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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 2003
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |_| No |X|
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
As of October 28, 2003 the issuer had outstanding 13,797,567 shares of
Class A Common Stock. The aggregate market value of the Class A Common Stock
held by non-affiliates as of October 28, 2003 was approximately $17,936,837,
based on a closing price for the Class A Common Stock of $1.30 on the Nasdaq
SmallCap Market on that date.
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INTERNET COMMERCE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I .................................................................. 1
Item 1. Business................................................. 1
Item 2. Properties............................................... 13
Item 3. Legal Proceedings........................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...... 13
PART II .................................................................. 14
Item 5. Market for Internet Commerce Corporation's
Common Equity and Related Stockholder Matters............ 14
Item 6. Selected Consolidated Financial Data..................... 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 17
Risk Factors............................................. 37
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 41
Item 8. Financial Statements and Supplementary Data.............. 41
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 42
Item 9A Controls and Procedures.................................. 42
PART III .................................................................. 43
Item 10. Directors and Executive Officers ........................ 43
Item 11. Executive Compensation................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 43
Item 13. Certain Relationships and Related Transactions........... 43
Item 14. Principal Accounting Fees and Services................... 43
PART IV .................................................................. 44
Item 15. Financial Statements, Financial Schedules, Exhibits
and Reports on Form 8-K.................................. 44
Signature......................................................... 47
PART I
Item 1. Business
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this annual report regarding our
financial position, business strategy and plans and objectives of management for
future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this annual
report, the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
statements reflect our current view with respect to future events and are
subject to risks, uncertainties and assumptions related to various factors
including, without limitation, those described below the heading "Overview",
those described starting on page 37 of this annual report under the heading
"Risk Factors" and in our registration statements and periodic reports filed
with the Securities and Exchange Commission under the Securities Act and the
Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described in this
annual report as anticipated, believed, estimated, expected or intended.
Overview
Internet Commerce Corporation is in the e-commerce business-to-business
communication services market, providing electronic commerce ("EC")
infrastructure solutions. References in this annual report to the "Company,"
"ICC," "we" or "us" mean Internet Commerce Corporation, a Delaware corporation,
and its subsidiary on a consolidated basis, unless the context otherwise
requires.
Our business operates in three segments. These three segments are:
o ICC.NET - Our ICC.NET service, the Company's global Internet-based
value added network or VAN, uses the Internet and our proprietary
technology to deliver our customers' documents and data files to
members of their trading communities, many of which may have
incompatible systems, by translating the documents and data files
into any format required by the receiver. We believe that our
ICC.NET service has significant advantages over traditional VANs,
email-based and other Internet-based software systems, because our
service is provided at a low cost, generally with greater
transmission speed in nearly real-time and offers more features.
ICC.NET provides the following services:
o Traditional VAN services -- our ICC.NET service provides
the full suite of traditional VAN services, but uses the
Internet to provide cost savings and increased
capabilities for our customers;
o Electronic data interchange ("EDI") for web-based
retailers -- our ICC.NET service provides an electronic
document and data file delivery link between web-based
retailers and their vendors that require documents and
data files to be transmitted using EDI format;
o AS2 capability -- ICC supports the EDI-INT standard for
those customers that are required to communicate via
this protocol.;
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o EDI-to-fax service -- our ICC.NET service can translate
electronic documents into fax format and send the
documents by fax to our customers' trading partners that
are not equipped to receive electronically transmitted
documents;
o Data mapping -- our data mapping capabilities maximize
the value of our network by providing in-line data
translation facilities to our customers;
o Large-scale electronic document management and delivery
-- our ICC.NET service can transmit large-scale non-EDI
electronic documents and data files and provide
real-time delivery, archiving, security, authentication
and audit services;
o Point-of-Sale service -- the exchange of Point-of-Sale
data is growing in the retail industry to improve supply
chain efficiency. Up to now, the cost of moving large
amounts of Point-of-Sale information electronically has
been prohibitive. ICC offers a Point-of-Sale service
that allows retailers and their suppliers to exchange
data quickly and effectively utilizing the ICC.NET
service;
o ICC.CATALOG - our web-based electronic product catalog
service transforms static vendor product information
into a pro-active purchasing tool through the direct
creation of EDI compliant purchase orders that can be
transmitted over the ICC.NET service by synchronizing
trading partner data in real-time, including graphic
images of all products and by offering sophisticated
navigation and advanced search capabilities to
streamline product comparison and order information; and
o HIPAA.ICC.NET -- our HIPAA.ICC.NET is a highly secure
Internet-based low cost network that reliably moves all
EDI healthcare documents between providers and payers in
real-time over the ICC.NET service and provides users
with a specialized user interface.
o Service Bureau - Our Service Bureau manages and translates the data
of small and mid-sized companies that exchange EDI data with large
companies and provides the following services and software products:
o Receives electronic purchase orders from large retailers
and converts the purchase orders into hard copies or
other alternative formats and delivers those documents
to their suppliers that are our customers;
o Converts paper or other alternatively formatted invoices
from our customers into EDI format that is transmitted
to their trading partners; and
o Software - ICC markets a broad range of Windows-based
software products used by suppliers to reach large
retailers including ScanPak Professional, which provides
UPC (Universal Product Code) services for ASN (Advanced
Ship Notice) Casing & UCC (Uniform Code Council) 128
labels.
o Professional Services - Our Professional Services segment
facilitates the development and operation of comprehensive
business-to-business e-commerce solutions. We provide the following
professional services:
o EC infrastructure solutions by providing mission critical
e-commerce consulting, software, outsourced services and
technical resource management;
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o HIPAA (Health Insurance Portability and Accountability Act)
impact and data gap analysis for health care providers and
payers. We can design, build, test and rollout systems to
ensure compliance with Federally mandated standards for health
care data. Through strategic alliances with industry leading
partners, including Emanio, Inc., a leading provider of
translator software; HCEC a leading healthcare E-business
collaborative that markets ICC's services to its member
organizations; and ACOM, a leading provider of tactical
back-office technology solutions that integrates financial/ERP
systems to form comprehensive Electronic Purchasing-to-Payment
(EP2P) systems, we offer third-party translators, combined
with our ICC.NET data mapping capabilities; and
o A series of product-independent EDI seminars for e-commerce
users. The seminars are hosted by leading universities and
training facilities across the United States. We also develop
in-house EDI training programs and offer public seminars for
understanding and implementing HIPAA regulations.
We are subject to various risk factors that are described under the
heading "Risk Factors" starting on page 37 of this Form 10-K.
Corporate Background
The Company was incorporated under the name Infosafe Systems, Inc. in
November 1991 in the State of Delaware. Our principal executive offices are
located at 805 Third Avenue, New York, NY 10022. Our telephone number at that
address is (212) 271-7640
Industry Background
Although the Internet has become an important sales channel, we believe
that its primary value is in achieving business efficiencies and cost savings by
expanding global business-to-business connectivity.
We believe that improvements in speed and efficiency in the supply chain
between businesses are important and that improvements in the capacity of a
business to purchase and sell goods and services or raw materials within its
business community is an important factor in its ability to compete. Thus, for
example, in a just-in-time economy, timeliness, and not price, may be the most
important component in creating a competitive advantage.
The speed and efficiency of the supply chain between businesses are
hindered by incompatibilities in technologies and methodologies used to
communicate business information among trading communities, which slows down the
flow of information and creates bottlenecks. These incompatibilities stem from
the diversity of trading partners, which may range from members of the Fortune
1000 to sole proprietors providing niche products. Trading partners may
therefore have different communications capabilities and requirements. Some
trading partners may rely on paper or fax to communicate, others may exchange
data in proprietary file formats through direct dial-up connections or over the
Internet, while the largest trading partners use electronic methods, such as
EDI, over VANs.
Development of Our Business
Through July 2000, our business was entirely focused on our ICC.NET
service. Our ICC.NET service is currently in use by our customers for the secure
exchange of business-to-business electronic forms and data files.
In addition to the continued development and enhancement of our ICC.NET
service, we made two acquisitions during fiscal 2001. These acquisitions have
enabled us to offer a more complete range of services to allow our customers to
expand their EC trading communities and bridge their legacy systems to the
Internet.
In August 2000, we acquired Intercoastal Data Corporation, referred to as
IDC, through which we acquired our service bureau segment. IDC is engaged in the
development, marketing, sale and other exploitation of business-
3
to-business EDI standard-based applications for standard-based EDI exchange over
VANs, private networks, exchanges, extranets and the Internet. In November 2000,
we completed the acquisition of Research Triangle Commerce, Inc., referred to as
RTCI, through which we acquired our professional services segment. RTCI is an EC
infrastructure solutions company serving the business-to-business e-commerce
market. RTCI assists its clients to conduct business electronically through a
continuum of services, including eConsulting, data transformation mapping (EDI,
EAI, XML) and internetworking. RTCI developed a business model that offers
remote service delivery, fixed and value-based pricing and reusable solutions.
Data transformation mapping has subsequently been integrated into the ICC.NET
service offerings.
On a sequential quarterly basis, cash used in operating activities for the
second, third and fourth fiscal quarters of 2003 was $1.2 million, $809,000 and
$159,000, respectively. While we anticipate that we will achieve positive cash
flow from operations in the third and fourth quarters of the year ending July
31, 2004, we do not anticipate positive cash flow from operations in the first
or second quarters of that fiscal year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources" and "Risk Factors" elsewhere in this annual report.
Business Strategy
Our ICC.NET service provides a platform with many applications that allows
our customers to fulfill a substantial portion of their electronic document and
data delivery requirements with significantly less administrative effort and
cost than they previously incurred. ICC.NET provides our customers with the
ability to send us the majority of their important documents and data files
which we then transmit to each of the intended recipients in any form requested
by the recipient. Therefore, our customers can integrate a substantial portion
of their document and data file delivery methods into a single, seamless
process.
We intend to continue to market ICC.NET to new customers with an
increasing focus on industries in which ICC.NET has achieved penetration and
revenues. Those industries include book retailing and publishing, pharmaceutical
manufacturing, automotive, footwear manufacturing, office supplies,
transportation logistics, financial services, manufacturing, retail, grocery and
soft goods manufacturing.
A large company that uses EDI to communicate with its vendors is referred
to as a hub; its trading partners, vendors or customers are referred to as
spokes. We are aware that a significant number of these hub companies intend to
expand their use of electronic commerce to more of their spoke companies. Small
spoke companies using our ICC.NET service require only an Internet connection
and a web browser to receive and transmit documents electronically and are also
able to receive electronic documents using our ICC.NET fax service. As a result,
large hub companies can now request or encourage electronic commerce with their
small spoke companies. In turn, many of these spoke companies may become the hub
companies for their suppliers, which could further broaden the reach of our
ICC.NET service.
Additionally, we will focus on marketing ICC.NET to other members of the
trading communities of our existing customers and will pursue opportunities to
cross-sell our services to the customers in our three business segments.
Our current customers conduct their business internationally, and we are
servicing these customers and pursuing new international customers. See
"International" below.
We will continue to encourage the use of our ICC.NET service through
exceptional customer service. We currently offer technical support to our
customers twenty-four hours a day, seven days a week. Due to the multiple
redundancies of all of our systems and the stability of the Securities Industry
Automation Corporation, or SIAC, which is the location of our data center, our
ICC.NET service has been fully operational more than 99% of the time. SIAC
manages all computing operations for the New York Stock Exchange and the
American Stock Exchange.
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We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that sequential
period-to-period comparisons of our operating results for any particular period
will not necessarily indicate our future performance.
Services and Products
ICC.NET, our global Internet-based value added network, or VAN, provides
complete supply chain connectivity solutions for electronic data interchange, or
EDI, and e-commerce and offers users a sophisticated vehicle to send and receive
files of any format and size securely. We also offer a broad range of consulting
services and associated mapping and XML technology, custom application
development, comprehensive e-commerce education and an EDI service bureau. The
following summarizes the principal services and products offered by our three
operating segments, namely our ICC.NET service, service bureau and professional
services.
ICC.NET Service
Our ICC.NET service provides a solution to the communication difficulties
caused by the differences in data formats, networks and communications methods
used by the members of trading communities by bridging the gap in technological
capabilities and enabling seamless electronic business communication. Our
ICC.NET service can translate incompatible files into a format any user is
capable of receiving and uses the Internet to transmit the data file by EDI, fax
or other formats. Users of our ICC.NET service can thus improve their
productivity and reduce their costs by enabling electronic business-to-business
transactions between parties with different systems.
Our ICC.NET service improves the basic infrastructure of
business-to-business electronic communications by providing intelligent
messaging and routing using the Internet, which, improves the security,
reliability, ease of use and acceptability of using the Internet for
business-to-business electronic commerce. ICC.NET performs these functions
without requiring that the user purchase software and at prices that are highly
competitive.
We designed our ICC.NET service to avoid what we believe are
inefficiencies in traditional VAN services, software products and phone and
manual fax processes, including higher costs, slower transmission and greater
difficulty in operation than our ICC.NET service. ICC.NET incorporates
proprietary technology and is immediately accessible using a standard Internet
connection and a web browser.
Our ICC.NET service uses the Internet to deliver more features than
traditional VANs, including the following:
o Documents are delivered up to 100 times faster, depending upon the
speed of the customer's Internet connection;
o Our customers can more effectively track, monitor and process
business documents and other data files using our real-time document
management java-applet screen displays;
o Our ICC.NET service allows us to consistently provide confirmed
delivery of documents and other data files;
o Documents can be delivered either in real-time or retrieved when
convenient for the customer. Real-time delivery reduces the
potential for document corruption, bottlenecks and other problems
associated with batch delivery modes, which are traditionally
store-and-forward and in some cases can take several hours to be
delivered;
o Our ICC.NET service can handle data transmissions other than
standard business documents, such as images, engineering drawings,
architectural blueprints, audio and certain types of video; and
o Our customers enjoy flexibility in creating different document types
and formats for various business applications. For example, our
customers can add their business logo to their documents and can use
their own format for each document type.
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In addition, we believe our ICC.NET service offers advantages over e-mail
and other Internet-based electronic commerce systems, such as a full range of
VAN services, translation of a wide variety of data into customer-specified
formats, management of business documents or data files of virtually any size
and of a wide variety, including purchase orders, invoices, statements,
inventory tracking and shipping documents, images, engineering drawings,
architectural blueprints, audio and certain types of video. Our ICC.NET service
also provides a complete audit trail of content delivery and customer selection
from a variety of security methods.
ICC.NET is one of the only Internet-based data transmission services that
communicates to over sixty-five traditional VANs, private networks and exchanges
that currently provide EDI services for approximately 90% of companies that are
capable of using EDI. As a result, we can handle EDI traffic between our
customers and any of their trading partners that choose to continue to use a
traditional VAN and a customer that uses a traditional VAN and its trading
partners that do not. The ability to reach these networks provides our customers
with the possibility of maximum penetration into their trading partner
community.
EDI Mapping Factory(R). We are a provider of EDI mapping services to
enable translation between different data formats.. Our EDI Mapping Factory(R)
provides off-site mapping using a variety of translators on multiple platforms.
Our experience includes mapping for ANSI ASC X12 and UN/EDIFACT Transaction
Sets, XML and other standards, including support for SAP IDOCs. We provide
expert data mapping services for HIPAA compliance initiatives. We can also
provide data transformation services for database conversions, client specified
files and other tasks involving the care and movement of data. Our systems and
technicians can handle many operating system environments, including Windows NT,
UNIX, AS/400 and mid-range systems.
XML Services. The industry standardization of XML continues to evolve
slowly, with no clear winners for a single business-to-business, or B2B,
standard. New proposed standards emerge periodically, and consolidation we
believe may be some time away. Our experience with XML, in many forms, allows us
to provide the flexibility and interoperability our customers require in this
changing environment. We provide a complete spectrum of services, from design
through inline translation between XML, EDI, and flat file formats, and full
end-to-end B2B solutions. We have participated in the development of several
standards for the use of XML in B2B and EDI environments, and remain in the
forefront of this technology.
EDI for web-based retailers. We provide an electronic document and data
file delivery link between web-based retailers and their vendors. We believe
that many larger vendors require that product orders and other documents be
transmitted using EDI. Web retailers can use our ICC.NET service to meet these
requirements and thus reduce their costs and improve their ability to locate,
order, track and deliver products. Our ICC.NET service can process purchase
orders, invoices, order status reports and other files transmitted between
web-based shopping portals of electronic retailers and their vendors,
distributors and manufacturers and can also manage critical logistics delivery
files.
EDI for the health care industry. We offer services for the implementation
of EDI healthcare transactions mandated by the administrative simplification
regulations of the Health Insurance Portability and Accountability Act (HIPAA).
Standards developed by ANSI (American National Standards Institute) apply to
health plans, clearinghouses and healthcare providers that transmit information
electronically. By combining our expertise in traditional EDI and HIPAA
requirements with our client's knowledge of its operations and systems, we offer
solutions that enable our clients to comply with the HIPAA regulations. We have
also formed partnerships aimed at HIPAA compliance that couple third-party
translators with our data mapping capabilities. Our ICC.NET service can
facilitate the exchange of healthcare eligibility and enrollment forms, care
review, patient information and claim status and payments.
Large-scale electronic document management and delivery. Our ICC.NET
service can electronically transmit large-scale EDI and non-EDI electronic
documents and other large files, which may include catalogs, Point-of-Sale data,
engineering drawings, graphics and some types of video. ICC.NET allows customers
to manage and distribute large files in real-time and provides archiving,
security, authentication and audit services. ICC.NET will support both a
publish/subscribe configuration, in which a customer can publish any number of
files for subscribers authorized by the customer to view and/or download, and a
point-to-point-delivery configuration that operates like
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our ICC.NET VAN service. ICC's Point-of-Sale service allows retailers and their
suppliers to exchange information quickly and effectively.
ICC.CATALOG. ICC provides a web-based electronic product catalog
("ICC.CATALOG") service for use in the retailer-vendor business community. The
ICC.CATALOG enables vendors that supply goods to retailers to create, store and
maintain a web-based online database of their product information. Users can
electronically access and selectively download the product information and
generate EDI compliant purchase orders. Both the retailer and the vendor can
access the service worldwide using the Internet and can perform real-time
updates. ICC.CATALOG complies with industry standards and is designed to reduce
the costs of both retailers and vendors through ease of use, advanced features,
functions and low cost pricing. The ICC.CATALOG integrates seamlessly with our
ICC.NET service.
HIPAA.ICC.NET. ICC offers leading-edge services for EDI healthcare
transactions mandated by HIPAA. By combining our expertise in EDI and HIPAA
requirements, we offer clients best of breed, one-stop solutions. HIPAA.ICC.NET
is based on the low-cost, proven ICC.NET transaction exchange system. and
provides users with a specialized browser interface. ICC.NET reliably moves
healthcare claims, eligibility and enrollment forms, and all the other HIPAA
transactions, including NCPDP.
EDI-to-fax service. Traditional EDI users convert electronic documents
into a faxable format and fax the documents manually to their trading partners
that are unable to receive electronically transmitted documents in EDI format.
Our ICC.NET IP-based worldwide fax service allows our customers to send a
document electronically, which we then electronically convert to faxable format
and fax to any of our customer's trading partners that are unable to receive
electronically transmitted documents in EDI format.
AS2 Connectivity. We continue to invest in leading edge technology to meet
the changing requirements of our customers. An example of this is AS2, which is
one of the newest standards associated with moving information across the
Internet. We have incorporated AS2 technology into our service offerings so that
our customers can utilize the technology without a significant up-front
investment in software. By using ICC's AS2 solution, our customers avoid the
support costs associated with purchasing an AS2 software product.
The Service Bureau
ICC's Service Bureau allows vendors to comply with its customers'
electronic commerce needs. ICC's fees are generally more cost effective than
establishing an in-house EDI department.
ICC's Service Bureau is focused on the retail industry and is capable of
exchanging business transactions with most major retailers. Customers can view
account activity on-line through the use of the Internet.
The primary features of the Service Bureau include:
o Purchase Order, Invoice and Product Activity Data Processing;
o UPC Maintenance;
o UPC and UCC 128 Label Service and Ship Notices; and
o Automated packing process using ScanPak Professional.
Our Service Bureau also offers an assortment of software products. Our
principal software products are:
o ScanPak Professional is a Windows-based warehouse management tool
providing an automated Advanced Ship Notice and UCC/EAN-128 label
solution. ScanPak Professional allows our customers to scan
merchandise and automatically generate bar code labels for each case
as it is packed. Keyboard use at packing stations can be eliminated.
This software electronically matches the contents of each case
against purchase orders. From the casing information created by
ScanPak
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Professional, our customers can generate and transmit accurate EDI
ship notices to retailers or third party EDI software products.
ScanPak Professional interfaces with ICC.NET and other third party
EDI software products.
o EZ-EDI(TM) translator package receives electronic purchase orders
via the major networks, prints purchase orders, holds the orders in
an open orders file for possible changes and sends electronic
invoices back to the retailer. It allows our customers to manage
their orders with ease - changing quantities and prices as needed,
adding manual orders, backordering and deleting orders that cannot
be filled.
o UPC Manager(TM)allows our customers to create an 832 EDI document
(sales catalog) and provides an automatic link to network UPC
catalogs. UPC Manager(TM)allows our customers to add, change and
delete information in their in-house UPC catalogs, the local
repository of their UPC product information. UPC Manager(TM)
automatically generates proper UPC numbers for products that do not
have UPC numbers assigned and accepts current UPC numbers for
products with them. Tracking active, inactive UPC numbers for the
appropriate time intervals, UPC Manager(TM)also provides extensive
error checking on in-house catalog data to ensure that information
sent to the networks is valid.
Software sales have not been a significant source of revenue during the
years ended July 31, 2003 and 2002.
Professional Services
Our professional services facilitate the development and operations of
comprehensive business-to-business electronic commerce solutions. We specialize
in electronic commerce, or EC, solutions involving EDI and EAI (Enterprise
Application Integration) by providing mission critical EC consulting, EC
software, outsourced EC services, technical resource management and HIPAA gap
analysis
Custom Solutions. Our custom solutions group provides programming
solutions designed to fit our customers' specific needs. We can build web-based
applications for both customer end-users and servers. We provide a comprehensive
and integrated design or redesign of our customers' entire internal EC/EDI
environment.
Consulting Services. Our consulting services group brings industry
specific experience and high-level expertise to our customers. We have the EC
consulting experience to support our customers' information technology
functions. We have also initiated a special focus on the healthcare industry
involving the analysis, design and construction of solutions that address HIPAA
compliance.
Education. We offer EC and EDI education and training resources through a
series of product-independent seminars hosted by leading universities around the
United States. These seminars address the basic components of EDI, software,
networks, standards, trading partner issues, business management issues and
specific industry-related issues. Custom courses can be arranged for our
customers at their locations. We also offer public and private seminars that
focus on healthcare EDI and HIPAA requirements. Building on our core education
program, these seminars emphasize the use of EDI within the healthcare industry
by addressing standards and using exercises to upgrade knowledge of claim
processing and remittance transactions.
Financial information about our business segments can be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 and in Note 15 of the notes to our consolidated
financial statements included elsewhere in this annual report. Our revenue by
geographic region is set forth in Note 14 of the notes to our consolidated
financial statements.
International
Triaton GmbH (formerly Hightech International Services GmbH), a subsidiary
of Thyssen Krupp Information Services GmbH, licensed our ICC.NET service under
the joint services agreement dated July 28, 2000.
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In July of 2002, the joint services agreement was terminated and we entered into
a new licensing agreement with Triaton. Under the new agreement, Triaton was
granted a non-exclusive license to use ICC's electronic data interchange system
in its most recent version anywhere in the continent of Europe, Great Britain
and Ireland for a five-year term in exchange for a licensing fee of $3,000,000.
Triaton has the right to use and provide the ICC.NET service with its customers.
ICC will not report any additional revenues under the amended agreement with
Triaton, except that at Triaton's request, ICC will provide sales support,
customer support and software support services on its standard terms and
conditions.
We have also entered into reseller agreements in Brazil and the United
Kingdom. Advanced Trade Technologies and Services Limited, or ATTS, will be
reselling the full line of ICC services and products including service bureau,
software, consulting services, ICC.CATALOG and ICC.NET in South America.
Freshlook LLC is focusing on reselling all ICC.NET services in the United
Kingdom and Ireland. During the years ended July 31, 2003 and 2002 we did not
recognize significant revenue from these reseller agreements.
Competition
Our principal competitors include: Inovis Inc.; GXS, Global eXchange
Services Inc.; International Business Machines Corporation Global Services;
Sterling Commerce, Inc.; EasyLink Services Corp.; and Kleinschmidt Inc.
Two of the largest networks, Global eXchange Services ("GXS") and Sterling
Commerce, which we believe to account for approximately 60% of the estimated EDI
users, discontinued their interconnect arrangements with the Company. GXS
discontinued its interconnection with our service in September 2001 and Sterling
Commerce discontinued its interconnection with our service in April 2002. We
have entered into arrangements with Inovis, Inc. (formerly a division of
Peregrine Systems, Inc. and now an independent company) and IBM Corporation so
our customers can continue to communicate through us with their trading
communities. As a result of these interconnection arrangements, we incur
additional costs and may lose existing customers if the arrangements we have
provided are inadequate for their business purposes. We believe, however, that
the arrangements we have made satisfy our existing customers.
Our market is characterized by intense price competition and rapidly
changing technology, customer demands and innovation. The Internet's growth and
the intense competition in our industry resulted in significant changes.
Traditional VAN's such as GXS and Inovis have been sold by their parent
companies. GXS was acquired by Francisco Partners in September 2002, and Inovis
was spun off from Peregrine Systems, Inc. and acquired by Golden Gate Capital
Inc. also in September 2002. We believe that much of this activity is attributed
to the impact of the Internet on traditional VAN's.
Our principal competitors have significant existing customer relationships
and larger financial, marketing, customer support, technical and other resources
than we do. As a result, they may be able to respond more quickly to changing
technology and changes in customer requirements or be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to potential customers and employees, or be able to
devote greater resources to the development, promotion and sale of their
services than we can. As a result, we may not be successful in competing against
our competitors.
New competition is emerging in the form of web services networks,
collaborative applications, application service providers, e-marketplaces and
integration broker suites. ICC has enhanced its technologies to communicate with
these AS2-based technologies. Competitors providing these alternatives include
Cyclone Corporation and Inovis. They offer software solutions that utilize the
Internet to transmit data between trading partners. We believe that the high
cost of implementation of these software solutions and the ongoing costs of
supporting a company's trading partners are a barrier to the wider acceptance of
these product offerings in the marketplace.
Our catalog service competes with Quick Response Systems Corporation, or
QRS, QRS and Global eXchange Services have dominated the catalog service
industry for more than ten years, but we believe that our catalog pricing and
functionality may create competitive advantages for our service.
9
Patents and Trademarks
Patents
On August 26, 1997, ICC was granted patent U.S. No. 5,661,799, entitled
"Apparatus and Storage Medium for Decrypting Information." The essential
components of this patent include 1) the decryption of encrypted information
without requiring that decryption keys be transmitted from one place to another,
2) the decryption of encrypted information which employs different keys for
different segments of information and 3) the disabling of a system for the
decryption of encrypted information if a user is no longer authorized to
retrieve information.
On January 7, 1997, ICC was granted patent U.S. No. 5,592,549, entitled
"Method and Apparatus for Retrieving Selected Information from a Secure
Information Source." The important components to this "Branding Patent" are: 1)
decryption of an electronic item or product, such as a document or software, 2)
the attachment of an identifying serial number and 3) the logging of the item
number and serial number. By attaching a "brand" at the time the document is
decrypted from a secure data source, an "audit trail" of the decrypted
information can be maintained.
In December 1995, ICC was granted patent U.S. No. 5,473,687, entitled
"Method for Retrieving Secure Information from a Database," covering its
technology for providing a secure method for the commercial distribution and use
of digital information on a rental basis using a technique to discourage
long-term use without endangering the computer or the operating system.
In February 1995, ICC was granted patent U.S. No. 5,394,469, entitled
"Method and Apparatus for Retrieving Secure Information From Mass Storage
Media," for its system to retrieve and monitor the use of protected information
from various digital media.
We rely upon this encryption and authentication technology to provide
secure transmission of confidential information. If our security measures do not
prevent security breaches, we could suffer operating losses, damage to our
reputation, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
that render current encryption technology outdated may result in a breach of our
encryption and authentication technology and could enable an outside party to
steal proprietary information or interrupt our operations.
Uncertain Patent Protection
Although ICC owns the patent rights described above, we believe that the
protection of our rights in our ICC.NET service will depend primarily on our
proprietary software and messaging techniques that constitute "trade secrets."
ICC has made no determination as to the patentability of these trade secrets.
ICC will continue to evaluate, on a case-by-case basis, whether applying for
additional patents in the future is in our best interest. There can be no
assurance that our technology will remain a secret or that others will not
develop similar technology and use such technology to compete with us.
In addition, there can be no assurance that any patents owned by ICC or
our trade secrets will afford us adequate protection or not be challenged,
invalidated, infringed upon or circumvented, or that patent applications
relating to our products or technologies that we may file or license in the
future, including any patent as to which a notice of allowance was issued, will
result in patents being issued, or that any rights granted thereunder will
provide competitive advantages to ICC. Although we believe that our technology
does not infringe upon the proprietary hardware or software of others, it is
possible that others may have or be granted patents claiming products or
processes that are necessary for or useful to the development of our ICC.NET
service and that legal actions could be brought against us claiming
infringement.
10
Trademarks
ICC's trademarks, ICC.NET, INFOSAFE, COMMERCESENSE, EDI MAPPING FACTORY,
EZ-EDI and UPC Manager have been registered with the United States Patent and
Trademark Office. Our applications to register AUDINET, B2B4B2C, B to B for B to
C, E-COMMERCE MADE EASY and XML MAGIC have now been allowed as trademarks and
await registration. We intend to apply for additional name and logo marks in the
United States and in foreign jurisdictions. No assurance can be given that
registrations will be issued on the allowed applications or that interested
third parties will not petition the United States Patent and Trademark Office to
cancel our registration.
Sales and Marketing
We employ a variety of marketing initiatives to enhance awareness of our
ICC.NET and other services and products in the electronic commerce community and
to increase our sales domestically and internationally.
Direct Marketing through Sales Force. Direct sales to large and medium
sized corporations by our own sales force form the core of our sales strategy.
Our sales force currently consists of professional sales staff and support
personnel located across the United States to serve our diverse geographic
customer-base. Our sales force consists of field sales representatives who make
direct sales calls at customer sites and must meet target quotas. Our
representatives are supported by technical personnel based in the field. All
field sales personnel report to our Vice President of Sales.
Indirect Marketing through Hub Companies. We believe that smaller spoke
companies comprise a significant potential market that may be reached without
any direct marketing on our part, because the low cost of our ICC.NET service
should allow these smaller spoke companies to consider using our service if
requested to do so by their hub companies.
Seminars and Tradeshows. We conduct seminars, consisting of a traveling
road show providing targeted group demonstrations and selling activities to
pre-qualified audiences invited to events in their own localities by direct mail
and advertising supported by telemarketing confirmation. ICC maintained its
participation in industry tradeshows and has personnel who focus solely on this
area. We staff national shows with sales, support and executive personnel from
our headquarters and field locations.
Industry Initiatives. To broaden our market appeal and customer
penetration, ICC has initiated a variety of special products, each aimed at
increasing traffic across our ICC.NET network. For example, we offer retail
customers the ICC.CATALOG, a web-based facility that enables suppliers and
vendors to enhance their e-commerce capabilities and realize improved
efficiencies and economies. In the healthcare arena, ICC offers a complete suite
of solutions focused on the federally mandated HIPAA. These solutions include
strategic and tactical consulting, integrated third party software, mapping and
transaction transport. Among our other focused initiatives are scan-based
trading, Point-of-Sale and telecommunications industry offerings.
Web-based and Print Advertising. We use both web-based and traditional
print advertising. Our web site embodies a variety of promotional features. ICC
maintains a print advertising media campaign to generate sales leads and
increase brand recognition.
Strategic Relationships. We have relationships with general consulting
firms that recommend our products and services. In addition, ICC is integrated
into and sold by various enterprise requirement planning (ERP), purchasing,
accounting, procurement and EDI translation software product vendors. ICC is
also the underlying EDI and VAN services provider for vertically oriented
portals and exchanges in the automotive, home furnishings, retail, electronics
and EDI outsource industries. We believe that an interface with our
Internet-based electronic commerce system will appeal to complementary providers
of software and services by highlighting the cutting-edge character of their
offerings and enabling them to provide a complete solution to their customers.
11
Technical Support
We provide technical support twenty-four hours a day, seven days a week
for all our ICC.NET customers. For new users of our ICC.NET service, we provide
education about the application and correctly configure the users' computer
systems. We also provide ongoing assistance for previously installed users. Due
to the multiple redundancies of all of our systems and the stability of SIAC,
our ICC.NET service has been fully operational more than 99% of the time.
Customers
We currently provide services to approximately 1,600 customers.
Approximately 1,100 of these customers use our ICC.NET service and represent a
variety of industries, including book retailing and publishing, pharmaceutical
manufacturing, automotive, footwear manufacturing, office supplies,
transportation logistics, financial services, manufacturing, retail, grocery and
soft goods manufacturing. Customers in these and other industries include
American Power Conversion Corporation, AOL Time Warner, Barnes & Noble, Inc.,
BMG Entertainment, Brother International Corporation, CIT Group, Inc.,
Colgate-Palmolive, Dot Foods, Hastings Entertainment, Inc., Linens n' Things,
Inc., The McGraw-Hill Companies, Inc., New Balance Athletic Shoes, Inc.,
Nordstrom.com, Random House Inc., Revlon, Inc., Sealy Inc., Sector
Communications, Inc., a SIAC company, Simon & Schuster, Inc., Smartworks, LLC,
TravelCenters of America, Inc., Verizon Wireless and Volvo IT N.A..
The customer base of our professional services segment changes frequently
due to the nature of professional service contracts. Current customers include
Atlantic Tech Services, F. Schumacker & Co., State of North Carolina, Accenture,
LLP, Hanger Othropedic Group and Merck & Co. Inc.
Our service bureau has approximately 500 customers.
For the year ended July 31, 2003, no single customer accounted for a
material portion of our revenues. For the year ended July 31, 2002, one customer
accounted for 22% of our consolidated revenues, or 30% of the revenues of our
ICC.NET business segment. This customer also accounted for 11% of our
consolidated revenues and 22% of our ICC.NET segment revenues in the year ended
July 31, 2001. This customer is not expected to be a significant customer in the
future.
Research and Development
Research and development costs related to the enhancement and improvement
of our ICC.NET service amounted to $1,111,000, $977,000 and $931,000 for the
years ended July 31, 2003, 2002 and 2001, respectively.
Employees
At July 31, 2003, ICC had 90 full-time employees.
12
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New York
under a lease that expires on December 31, 2004 and provides for annual base
rent of approximately $500,000. The lease covers approximately 12,300 square
feet.
Our development and network administration groups and our technical
support call center are located in East Setauket, New York under a lease that
expires on June 30, 2004 and provides for annual base rent of approximately
$180,000. The lease covers approximately 8,900 square feet.
Our service bureau is located in Carrollton, Georgia under a lease that
expires on July 31, 2005 and provides for annual base rent of approximately
$80,000. The lease covers approximately 8,000 square feet.
We lease general office space in Cary, North Carolina under a lease that
expires on October 31, 2004 and provides for annual base rent of approximately
$550,000. The lease covers approximately 27,000 square feet. Effective August 1,
2002, ICC entered into an agreement with the landlord of the Cary facility that
reduced the rent on approximately 13,000 square feet, which the landlord
released to new tenants. The agreement reduced the annual base rent for such
property to approximately $405,000. In addition, approximately 6,580 square feet
of the remaining space has been subleased.
Our data center is located at the facilities of The Securities Industry
Automation Corporation (SIAC) under an agreement that expires in December 2004.
The agreement shall be renewed automatically for an additional one-year term.
We believe that these facilities should be adequate for our present and
reasonably foreseeable operating requirements.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No meetings of stockholders took place during the fourth quarter of the
year ended July 31, 2003.
13
PART II
Item 5. Market for Internet Commerce Corporation's Common Equity and Related
Stockholder Matters
(a) Market Information
From September 20, 2000 until January 30, 2003, ICC's class A common stock
was traded on the Nasdaq National Market under the symbol ICCA. Since January
30, 2003, ICC's class A common stock has been traded on the Nasdaq SmallCap
Market under the symbol ICCA. The following table sets forth the high and low
closing prices of ICC's common stock for the periods indicated. These quotations
represent prices between dealers in securities, do not include retail mark-ups,
mark-downs or commissions and do not necessarily represent actual transactions.
Fiscal Year Ended July 31:
2003 2002
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
- --------------------
First Quarter $ 3.17 $ 1.30 $ 4.00 $ 1.50
Second Quarter $ 2.10 $ 1.15 $ 4.80 $ 2.45
Third Quarter $ 1.41 $ .80 $ 4.50 $ 2.55
Fourth Quarter $ 2.04 $ 1.15 $ 3.55 $ 1.55
(b) Holders
As of October XX, 2003, there were approximately 200 record holders of our
class A common stock. Many of our shares of class A common stock are held by
brokers and other institutions on behalf of stockholders, and we are unable to
estimate the number of stockholders represented by these record holders.
(c) Dividends
ICC has not paid any cash dividends on its class A common stock and does
not intend to declare or pay cash dividends on the class A common stock in the
foreseeable future. The holders of the outstanding shares of series C preferred
stock are entitled to a 4% annual dividend payable in cash or in shares of class
A common stock, at the option of ICC. These dividends are payable on each
January of each year. ICC issued 302,343 shares of class A common stock in
payment of the dividend due January 1, 2003 and 98,839 shares of class A common
stock in payment of the dividend due on January 1, 2002.
14
(d) Securities Authorized for Issuance under Equity Compensation Plans
Shares of class A common
stock remaining available
Shares of class A common for future issuance under
stock to be issued upon Weighted-average equity compensation plans
exercise of outstanding exercise price of (excluding securities
options, warrants and rights outstanding options, reflected in column (a))
(in thousands) warrants and rights (in thousands)
Plan Category
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders (1) 5,112 $7.42 969
Equity compensation plans not
approved by security holders (2) 442 $24.06 -
--------------------------- --------------------- -------------------------
Total 5,554 $8.59 969
(1) Includes stock options to purchase 114,491 shares of class A common stock
with a weighted average exercise price of $5.82 per share under the Employee
Stock Option plan of RTCI, which was assumed in connection with the acquisition
of RTCI completed on November 6, 2000.
(2) Includes stock options to purchase 150,000 shares of class A common stock
and warrants to purchase 292,140 shares of class A common stock issued pursuant
to individual compensation arrangements. These stock options have a weighted
average exercise price of $60.00 per share and were awarded to a former
president and chief executive officer of the Company under an employment
contract. The warrants are described in Note 9, Stockholders' Equity, of the
Notes to Consolidated Financial Statements included in our annual report on Form
10-K for the year ended July 31, 2003. The issuance of all the warrants shown
under the captions Consulting Warrants, 2001 Private Placement Commission
Warrants, ING Warrants, 2003 Private Placement Commission Warrants and Silicon
Valley Bank Warrants constitute individual compensation arrangements. In
addition, warrants to purchase 38,460 shares of class A common stock shown under
the caption 2003 Private Placement Warrants were issued as settlement of certain
outstanding payables for services and constitute an individual compensation
arrangement.
Recent Sales of Unregistered Securities
In 2003, we issued a total of 51,703 shares of class A common stock to six
non-employee directors of ICC in payment of directors' fees. The issuance of
these securities was exempt from registration under the Securities Act pursuant
to Section 4(2).
On January 1, 2003, the Company issued 302,343 shares of class A common
stock in payment of the dividends on series C preferred stock.
15
Item 6. Selected Consolidated Financial Data
Our selected consolidated statement of operations data for each of the
years in the five-year period ended July 31, 2003 is presented below. Our
selected balance sheet data is presented below as of July 31, 2003, 2002, 2001,
2000 and 1999. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with, our
consolidated financial statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this annual report.
Year Ended July 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 12,083 $ 14,222 $ 9,743 $ 1,303 $ 105
-------- -------- -------- -------- --------
Expenses:
Cost of services 7,622 8,776 9,354 2,514 452
Impairment of software inventory 248 -- -- -- --
Impariment of capitalized software 148 -- -- -- --
Product development and enhancement 1,111 977 931 702 517
Selling and marketing 3,035 3,499 5,384 3,273 420
General and administrative 4,439 5,849 9,683 4,814 3,581
Non-cash charges for stock-based
compensation, services and legal settlements 139 250 991 5,161 3,267
Impairment of goodwill and acquired intangibles 982 1,711 16,708 -- --
-------- -------- -------- -------- --------
Total operating expenses 17,724 21,062 43,051 16,464 8,237
-------- -------- -------- -------- --------
Operating loss (5,641) (6,840) (33,308) (15,161) (8,132)
-------- -------- -------- -------- --------
Other income (expense), net (363) 292 523 675 (1,490)
-------- -------- -------- -------- --------
Loss before income taxes (6,004) (6,548) (32,785) (14,486) (9,622)
Income tax benefit -- -- 1,930 -- --
-------- -------- -------- -------- --------
NET LOSS (6,004) (6,548) (30,855) (14,486) (9,622)
Dividends on preferred stock (400) (365) (420) (458) (191)
Dividends to preferred stockholders for
beneficial conversion feature (107) -- -- (4,549) (1,222)
Beneficial conversion feature from repricing and
issuance of warrants -- (461) -- -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $ (6,511) $ (7,374) $(31,275) $(19,493) $(11,035)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.53) $ (0.68) $ (3.57) $ (4.49) $ (7.62)
======== ======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 12,303 10,867 8,768 4,337 1,447
======== ======== ======== ======== ========
July 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- --------- --------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 2,283 $ 2,088 $ 2,223 $ 14,003 $ 114
Working capital 1,700 2,622 646 17,831 3,119
Total assets 8,598 12,625 15,674 22,332 6,540
Capital lease obligations 194 374 255 231 358
Total liabilities 2,758 3,244 4,487 2,242 1,486
Stockholders' equity 5,840 9,381 11,187 20,090 5,055
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This annual report on form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Specifically, all statements other than statements of
historical facts included in this annual report regarding our financial
position, business strategy and plans and objectives of management for future
operations are forward-looking statements. These forward-looking statements are
based on the beliefs of management, as well as assumptions made by and
information currently available to management. When used in this Report, the
words "anticipate," "believe," "estimate," "expect," "may," "will," "continue"
and "intend," and words or phrases of similar import, as they relate to our
financial position, business strategy and plans, or objectives of management,
are intended to identify forward-looking statements. These statements reflect
our current view with respect to future events and are subject to risks,
uncertainties and assumptions related to various factors including, without
limitation, those described below the heading "Overview", those described
starting on page 32 of this annual report under the heading "Risk Factors" and
in our registration statements and periodic reports filed with the SEC under the
Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Should any one or more of
these risks or uncertainties materialize, or should any underlying assumptions
prove incorrect, actual results may vary materially from those described in this
annual report as anticipated, believed, estimated, expected or intended.
Overview
We are in the e-commerce business-to-business communication services
market providing complete EC infrastructure solutions. Our business operates in
three segments: namely, our ICC.NET service, our Service Bureau and our
Professional Services.
Our ICC.NET service, the Company's global Internet-based value added
network or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, email-based and other
Internet-based software systems, because our service is provided at a low cost,
with greater transmission speed in nearly real-time and offers more features.
Our Service Bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies. Our Professional Services
segment facilitates the development and operations of comprehensive
business-to-business e-commerce solutions.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001 we made two acquisitions that enable us to offer a
more complete range of services to allow our customers to expand their
e-commerce trading communities and bridge their legacy systems to the Internet.
In August 2000, we acquired IDC, an EDI service bureau. IDC delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments.
In November 2000, we acquired RTCI, thereby expanding our professional
services capability. RTCI was an e-commerce infrastructure solutions company
serving the business-to-business e-commerce market. RTCI assists its clients to
conduct business electronically through a continuum of services including
eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking.
RTCI developed a business model that offered remote service delivery, fixed and
value-based pricing and reusable solutions. Subsequent to the acquisition in
fiscal 2001, due to a reduction of the workforce of RTCI, a steep decline in
value of companies similar to RTCI, continued operating losses and a significant
reduction in the forecasted future operating profits of our professional
services segment, management determined that triggering events had occurred
related to certain intangible assets. Projected cash flow analysis related to
those assets determined that the assets had been impaired. These intangible
assets were written down to fair value during the fourth quarter of 2001 based
on the related discounted expected future cash flows.
17
During the fourth quarter of fiscal 2003 the goodwill of the Service
Bureau was tested for impairment due to a significant decline in revenues and
operating income resulting primarily from the bankruptcy of its largest
customer. An impairment loss of $982,142 was recognized as a result of this
evaluation. The fair value of the Service Bureau reporting unit was estimated
using the net present value of expected future cash flows.
Due to a continued decline in its revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted future
operating profits, the Professional Services segment was tested for impairment
during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was
recognized as a result of this evaluation. The fair value of the Professional
Services segment unit was estimated using the net present value of expected
future cash flows. During the fourth quarter of fiscal 2002, the Company
integrated its data mapping and XML services and personnel into the ICC.NET
business segment. These products and services had previously been part of the
Company's Professional Services segment. These products and services are
primarily utilized to support customers of the ICC.NET VAN service. The
reorganization was undertaken to more closely align these data transfer services
with the customers they serve. The segment information presented below in the
results of operations has been restated for 2002 and 2001 to reflect this
reorganization as if it had occurred August 1, 2001.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 65
business-to-business networks for the benefit of our customers. Two of the
largest networks, Global eXchange Services ("GXS") and Sterling Commerce, which
we believe to account for approximately 60% of the estimated EDI users,
discontinued their interconnect arrangements with the Company. GXS discontinued
its interconnection with our service in September 2001 and Sterling Commerce
discontinued its interconnection with our service in April 2002. We have entered
into arrangements with Inovis, Inc. (formerly a division of Peregrine Systems,
Inc. and now an idependent company) and IBM Corporation so our customers can
continue to communicate through us with their trading communities. As a result
of these interconnection arrangements, we will continue to incur additional
costs and may lose existing customers if the arrangements we have provided are
inadequate for their business purposes. We believe, however, that the
arrangements we have made satisfy our existing customers.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
Critical accounting policies are those policies that require application
of management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in note 2 of the notes to the consolidated
financial statements included elsewhere in this annual report on Form 10-K for
the year ended July 31, 2003. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. We have identified
the following to be critical accounting policies of the Company:
Revenue Recognition: The Company derives revenue from subscriptions to its
ICC.NET service, which includes transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally three to six months. Usage fees are recognized in the period
the services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping services
to its customers. Implementation fees are recognized over the life of the
subscription period. Interconnection fees are fees charged to connect to another
VAN service and are recognized when the data is transmitted to the connected
service. Revenue from data mapping services is recognized when the map has been
completed and delivered to the customer. The Company has a limited number of
fixed fee data mapping services contracts. Under these arrangements the Company
is required to provide a specified number of maps for a fixed fee. Revenue from
such arrangements is recognized using the percentage-of-completion method of
accounting (see below).
18
Service Bureau revenue is comprised of EDI services including data
translation services, EDI-to-print and print-to-EDI purchase order and invoice
processing, UPC services including UPC number generation, UPC catalog
maintenance and UPC label printing. The Service Bureau also derives revenue from
licensing software and providing software maintenance and support. Revenue from
EDI services and UPC services is recognized when the services are provided. The
Company accounts for its EDI software license sales in accordance with the
American Institute of Certified Public Accountants' Statement of Position 97-2,
"Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software
licenses is recognized when all of the following conditions are met: (1) a
non-cancelable non-contingent license agreement has been signed; (2) the
software product has been delivered; (3) there are no material uncertainties
regarding customer acceptance; and (4) collection of the resulting receivable is
probable. Revenue from software maintenance and support contracts is recognized
ratably over the life of the contract. The Service Bureau's software license
revenue was not significant in any of the periods presented.
In addition, SOP 97-2 generally requires that revenue from software
arrangements involving multiple elements be allocated among each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation or training. Furthermore,
SOP 97-2 requires that revenue be recognized as each element is delivered with
no significant performance obligation remaining on the part of the Company. The
Company's multiple element arrangements generally consist of a software license
and post contract support. The Company allocates the aggregate revenue from
multiple element arrangements to each element based on vendor specific objective
evidence. The Company has established vendor specific objective evidence for
each of the elements as it sells both the software and post contract customer
support independent of multiple element agreements. Customers are charged
standard prices for the software and post contract customer support and these
prices do not vary from customer to customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education and
training at seminars throughout the United States. Revenue from EDI and
electronic commerce consulting and education and training are recognized when
the services are provided.
Revenue from fixed fee data mapping and professional service contracts is
recognized using the percentage-of-completion method of accounting, as
prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue cycle is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill is written down to its implied
fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
19
Other Intangible Assets: Other intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets other
than goodwill that were not subject to amortization.
Impairment of long-lived assets: Long-lived assets of the Company,
including amortizable intangibles, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. Management also reevaluates the periods of amortization of
long-lived assets to determine whether events and circumstances warrant revised
estimates of useful lives. When such events or changes in circumstances occur,
the Company tests for impairment by comparing the carrying value of the
long-lived asset to the estimated undiscounted future cash flows expected to
result from use of the asset and its eventual disposition. If the sum of the
expected undiscounted future cash flows is less than the carrying amount of the
asset, the Company would recognize an impairment loss. The amount of the
impairment loss will be determined by comparing the carrying value of the
long-lived asset to the present value of the net future operating cash flows to
be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation with its employees using the intrinsic value method in accordance
with the provisions of Account Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees" and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). SFAS No.
123 establishes a fair-value method of accounting for stock-based compensation
plans. Stock-based awards to non-employees are accounted for at fair value in
accordance with SFAS No. 123.
Income Taxes: Deferred income taxes are determined by applying enacted
statutory rates in effect at the balance sheet date to the differences between
the tax bases of assets and liabilities and their reported amounts in the
consolidated financial statements. A valuation allowance is provided based on
the weight of available evidence, if it is considered more likely than not that
some portion, or all, of the deferred tax assets will not be realized.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
Significant accounting estimates used in the preparation of the Company's
consolidated financial statements include the fair value of equity securities
underlying stock based compensation, the realizability of deferred tax assets,
the carrying value of goodwill, intangible assets and long-lived assets, and
depreciation and amortization. The following discussion reviews items
incorporated into our financial statements for the years ended July 31 2003,
2002 and 2001 that required the use of significant management estimates.
The Company has entered into several transactions involving the issuance
of warrants and options to purchase shares of the Company's class A common stock
to consultants, lenders, warrant holders, placement agents and other business
associates and vendors. The issuance of these securities required management to
estimate their value using the Black-Scholes option-pricing model. The
Black-Scholes option-pricing model requires management to make certain estimates
for values of variables used by the model. Management estimated the values for
stock price volatility, the expected life of the equity instruments and the risk
free rate based on information that was available to management at the time the
Black-Scholes option-pricing calculations were performed. Changes in such
estimates could have a significant impact on the estimated fair value of those
equity instruments.
On May 30, 2003, the Company executed an Accounts Receivable Financing
Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term
of 1 year. On October 22, 2003, the Company and Silicon Valley Bank amended the
Financing Agreement to extend the term of the agreement to August 31, 2004. In
connection with the Financing Agreement, the Company issued the Bank warrants to
purchase 40,000 shares of the Company's class A common stock. The warrants are
immediately exercisable at an exercise price of $1.39 per share, equal to the
fair market value of the Company's class A common stock on the date of closing
of the Financing Agreement. The warrants are exercisable for a seven-year
period. The value of the warrants in the amount of $34,000 is being amortized
over the life of the Financing Agreement.
20
On March 10, 2003, the Company issued options to purchase 100,000 shares
of class A common stock to a non-employee member of the board of directors as
compensation for consulting services. The estimated fair value of the options
was determined by management to be $42,000.
The allocation of the proceeds from the sale of the series D preferred
stock and warrants issued in the Company's April 30, 2003 private placement
between the fair value of the series D preferred stock and the fair value of the
detachable warrants required management to estimate the fair value of the
warrants. Management's estimate resulted in a beneficial conversion feature in
the amount of $106,730. The discount was immediately accreted and treated as a
deemed dividend to the holder of the series D preferred as all of the series D
preferred stock was eligible for conversion upon issuance.
In connection with the private placement that closed during April and May
of 2003, the Company incurred fees which were paid by issuing warrants to
purchase 110,680 shares of class A common stock at an exercise price of $1.47
per share. The fair value of the warrants was determined by management to be
$87,800.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes option-pricing model. This amount has been added to the Company's
net loss to increase the net loss attributable to common stockholders during
fiscal 2002.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for options and warrants of ICC, providing the holders the right to receive,
upon exercise, an aggregate of 394,905 shares of ICC class A common stock and
$343,456 of cash. The options and warrants were valued using the Black-Scholes
option-pricing model. The fair value of the vested portion of the options was
included in the purchase price for RTCI.
Goodwill is evaluated for impairment at least annually and whenever events
or circumstances indicate impairment may have occurred. The assessment requires
the comparison of the fair value of each of the Company's reporting units to the
carrying value of its respective net assets, including allocated goodwill. If
the carrying value of the reporting unit exceeds its fair value, the Company
must perform a second test to measure the amount of impairment. The second step
of the goodwill impairment test compares the implied fair value of reporting
unit goodwill with the carrying amount of that goodwill. The Company allocates
the fair value of a reporting unit to all of the assets and liabilities of that
unit as if the reporting unit had been acquired in a business combination and
the fair value of the reporting unit was the price paid to acquire the reporting
unit. The excess of the fair value of a reporting unit over the amounts assigned
to its assets and liabilities is the implied fair value of goodwill. If the
carrying amount of reporting unit goodwill exceeds the implied fair value of
that goodwill, an impairment loss is recognized by the Company in an amount
equal to that excess.
The Company estimates the fair value of its reporting units based on the
net present value of expected future cash flows. The use of this method requires
management to make estimates of the expected future cash flows of the reporting
unit and the Company's weighted average cost of capital. Estimating the
Company's weighted average cost of capital requires management to make estimates
for long-term interest rates, risk premiums, and beta coefficients. Management
estimated these items based on information that was available to management at
the time the Company prepared its estimate of the fair value of the reporting
unit. Changes in either the expected cash flows or the weighted average cost of
capital could have a significant impact on the estimated fair value of the
Company's reporting units.
Impairments of goodwill and acquired intangibles in the amount of
$982,000, $1,711,000 and $16,708,000 were as recorded during the years ended
July 31 2003, 2002 and 2001, respectively. During fiscal 2001, due to a
significant reduction of the workforce of the professional services segment, a
steep decline in the value of companies similar to it, continued operating
losses and a significant reduction in the forecasted future operating profits,
management determined that triggering events had occurred related to the certain
acquired intangible assets of the Professional Services segment, namely its
assembled workforce, its customer list and goodwill. The projected cash flow
analysis related to those assets determined that the assets had been impaired.
These intangible assets were written down to fair value based on the discounted
expected future cash flows from the intangible assets over their remaining
estimated useful lives. An impairment loss of $16,708,000 was recognized as a
result of this evaluation. During fiscal 2002, due to a continued decline in its
revenues throughout the course of 2002, continued operating losses and a
significant reduction in forecasted future operating profits, the Professional
Services segment was tested for impairment during the fourth quarter of fiscal
2002. An impairment loss of $1,711,000 was recognized as a result of this
evaluation. The fair value of the Professional Services segment unit was
estimated using the net present value of expected future cash flows. During
21
the fourth quarter of fiscal 2003 the goodwill of the Service Bureau was tested
for impairment due to a significant decline in revenues and operating income
resulting primarily from the bankruptcy of its largest customer. An impairment
loss of $982,142 was recognized as a result of this evaluation. The fair value
of the Service Bureau reporting unit was estimated using the net present value
of expected future cash flows.
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2003 Compared with Fiscal Year Ended July 31, 2002.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segment. All significant intersegment activity has been eliminated. Accordingly,
the segment results below exclude the effect of transactions with our
subsidiary.
Year Ended
July 31,
--------------------------------
Income (loss) before income taxes: 2003 2002
------------ ------------
ICC.NET $(4,004,933) $(3,126,008)
Service Bureau (1,132,102) 4,949
Professional Services (867,283) (3,426,494)
----------- -----------
Consolidated loss before income taxes $(6,004,318) $(6,547,553)
22
Results of Operations - ICC.NET
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. The following table
summarizes operating results for our ICC.NET service:
Year Ended
July 31,
----------------------------
2003 2002 (1)
----------- ------------
Revenues:
VAN services $ 8,237,525 $ 6,266,277
Mapping services 571,063 1,064,387
Services to Triaton 58,333 105,626
Technology license -- 3,000,000
------------ ------------
8,866,921 10,436,290
Expenses:
Cost of services 5,167,554 5,744,587
Product development and enhancement 975,583 822,314
Selling and marketing 2,757,489 3,034,683
General and administrative 3,492,835 4,230,242
Non-cash charges for stock-based compensation 139,415 59,989
------------ ------------
12,532,876 13,891,815
------------ ------------
Operating loss $ (3,665,955) $ (3,455,525)
------------ ------------
Other (expense) income, net (338,978) 329,517
------------ ------------
Loss before income taxes $ (4,004,933) $ (3,126,008)
------------ ------------
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
Revenues - ICC.NET - Revenues from our ICC.NET service were 73% of our
total consolidated revenues for the fiscal year ended July 31, 2003 ("2003")
compared to 73% for the fiscal year ended July 31, 2002 ("2002"). Total ICC.NET
revenue decreased $1,569,000 in 2003 from 2002, or approximately 15%. VAN
services revenue increased $2,030,000, or approximately 32%, in 2003 from the
prior year. The increase in VAN services revenue is attributable to an increase
in the number of customers to approximately 1,100 in July 2003 from
approximately 600 in July 2002. Approximately 300 of these new customers signed
up for our service during the month of April 2003. Mapping services decreased
$493,000 or approximately 46% in 2003 compared to 2002 primarily due to the
continued slowdown in the economy. During 2002, we recognized technology license
revenue of $3,000,000 from Triaton GmbH, a subsidiary of Thyssen Krupp
Information Services, GmbH, for the license of our ICC.NET service. Under the
terms of the July 2002 license agreement, we granted Triaton a non-exclusive
license to use ICC's electronic data interchange system in its most recent
version anywhere in the continent of Europe, Great Britain and Ireland for a
five-year term. Triaton has the right to use and provide the ICC.NET service to
its customers. Triaton paid us $1,500,000 in July 2002 and an additional
$1,500,000 in October 2002 under this license agreement. ICC will not report any
additional revenues under the July 2002 agreement with Triaton, except that, at
Triaton's request, ICC will provide sales support, customer support and software
support on ICC's standard terms and conditions. 2002 included $105,000 of fees
from Triaton under a July 2001 agreement.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 58% of revenue derived from the ICC.NET service in 2003, compared to
55% of revenue in 2002. Cost of services related to our ICC.NET service consists
primarily of salaries and employee benefits, connectivity fees, amortization and
rent. Total cost of services decreased $577,000 in 2003 from 2002. Product
development personnel who were temporarily assigned to cost of services during
2002 represented $278,000 of this decrease. These employees were used to
implement
23
alternative connectivity solutions for the ICC.NET service when GXS and Sterling
disconnected our service from their networks during 2002. Amortization decreased
$246,000 in 2003 compared to 2002 primarily due to certain capitalized software
costs becoming fully amortized during 2002. Salaries and employee benefits
decreased $138,000 primarily due to a reduction of personnel to 28 at the end of
2003 from 38 at the beginning of 2002. In addition, consulting costs decreased
$159,000 in 2003 compared to 2002 due primarily to decrease in costs associated
with technology license revenue from Triaton. However, these savings were
partially offset by increased connectivity costs of $306,000 in 2003 from 2002.
The increase in connectivity fees was primarily due to additional fees incurred
to offer our customers and their trading partners alternative connectivity when
GXS and Sterling disconnected our service from their networks during 2002. Cost
of services relating to VAN services decreased to $3,744,000 in 2003 from
$4,009,000 in 2002. Cost of services relating to mapping services decreased to
$1,424,000 in 2003 from $1,683,000 in 2002. Cost of services relating to
services provided to Triaton was $53,000 in 2002 compared to no costs in 2003.
We anticipate that our ICC.NET cost of services will decline as a percentage of
revenue in future periods due to increased utilization of our existing
communications infrastructure as we expect the use of our ICC.NET service to
increase.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The increase of $153,000 in 2003 over 2002 was primarily
attributable to an increase of $267,000 of costs relating to product development
personnel who had been temporarily assigned to cost of services during 2002. The
personnel were utilized to implement alternative connectivity solutions for the
ICC.NET service when GXS and Sterling disconnected our service from their
networks during 2002. The prior year allocation was partially offset by a
decrease of $78,000 in salaries and employee benefits as a result of reduction
in staff to 8 at the end of 2003 from 14 at the beginning of 2002. Also,
consulting costs decreased $17,000 in 2003 compared to 2002 due to increased
reliance on staff.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising and trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $277,000 in 2003 from 2002.
Advertising and trade show costs were reduced $175,000 because we attended fewer
trade shows and placed fewer print advertisements. The sales function was
centralized in the second fiscal quarter of 2003, a portion of the cost of our
sales force was allocated to the Professional Services segment based on the
level of effort utilized in selling Professional Services products. In 2003
these allocations totaled $99,000.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees and depreciation. General
and administrative costs supporting our ICC.NET service decreased $737,000 in
2003. Legal fees decreased $356,000 in 2003 primarily relating to our
disconnection from other VAN's. Bad debt expense decreased $173,000 in 2003 from
2002 due to a decrease in customer defaults from the prior year. In addition,
rent expense decreased $112,000 in 2003 from 2002 due to the renegotiation of
our lease to reduce office space at one of our existing facilities. These
decreases were partially offset by an increase in accounting fees of $130,000 in
2003 over 2002 due to services provided in connection with SEC filings and other
matters. For cost reduction purposes, the Company's executive management, human
resources, accounting and finance functions for all segments of the Company were
centralized and are now performed by ICC.NET personnel. Commencing in the second
fiscal quarter of 2003, ICC.NET began allocating the costs of executive
management, human resources, accounting and finance tasks to the segments based
on the level of services provided to each segment. In 2003, these allocations
totaled $234,000.
Non-cash charges - ICC.NET - Non-cash charges increased $79,000 in 2003
over 2002. In 2003, $60,000 of expense was recognized for common stock and
options issued to a non-employee member of our board of directors as
compensation for consulting services. In addition, expense recognized for common
stock to be issued to non-employee members of our board of directors as
compensation increased $19,000 in 2003 over 2002.
Other income, net - ICC.NET - Other expenses increased $668,000 in 2003
compared to 2002. An impairment charge of $318,000 was recorded in 2003 for the
write down of available-for-sale marketable securities due to an other than
temporary decline in value. In 2002 other income includes a legal settlement
from a competitor
24
of $63,000 and the favorable settlement of an acquisition-related liability of
$145,000. In addition, net gains from the disposition of marketable securities
decreased $140,000 in 2003 from 2002.
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau:
Year Ended
July 31,
----------------------------
2003 2002
----------- -----------
Revenues:
Services $ 1,487,946 $ 1,633,183
Expenses:
Cost of services 735,136 839,217
Impairment of capitalized software 148,479 --
----------- -----------
Total cost of services 883,615 839,217
Product development and enhancement 135,358 154,589
Selling and marketing 135,411 123,100
General and administrative 483,522 511,328
Impairment of acquired intangible 982,142
----------- -----------
2,620,048 1,628,234
----------- -----------
Operating income (loss) (1,132,102) 4,949
----------- -----------
Other income, net -- --
----------- -----------
Income (loss) before income taxes $(1,132,102) $ 4,949
=========== ===========
Revenues - Service Bureau - Revenue related to our service bureau was 12%
of our consolidated revenue in 2003 compared to 11% of consolidated revenue in
2002. The service bureau's revenue was primarily generated from services
performed, customer support and licensing fees. The decrease in revenue of
$145,000 in 2003 compared to 2002 was primarily the result of a decrease in
service revenue of $122,000 due to a large customer ceasing operations.
Cost of services - Service Bureau - Total cost of services relating to our
Service Bureau was 58% of revenue derived from the service bureau in 2003
compared to 51% in 2002. Excluding the impairment of the capitalized software,
costs of services was 49% of revenue derived from the Service Bureau in 2003
compared to 51% of revenue derived from the Service Bureau in 2002. Cost of
services related to our service bureau consists primarily of salaries and
employee benefits and rent. Cost of services, excluding the capitalized software
impairment charge, decreased $104,000 in 2003. This decrease in cost of services
was primarily the result of an $80,000 decrease in the use of consultants for
customer service and support and data entry services and a decrease in salary
and benefits of $22,000. Delivery charges to customers decreased $11,000 in 2003
compared to 2002 due to customers paying these cost directly to the delivery
agent. Cost of services - impairment of capitalized software of $148,000 in 2003
represents an impairment of capitalized software for in-process projects that
management decided, due to unfavorable market conditions continuing into the
foreseeable future, not to complete.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits and
rent. Product development and enhancement costs incurred by our service bureau
decreased $19,000 in 2003 from 2002. This decrease was primarily attributable to
a decrease in salaries and employee benefits of $16,000 as a result of reduced
staffing to 4 at the end of 2003 from 5 at the beginning of 2002.
25
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent. Selling and marketing increased $12,000 in 2003 primarily due
to an increase in salaries and employee benefits of $8,000, and a $5,000
severance payment in 2003.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. General
and administrative costs decreased $28,000 in 2003 from 2002. Salaries decreased
$160,000 in 2003 from 2002 as a result of a reduction in staff to 1 at the end
of 2003 from 4 at the end of 2002, and 6 at the beginning of 2002. This was
offset by an increase of $135,000 in general and administrative support staff
salary and benefits allocated by ICC.NET to the Service Bureau in 2003. See
"General and administrative - ICC.NET" above for a discussion of the allocation
of general and administrative expenses among segments.
Impairment of Acquired Intangibles - Service Bureau - During the fourth
quarter of fiscal 2003 the goodwill of the Service Bureau was tested for
impairment due to a significant decline in revenues and operating income
resulting primarily from the bankruptcy of its largest customer. An impairment
loss of $982,142 was recognized as a result of this evaluation. The fair value
of the Service Bureau reporting unit was estimated using the net present value
of expected future cash flows.
Results of Operations - Professional Services
Our professional services segment provides comprehensive
business-to-business electronic commerce solutions, including electronic
commerce infrastructure solutions. Our professional services segment also
conducts a series of product-independent EDI seminars for electronic commerce
users. The following table summarizes operating results for our professional
services:
Year Ended
July 31,
---------------------------
2003 2002 (1)
----------- ------------
Revenues:
Services $ 1,728,447 $ 2,152,323
Expenses:
Cost of services 1,719,118 2,191,750
Impairment of software inventory 248,092 --
----------- -----------
Total cost of services 1,967,210 2,191,750
Selling and marketing 141,826 341,717
General and administrative 462,273 1,107,741
Non-cash charges for stock-based compensation -- 190,019
Impairment of acquired intangible -- 1,710,617
----------- -----------
2,571,309 5,541,844
----------- -----------
Operating loss (842,862) (3,389,521)
Other income (expense), net (24,421) (36,973)
----------- -----------
Loss before income taxes $ (867,283) $(3,426,494)
=========== ===========
(1) Restated to reflect the integration of data mapping services into the
ICC.NET segment.
Revenues - Professional Services - Revenue related to professional
services was 14% of our consolidated revenue in 2003 compared to 15% of
consolidated revenue in 2002. Revenue generated from professional services
consists of consulting and educational services. As a result of the continued
slowdown in the economy, which has
26
resulted in a decrease in capital expenditures for information technology and
related services, revenue from our professional services decreased $424,000 in
2003 from 2002.
Cost of services - Professional Services - Total cost of services relating
to professional services was 114% of revenue derived from professional services
in 2003 compared to 102% in 2002. Excluding the impairment of software
inventory, the total cost of services was 99% of revenue from professional
services in 2003 compared to 102% of revenue in 2002. Cost of services related
to our professional services consists primarily of salaries and employee
benefits, and contract labor. Costs of services, excluding the impairment
charge, related to professional services decreased $473,000 in 2003 from 2002.
This was primarily attributable to a decrease in salaries and employee benefits
of $332,000 partially due to a reduction in workforce to 8 at the end of 2003
from 13 at the end of 2002 and 24 at the beginning of 2002. Travel, meals and
entertainment decreased $104,000 in 2003 from 2002 due to lower travel
requirements associated with projects. In addition, costs for rental of space
for educational seminars decreased $62,000 in the 2003 compared to 2002 due to
the use of lower cost facilities. Impairment of software inventory of $248,000
in 2003 represents an impairment for software inventory held by Professional
Services resulting from insufficient historical and projected revenue from these
products to support the recoverability of that carrying value.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits. Selling and marketing expenses related to our professional
services were reduced $200,000 in 2003 from 2002. The decrease in selling and
marketing expenses was primarily attributable to a decrease in salaries and
benefits of $196,000 in 2003. In addition, rent, travel and entertainment and
severance decreased $28,000, $26,000 and $21,000, respectively, in 2003 from
2002. These decreases were offset by an increase in the allocation of selling
and marketing expenses from ICC.NET of $99,000 in 2003 compared to 2002. See
"Selling and marketing - ICC.NET" above for a discussion of the allocation of
selling and marketing expenses between ICC.NET and professional services.
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation, amortization, legal and
other professional fees and telephone charges. General and administrative costs
supporting our professional services decreased $645,000 in 2003 from 2002. The
decrease was attributable in part to decreased rent expense of $281,000 as a
result of the renegotiation of our lease to reduce office space in our existing
facility. In addition, salary and benefits decreased $258,000 primarily due to a
reduction in personnel to 3 at the end of 2003 from 6 at the end of 2002 and 10
at the beginning of 2002. Legal fees decreased $109,000 in 2003 compared to 2002
due to the resolution of a legal matter in 2002. In addition, depreciation and
amortization decreased $93,000 in 2003 from 2002 due to assets reaching the end
of their depreciable or amortizable lives. These decreases were offset by an
increase in allocation of general and administrative expenses from ICC.NET of
$99,000 in 2003 compared to 2002. See "General and administrative - ICC.NET"
above for a discussion of the allocation of general and administrative expenses
among segments.
Non-cash charges - Professional Services - Non-cash charges in the 2002
consisted of stock-based compensation expense related to assumed unvested
restricted shares issued to RTCI employees in connection with our acquisition of
RTCI.
27
Results of Operations and Financial Condition
Fiscal Year Ended July 31, 2002 Compared with Fiscal Year Ended July 31, 2001.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported
segment. All significant intersegment activity has been eliminated. Accordingly,
the segment results below exclude the effect of transactions with our
subsidiary.
Year Ended