has established
vendor specific objective evidence for each of the elements as it sells both the
software and post contract customer support independent of multiple element
agreements. Customers are charged standard prices for the software and post
contract customer support and theses prices do not vary from customer to
customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education and
training at seminars hosted by leading universities around the United States.
Revenue from EDI and electronic commerce consulting and education and training
are recognized when the services are provided. Revenue from fixed fee
professional service contracts are recognized using the percentage-of-completion
method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill will be written down to its
implied fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
19
Other Intangible Assets: Other Intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets that were
not subject to amortization
Impairment of long-lived assets. Long-lived assets of the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. The
Company evaluates the carrying value of its long-lived assets in relation to the
future undiscounted cash flows of the asset when indications of impairment are
present. If it is determined that an impairment in value has occurred, the
excess of the carrying value of the asset will be written down to the present
value of the expected future operating cash flows to be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation arrangements with its employees using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-based Compensation." SFAS 123
established a fair-value-based method of accounting for stock-based compensation
plans. Stock-based awards to nonemployees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income Taxes: We have a history of unprofitable operations which generated
significant state and federal tax net operating losses, or NOL carryforward.
Generally accepted accounting principles in the United States require that we
record a valuation allowance against the deferred tax asset associated with this
NOL if it is "more likely than not" that we will not be able to utilize it to
offset future taxes. Due to our history of unprofitable operations, we have
recorded a valuation allowance equal to 100% of these deferred tax assets.
It is possible, however, that we could be profitable in the future at
levels which cause management to conclude that it is more likely than not that
we will realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, we would immediately record the estimated net realizable value of
the deferred tax asset at that time and would then provide for income taxes at a
rate equal to our combined federal and state effective rates. Subsequent
revisions to the estimated net realizable value of the deferred tax asset could
cause our provision for income taxes to vary significantly from period to
period, although our cash tax payments would remain unaffected until the benefit
of the NOL is utilized.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
The following discussion reviews items incorporated in our financial statements
that required the use of significant management estimates.
In connection with our purchase of Intercoastal Data Corporation ("IDC")
and Research Triangle Commerce, Inc. ("RTCI"), we allocated the total
acquisition costs to all tangible and intangible assets acquired and all
liabilities assumed, with the excess purchase price over the fair value of net
assets acquired recorded to goodwill. To arrive at the allocation of the total
purchase price, management used the best information available to make certain
assumptions in estimating the fair market value of IDC's and RTCI's tangible
assets, intangible assets (such as trademarks, brand, intellectual property
rights to developed technology, and customer lists) and liabilities.
Impairments of goodwill and acquired intangibles in the amount of
$1,711,000 and $16,708,000 were as recorded during the years ended July 31, 2002
and July 31, 2001, respectively. During fiscal 2001, due to a significant
reduction of the workforce of the professional services segment, a steep decline
in the value of companies similar to it, continued operating losses and a
significant reduction in the forecasted future operating profits, management
determined that triggering events had occurred related to the certain acquired
intangible assets of the Professional Services segment, namely its assembled
workforce, its customer list and goodwill. The projected cash flow analysis
related to those assets determined that the assets had been impaired. These
intangible
20
assets were written down to fair value based on the discounted expected
future cash flows from the intangible assets over their remaining estimated
useful lives. An impairment loss of $16,708,000 was recognized as a result of
this evaluation. During fiscal 2002, due to a continued decline in its revenues
throughout the course of 2002, continued operating losses and a significant
reduction in forecasted future operating profits, the Professional Services
segment was tested for impairment during the fourth quarter of fiscal 2002. An
impairment loss of $1,711,000 was recognized as a result of this evaluation. The
fair value of the Professional Services segment unit was estimated using the net
present value of expected future cash flows.
In March 2000, ICC granted an option to purchase 100,000 shares of class A
common stock pursuant to a consulting agreement with a former executive officer
and board member. The Black-Scholes option-pricing model was used to determine
the market value of these options, which required management to make certain
estimates for values of variables used by the model. Non-cash consulting charges
for this stock option amounted to $450,000 in the year ended July 31, 2001.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes pricing model. This amount has been deducted from the Company's
net loss to increase the net loss attributable to common stockholders.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for into options and warrants of ICC, providing the holders the right to
receive, upon exercise, an aggregate of 394,905 shares of ICC class A common
stock and $343,456 of cash. The options and warrants were valued using the
Black-Scholes pricing model. Management estimated the values for stock price
volatility, the expected life of the options and risk-free rate based on
information that was available to management at the time the Black-Scholes
option-pricing calculations were made. The fair value of the vested portion of
the options was included in the purchase price for RTCI.
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2002 Compared with Fiscal Year Ended July 31, 2001.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported segment.
All significant intersegment activity has been eliminated. Accordingly, the
segment results below exclude the effect of transactions with our subsidiary.
Year Ended
July 31,
------------------------------
Income (loss) before income taxes: 2002 2001
----------- ------------
ICC.NET $(3,126,008) $(12,057,379)
Service Bureau 4,948 (391,048)
Professional Services (3,426,493) (20,336,812)
----------- ------------
Consolidated loss before income taxes $(6,547,553) $(32,785,239)
=========== ============
Results of Operations - ICC.NET
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their
21
trading communities, many of which may have incompatible systems, by translating
the documents and data files into any format required by the receiver. The
following table summarizes operating results for our ICC.Net service:
Year Ended
July 31,
------------------------------
2002 (1) 2001 (1)
----------- ------------
Revenues:
VAN services $ 7,330,664 $ 4,690,919
Services to Triaton 105,626 1,068,500
Technology license 3,000,000 --
----------- ------------
10,436,290 5,759,419
Expenses:
Cost of services 5,744,587 5,794,541
Product development and enhancement 822,314 625,279
Selling and marketing 3,034,683 4,523,331
General and administrative 4,230,242 6,913,600
Non-cash charges 59,989 450,110
----------- ------------
13,891,815 18,306,861
----------- ------------
Operating loss (3,455,525) $(12,547,442)
----------- ------------
Other income, net 329,517 490,063
----------- ------------
Loss before income taxes $(3,126,008) $(12,057,379)
=========== ============
(1) Restated to reflect the integration of data mapping services into
the ICC.NET segment.
Revenues - ICC.Net - Revenues of our ICC.NET service were 73% of our total
consolidated revenues for the fiscal year ended July 31, 2002 ("2002"). Our
ICC.NET service revenues increased $4,677,000 in 2002 from the fiscal year ended
July 31, 2001 ("2001"). VAN revenues increased $2,640,000 in 2002, or 56% from
the prior year. This increase is the result of a larger customer base and
increased volume. Services to Triaton decreased from $1,069,000 under the
original agreement in 2001 to $106,000 in 2002. During 2002, we recognized
technology license revenue of $3,000,000 from Triaton for the license of our
ICC.NET service. Under the terms of the July 2002 license agreement, we granted
Triaton a non-exclusive license to use ICC's electronic data interchange system
in its most recent version anywhere in the continent of Europe, Great Britain
and Ireland for a five-year term. Triaton has the right to provide and use the
ICC.NET service to its customers. Triaton paid us $1,500,000 in July 2002 and an
additional $1,500,000 in October 2002 under this license agreement. ICC will not
report any additional revenues under the amended agreement with Triaton, except
that, at Triaton's request, ICC shall provide sales support, customer support
and software support on its standard terms and conditions
Cost of services - ICC.Net - Cost of services relating to our ICC.NET
service was 55% of revenues derived from the service in 2002, compared to 101%
of revenues derived from the service in 2001. These costs consist primarily of
salaries and employee benefits, data lines and amortization of capitalized
software and mapping technology. The decrease of $50,000 in 2002 from the prior
year was primarily the result of increased connectivity costs offset by lower
salaries and employee benefits. We reduced our cost of services personnel to 28
at the end of 2002 from 38 at the end of 2001 and as a result we were able to
reduce salaries and employee benefits by $521,000. The reduction in the number
of employees did not affect the quality or reliability of our service. Rental
expenses for leased computer equipment decreased $120,000 in 2002 compared to
the prior year. Connectivity fees are those costs that we incur to transmit data
electronically. These fees include charges from other VANs and charges from
Internet service providers. Total connectivity fees increased $370,000 in 2002.
The increase in connectivity fees was primarily due to additional fees incurred
to offer our customers and their trading partners alternate connectivity as a
result of GXS and Sterling disconnecting our service from their networks. In
addition, amortization increased $239,000 in 2002. This was primarily due to the
acquisition of RTCI. Because the acquisition took place at the beginning of the
second quarter of 2001, only nine months of mapping technology amortization was
recognized in 2001, compared to twelve months of amortization in 2002. We
anticipate that our
22
ICC.NET cost of services will continue to decline as a percentage of revenues in
future periods due to increased utilization of our existing infrastructure as we
expect the use of our ICC.NET service to increases.
Product development and enhancement - ICC.Net - Product development and
enhancement costs relating to our ICC.Net service consist primarily of salaries
and employee benefits. The increase of $197,000 in 2002 from 2001 was primarily
caused by an increase in salaries and employee benefits of $317,000 partially
offset by reductions in facility-related costs of $72,000, travel expenses which
were reduced $22,000 and computer equipment rental costs which were reduced
$27,000. These reductions were the result of our cost reduction measures.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising, trade shows and travel-related costs. Selling and marketing
expenses related to our ICC.NET were reduced $1,489,000 in 2002 from 2001.
Salaries and employee benefits related to our ICC.NET service decreased
$645,000, primarily due to the elimination of our telesales force. Consulting
and professional fees were reduced $275,000, advertising and trade show expenses
were reduced $233,000, rent and facility-related costs were reduced $157,000,
and travel-related costs were reduced $141,000--all as a result of our cost
reduction measures.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, rent, depreciation, telephone, insurance, amortization and consulting
and professional fees. General and administrative expenses supporting our
ICC.NET service decreased $2,683,000 in 2002 from the prior year. Salaries and
related employee benefits decreased $1,220,000 in 2002, due to a reduction in
the workforce. In addition, recruiting fees decreased $137,000. The prior year,
2001, included severance payments of $448,000, primarily due to the termination
of an officer. Consulting and professional fees decreased $704,000 in 2002
primarily as a result of the termination of a consulting contract with a former
officer of the Company that was recognized in 2001. Amortization decreased
$119,000, primarily as a result of the Company's implementation of SFAS No. 142,
effective August 1, 2001, which requires goodwill to be tested for impairment on
a periodic basis and no longer permits the amortization of goodwill.
Non-cash charges - ICC.NET - During 2002 the non-employee members of our
Board of Directors received class A common stock with a value of $60,000 as
compensation for their services. No such compensation was paid in 2001. In March
2000, ICC granted an option to purchase 100,000 shares of class A common stock
pursuant to a consulting agreement with a former executive officer and board
member of ICC. Non-cash consulting charges for this stock option amounted to
$450,000 in 2001. No such charges were incurred in 2002.
Other income, net - ICC.NET - Interest and investment income decreased
$364,000 in 2002 compared to 2001 as the result of lower average cash balances
and interest rates compared to the prior year. This was partially offset by
other non-operating income of $208,000 during 2002. This includes a legal
settlement from a competitor of $63,000 and the favorable settlement of an
acquisition liability of $145,000. No such settlements were recorded in 2001.
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau:
Year Ended
July 31,
---------------------------
2002 2001
---------- -----------
Revenues:
Services $1,633,183 $ 1,462,088
Expenses:
Cost of services 839,217 668,535
Product development and enhancement 154,589 305,750
Selling and marketing 123,100 105,382
General and administrative 511,329 773,469
---------- -----------
1,628,235 1,853,136
---------- -----------
Operating income (loss) 4,948 (391,048)
---------- -----------
Other income, net -- --
---------- -----------
Income (loss) before income taxes $ 4,948 $ (391,048)
========== ===========
23
Revenues - Service Bureau - Revenues of our service bureau were 11% of our
total consolidated revenues for 2002. The service bureau's revenues were
primarily generated from services performed, customer support and licensing
fees. This increase in revenues of $171,000 was primarily the result of an
increased demand for barcode label printing from existing customers.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 51% of revenues of the service bureau in 2002, compared to
46% of revenue of the service bureau in 2001. These costs consist primarily of
salaries and employee benefits, data lines, rent and consultants. Salary and
benefits increased by $112,000 in 2002 from 2001, primarily as a result of an
increase in staff. Facilities related costs increased $29,000 and consulting
expenses increased $10,000 from the prior year.
Product development and enhancement - Service Bureau - Product development
and enhancement costs relating to our service bureau consist primarily of
salaries and employee benefits and rent. Product development and enhancement
costs incurred by our service bureau decreased $151,000 in 2002 from 2001. The
decrease was primarily attributable to capitalized labor costs for newly
developed software in the amount of $92,000. Also, consulting fees were reduced
by $52,000.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent, which increased $18,000.
General and administrative - Service Bureau - General and administrative
expenses supporting our service bureau consist primarily of salaries and
employee benefits, depreciation, amortization, rent, telephone and office
expenses. Amortization decreased $241,000, primarily as a result of the
Company's implementation of SFAS No. 142, effective August 1, 2001, which
requires goodwill to be tested for impairment on a periodic basis and no longer
permits the amortization of goodwill.
Results of Operations - Professional Services
Our professional services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions. Our professional services segment also conducts a
series of product-independent EDI seminars for electronic commerce users. The
following table summarizes operating results for our professional services:
Year Ended
July 31,
-------------------------------
2002 (1) 2001 (1)
------------ ------------
Revenues:
Services $ 2,152,323 $ 2,521,012
Expenses:
Cost of services 2,191,750 2,891,278
Selling and marketing 341,717 754,871
General and administrative 1,107,741 1,995,515
Non-cash charges for stock-based 190,019 540,938
compensation & services
Impairment of goodwill and acquired
intangible 1,710,617 16,708,479
------------ ------------
5,541,844 22,891,081
------------ ------------
Operating loss (3,389,521) (20,370,069)
Other income (expense), net (36,972) 33,257
------------ ------------
Loss before income taxes $ (3,426,493) $(20,336,812)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
24
Revenues - Professional services - Revenues from professional services
were 15% of our total consolidated revenues for 2002. Revenues from professional
services consist of consulting and educational services. As a result of the
continuing economic slowdown, revenues from professional services decreased
$369,000 in 2002 from 2001 for consulting services.
Cost of services - Professional Services - Cost of services relating to
professional services was 102% of revenues derived from professional services in
2002, compared to 115% of revenues in 2001. Cost of services consists primarily
of salaries and benefits, consultants, travel related expenses, amortization and
off site facilities. Cost of services related to our professional services
decreased $700,000 in 2002. Amortization expense decreased $472,000 from the
prior year. As required by FAS 142, we reclassified the workforce intangible
from other intangible assets to goodwill and as a result, no such amortization
charge was incurred in 2002. We reduced our cost of services personnel to 13 at
the end of 2002 from 24 at the end of 2001. As a result salary and employee
benefits decreased by $158,000 in 2002. In addition, as part of our cost
reduction measures, facility-related costs and computer equipment rentals
decreased $50,000 from the prior year.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits, travel related expenses, advertising, trade shows and
amortization. Selling and marketing expenses related to our professional
services were reduced $413,000 in 2002 from the prior year. This decrease is the
result of a decrease in salaries and employee benefits of $78,000. Amortization
expense for the acquired customer list was no longer recorded during 2002 as an
impairment charge for the full carrying value was recognized in the fourth
quarter of 2001. This resulted in a decrease of $61,000 in amortization expense
during the current year. In addition, as part of our cost reduction measures,
travel-related expenses, tradeshow fees, advertising expenses and office
expenses decreased by $272,000 from the prior year.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, legal fees, telephone charges,
depreciation, amortization and professional fees. General and administrative
costs supporting our professional services decreased $888,000 in 2002 from 2001.
The decrease was partially attributable to a decrease in depreciation and
amortization of $886,000, a result of the Company's implementation of SFAS No.
142, effective August 1, 2001, which requires goodwill to be tested for
impairment on a periodic basis and no longer permits the amortization of
goodwill. The decrease was also attributable to a decrease in salaries and
employee benefits of $254,000, primarily due to a reduction in the workforce.
Offsetting these decreases were a lease abandonment charge of $193,000 and an
increase of $61,000 in legal and professional fees.
Non-cash charges - Professional Services - Non-cash charges for
compensation and services relating to our professional services in 2002
consisted of $190,000 of stock-based compensation expenses related to 172,907
unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI. The value of the restricted shares was amortized from the
date of acquisition through January 1, 2002. During 2001, professional services
recognized $541,000 of stock based compensation expense related to these
restricted shares.
25
Impairment of Acquired Intangibles - Professional Services - During 2001,
professional services recorded an impairment charge of $16,708,000 related to
the impaired intangibles acquired from RTCI. Due to a significant reduction of
the workforce of professional management, a steep decline in the value of
similar companies, continued operating losses and a significant reduction in
forecasted operating profits, we determined that a triggering event had occurred
related to the to certain acquired intangible assets of the professional
services segment, namely the assembled workforce, the customer list and
goodwill. Projected cash flow analysis related to these assets determined that
this asset had been impaired. This intangible assets were written down in 2001
to fair value based on the related discounted expected future cash flows and
from the intangible assets. During 2002 management once again determined that
triggering events had occurred related to goodwill. The carrying value of
goodwill was reevaluated for impairment and an impairment charge of $1,711,000
was recognized in 2002.
Income tax benefit - Professional Services - The income tax benefit of
$1,929,887 in 2001 primarily resulted from the decrease of our deferred tax
liability associated with the amortization of identifiable intangibles and from
the offset of deferred tax liabilities against post-acquisition net operating
losses. No such benefit was recorded in 2002.
Fiscal Year Ended July 31, 2001 Compared with Fiscal Year Ended
July 31, 2000.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segment. All significant intersegment activity has been eliminated. Accordingly,
the segment results below exclude the effect of transactions between with our
subsidiary.
Year Ended
July 31,
----------------------------
Consolidated income (loss) before income taxes: 2001(1) 2000
------------ ------------
ICC.NET $(12,057,379) $(14,485,627)
Service Bureau (2) (391,048) --
Professional Services (3) (20,336,812) --
------------ ------------
Consolidated loss before income taxes $(32,785,239) $(14,485,627)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
(2) We acquired our service bureau in August 2000.
(3) We acquired our porfessional services business in November 2000.
Results of Operations - ICC.Net
The following table summarizes operating results for our ICC.Net service:
Year Ended
July 31,
-------------------------------
2001 (1) 2000
------------ ------------
Revenues:
VAN services $ 4,690,919 $ 1,303,441
Services to Triaton 1,068,500 --
------------ ------------
5,759,419 1,303,441
Expenses:
Cost of services 5,794,541 2,514,282
Product development and enhancement 625,279 702,218
Selling and marketing 4,523,331 3,273,294
General and administrative 6,913,600 4,814,160
Non-cash charges 450,110 5,160,345
------------ ------------
18,306,861 16,464,299
------------ ------------
Operating loss (12,547,442) $(15,160,858)
------------ ------------
Other income, net 490,063 675,231
------------ ------------
Loss before income taxes $(12,057,379) $(14,485,627)
============ ============
(1) Restated to reflect the integration of data mapping services into the
ICC.NET business segment.
26
Revenues - ICC.NET - Revenues of our ICC.NET service were 59% of our total
consolidated revenue for the fiscal year ended July 31, 2001 ("2001"). Our
ICC.NET services revenues increased $4,456,000 in 2001 from the fiscal year
ended July 31, 2000. VAN revenue increased $3,387,000 in 2001 or 260% from the
prior year. The increase is the result of a larger customer base and increased
volume. This increase includes $1,000,000 of fees from Triaton, under a Joint
Services Agreement dated July 28, 2000.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was $5,795,000, or 101% of revenues derived from the service in 2001,
compared to $2,514,000 or 193% of revenues in 2000. These costs consist
primarily of salaries and employee benefits, data lines and amortization of
capitalized software and mapping technology. Salaries and employee benefits
related to the ICC.NET service increased $1,814,000 and computer equipment
rentals increased $222,000. Depreciation and amortization increased $680,000
primarily as a result of the amortization of the mapping technology acquired as
part of our acquisition of RTCI during 2001. In addition, data lines costs
increased $207,000, consulting fees increased $152,000 and rent expense
increased $92,000. The increases in salaries, employee benefits, data lines and
support were due to the increased use of our service, which resulted in the
hiring of additional employees for our customer and technical support functions.
We anticipate that our ICC.Net cost of services will continue to decline as a
percentage of revenues in future periods due to increased utilization of our
existing communications ifrastructure as the use of our service increases.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The decrease of $77,000 in 2001 from 2000 is attributable
to a decrease in salaries and benefits of $205,000, partially offset by
increases in rent expense of $81,000 and computer equipment rental costs of
$44,000.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consisted primarily of salaries and employee benefits,
advertising, trade shows and travel-related costs. Selling and marketing
expenses for our ICC.NET service increased $1,250,000 from the prior year. This
is attributable to an increase in salaries and employee benefits of $718,000 as
well as expenditures for trade shows, advertising and consultants which
increased a total of $348,000 as we increased our marketing efforts. In
addition, rent expense increased $109,000 due to the lease of additional office
space expenditures related to the RTCI acquisiiton and were not present in the
prior year.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, rent, depreciation, telephone, insurance, amortization and consulting
and professional fees. Expenses related to our ICC.Net services increased
$2,099,000 in 2001. The general and administrative expenses include increases in
rent expense of $251,000 and salaries and benefits of $633,000. In addition,
depreciation expenses increased $224,000 from the prior year, primarily as a
result of additional fixed assets acquired. Severance of $455,000 was recognized
primarily due to the termination of an executive officer in
27
2001. In addition, consulting fees increased $499,000 primarily due to a f