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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, 2004
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
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(212) 271-7640
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(Registrants telephone number, including area code)
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X|No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is 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 27, 2004 the issuer had outstanding 19,057,230 shares of
Class A Common Stock. The aggregate market value of the Class A Common Stock
held by non-affiliates as of October 28, 2004 was approximately $15,756,865,
based on a closing price for the Class A Common Stock of $0.93 on the Nasdaq
SmallCap Market on that date.
DOCUMENTS INCORPORATED BY REFERENCE
The information required to be filed by Part III (Items 10, 11, 12, 13 and
14) is incorporated by reference from portions of the Registrant's proxy
statement in connection with its 2004 Annual Meeting of Stockholders. The
Compensation Committee Report, Stock Performance Graph and Audit Committee
Report of the Registrant's proxy statement are expressly not incorporated herein
by reference.
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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............................................... 12
Item 3. Legal Proceedings........................................ 12
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 12
PART II ................................................................. 13
Item 5. Market for Internet Commerce Corporation's Common
Equity and Related Stockholder Matters................. 13
Item 6. Selected Consolidated Financial Data..................... 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 16
Risk Factors............................................. 35
Item 7A.Quantitative and Qualitative Disclosures About
Market Risk............................................ 40
Item 8. Financial Statements and Supplementary Data.............. 41
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 41
Item 9A. Controls and Procedures................................. 41
Item 9B. Other Information....................................... 41
PART III ................................................................. 42
Item 10. Directors and Executive Officers ....................... 42
Item 11. Executive Compensation.................................. 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ 42
Item 13. Certain Relationships and Related Transactions.......... 42
Item 14. Principal Accounting Fees and Services.................. 42
PART IV ................................................................. 43
Item 15. Exhibits, Financial Statement Schedules and
Signatures............................................ 43
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,"
"hope," "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 starting on page 35 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, hoped or intended.
References in this annual report to "ICC," "we," "us," and "our" refer to
Internet Commerce Corporation and our wholly-owned subsidiaries on a
consolidated basis, unless otherwise stated.
Overview
Internet Commerce Corporation is a pioneer in the use of the Internet for
business-to-business (B2B) e-commerce solutions. Thousands of customers rely on
our solutions, expertise and support to help balance cost, fit and function
required to meet their individual requirements for coordinating communications
with their trading partners in compliance with the specifications of their
trading partners. We are a trusted provider of business-to-business solutions to
businesses, regardless of size and level of technical sophistication. With our
sophisticated technological capabilities, industry-focused initiatives and
expertise, focus on business requirements and an expert support team, we help
enable our customers' strategies to conduct business electronically.
Organizationally, our operations are comprised of two segments:
o ICC.NET(TM) segment
o Service Bureau segment
These segments are complementary to each other and support our ability to
provide solutions to many different kinds of enterprises, from sole
proprietorships to large corporations, operating in a variety of industries and
business model formats.
Our principle executive offices are located at 805 Third Avenue, Ninth
Floor, New York, New York 10022, and our telephone number at that location is
212-271-7640. We plan to relocate our executive offices to Atlanta, Georgia in
January, 2005. See "Property."
Industry Background
During the past decade, enterprises have focused on improvement within
their "four walls" to enhance revenue growth, cash flow and asset productivity.
This focus led to substantial investment in enterprise systems and other
technologies that enable an "internally-aligned" business model to streamline
processes and maximize efficiencies of supply chain operations. As organizations
aligned their business models for internal supply chain effectiveness, they
began to recognize that looking beyond their "four walls" was necessary to
continue to broaden supply chain connections.
To that end, businesses started to establish strategies and programs to
extend and manage supply chain processes outside the "four walls" of their
enterprises. A critical requirement for those initiatives was the creation of a
networked system in which trading partners could transmit information to and
from one another in a secure and reliable manner.
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The requirement to create and support this network led to the emergence of
technology companies that developed core competencies in business-to-business
connectivity. Those core competencies have evolved over time to exploit the
Internet to handle information exchange requirements consistently, securely,
reliably and efficiently, including:
o Exchange of real-time transactions electronically;
o Compliance with unique hub specific and industry-specific standards;
o Conformity to the requirements for use of radio frequency
identification devices chips and synchronized product data; and
o Communication with and management of trading partners of all sizes.
Company Background
Internet Commerce Corporation was incorporated in the State of Delaware in
1991 under the name Infosafe Systems, Incorporated.
ICC combines knowledge of procurement processes, expertise in electronic
data interchange (EDI), and capabilities of the Internet for
business-to-business transaction workflows. As a pioneer in the use of the
Internet for business-to-business e-commerce solutions, we exploited the
Internet's capabilities to enable trading partners to exchange information just
as the Internet was entering mainstream commerce. We were able to offer
e-commerce solutions with significantly more user benefits at a lower price than
the competition. We believe that our entrance into a traditional market changed
the dynamics of the industry.
Initially, we offered complementary products and services designed to
enable paperless electronic commerce among trading partners. Our flagship
service, the ICC.NET value added network, was the mechanism to launch and grow
our revenues.
Through July 2000, we were entirely focused on ICC.NET value added network
services that allowed for the secure exchange of business-to-business electronic
forms and data files. Recognizing that the market required a more complete range
of services, we made two acquisitions during fiscal year 2001, as follows:
o We acquired Intercoastal Data Corporation (IDC) in August 2000 for
its service bureau; and
o We acquired Research Triangle Commerce Incorporated (RTCI) in
November 2000 for its professional services.
These acquisitions enabled us to offer a range of services to support
customers seeking to expand their e-commerce trading communities and to bridge
legacy systems to the Internet. With these newly acquired businesses, we were
able to offer complementary services that furthered our image in the industry
and expanded our business model.
This year, we began to realign our business with the cessation of a
non-profitable service and the investment in a strategic growth opportunity.
o We ceased providing our e-commerce and electronic data interchange
education and training services in February 2004.
o We acquired Electronic Commerce Systems, Inc. (ECS) in June 2004 for
its service bureau and software products.
With the ECS acquisition, our focus broadened from selling value added
network services and we expanded our ability to provide e-commerce solutions.
ECS provides Internet-based services, software and service bureau services for
the e-commerce business-to-business communication service market.
Business Strategy
Our objective is to extend our position as an innovator and leader in
business-to-business connectivity and communication. We hope to achieve this
objective by delivering software, services and solutions that help our customers
successfully interconnect and exchange information electronically. To accomplish
our objectives, we employ the following strategies in both our business
segments:
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o Develop innovative offerings. In order to provide on-going value to
our customers, we continue to focus our product development
resources on the enhancement of existing offerings and the
development of new offerings that address evolving market needs and
industry standards. We intend to develop superior and broad
solutions, founded upon innovation, to address all aspects of
trading community enablement and management.
o Increase brand awareness. We have an integrated marketing approach,
which is designed to employ and interweave a variety of marketing
disciplines with a consistent delivery of marketing messages. By
instituting an integrated approach to different media and
distribution points, we hope to build awareness and reputation and
achieve sustainability and coverage over time.
o Provide a single point of accountability for trading communities.
Our range of products and services offer the functionality and
scalability to enable trading partners of different sizes with
unique business models, diverse company infrastructures and various
levels of technical sophistication to electronically transport,
route and deliver information seamlessly, reliably and securely,
regardless of communication protocol or data format.
o Expand strategic alliances and indirect sales channels. We are
establishing and expanding strategic alliances and partnerships in
order to generate business growth outside the United States. By
leveraging complementary technologies, business resources and
diverse domain expertise, we have the opportunity to expand our
offerings in the marketplace, increase our value to customers and
extend our reach into new industries.
o Acquire or invest in complementary businesses. We intend to pursue
acquisitions that provide us with complementary service offerings,
expand our geographic presence and distribution channels and/or
further solidify our competitive position.
Products and Services
We provide offerings that enable a long-term relationship, add value to
ever-evolving supply chain structures, and offer migration paths for business
model evolutions. With our broad range of offerings, we offer solutions that
power and optimize reliable, secure, and real-time transaction workflows within
and across trading communities.
ICC.NET Segment
Network Services. ICC.NET is a complete value added network (VAN) solution
which meets electronic data interchange requirements in a secure, reliable,
available and flexible environment - all at an affordable price to enable the
movement of information seamlessly and efficiently and expedite transaction
processing regardless of file size, communication protocol or data format.
Our ICC.NET basic service includes:
o Alert System: ICC.NET provides proactive alerts to document
processing events, transmission issues or delivery receipts. The
alerts are received by the customer based on the preferred method
for communication: email, text messaging or fax. With ICC.NET's
real-time alert system, our customers are able to respond to their
trading partners and address critical supply chain events
immediately.
o Archival Storage: ICC.NET archives the information sent and received
on-line for a period of 30 days and off-line for several years.
ICC.NET's archival storage provides our customers with a safety net
should they need to resend or review a document or data. A longer
on-line archival period is available with our ICC.ARCHIVE service
capabilities.
o Audit Trails: ICC maintains detailed audit trails of all set-up,
configuration and document transmission events. By accessing audit
trail information, ICC's Technical Support team has the ability to
conduct the analysis required to answer questions and address
issues.
o Connectivity Options: ICC.NET provides a variety of communications
options. FTP communications is included with the basic service.
Other options are available with our ICC.COMMS service capabilities.
With ICC.NET's connectivity options, our customers can select from
multiple communication protocols and options to ensure effective
communications within a trading community of diverse communication
protocols and security standards.
o Information Transmission and Exchange: ICC.NET improves the basic
infrastructure of electronic communications by providing intelligent
messaging and real-time routing using the Internet, which
incorporates the speed, security, reliability, ease-of-use and
flexibility for our customers' business-to-business connectivity.
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o Platform and Standard Independence: ICC.NET enables trading partners
with unique business models, diverse company infrastructures and
various levels of technical sophistication to transport, route and
deliver information seamlessly, reliably and securely regardless of
IT infrastructure, communication protocol or data format.
o Protected Data Center: ICC.NET's redundant servers are housed in the
facility built for the New York and American Stock Exchanges.
ICC.NET servers are secured by guards 24 hours a day, seven days a
week, every day of the year, "man-trap" doorways and card-key
access. All visitors to the facility must be personally escorted at
all times.
o Real-time Data Transmission: ICC.NET delivers information in
real-time, on a schedule or on an ad-hoc basis for customers and
their trading partners. Real-time transmission reduces the problems
inherent in batch delivery, such as the potential for corruption of
data and time delays in delivery.
o Reporting: ICC.NET provides a wide selection of on-line, real-time
reports. Reports may be accessed on-line or batch and delivered to
our customers through a browser, email or EDI system.
o Reliable and Secure Transmission: ICC.NET offers a variety of
industry-standard encryption solutions to provide secure and
reliable transmissions over high-speed connections to the Internet.
Every transaction is authenticated and provides for non-repudiation
to secure supply chain communications.
o Technical Support: We provide U.S. based support representatives, 24
hours a day, seven days a week, every day of the year to set up
accounts, initiate proactive communications, solve problems or
answer questions.
o Web-based document manager: ICC.NET enables customers to the view
time stamp documents and transaction events through the use of our
real-time java-applet. The applet offers control over data,
including the flexibility to acknowledge, view, send, receive, hold,
release, sort or search documents and other data files.
Charges for our ICC.NET service are based upon the amount information that
customers transmit through our network to their trading partners.
For additional fees, our ICC.NET service can be extended with service
capabilities that augment the basic services and meet requirements that are
unique to businesses or trading communities. Those services are priced in
various ways, depending upon the service selected, and include:
o ICC.ARCHIVE: We support extended on-line archiving beyond the
standard 30 day period.
o ICC.CATALOG: We provide a fully-capable, VICS compliant EDI catalog
system with full EDI support as well as browser-based web
capability.
o ICC.COMMS: We offer a variety of customized communication options
including Internet-based, AS2 and browser-based accessibility with
added security provided by VPN, PGP and frame relay to meet unique
communication requirements.
o ICC.CONNECT: We connect to more than 50 private networks, public
interconnects, exchanges, service bureaus and value added networks.
o ICC.DATA SYNC: ICC.NET, which has received industry-standard
approval and certification for UCCnet(TM) services, is capable of
transforming and transmitting global data synchronization attributes
to and from the UCCnet data pool.
o ICC.FAX: We provide real-time and cost-effective EDI-to-fax
capabilities for any document to any fax machine worldwide.
o ICC.INFOSAFE(TM): We enable the publishing of virtually any file
type to a large number of subscribers effectively and efficiently.
o ICC.MBN: We provide an EDI gateway service to bridge Microsoft
Business Network customers to their EDI-enabled trading partners.
o ICC.TRANSLATE: We provide in-line translation capabilities for any
data format, including EDI, flat file, XML and many others.
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Managed Services. We offer a wide-range of Managed Services to simplify
business-to-business connectivity, including the management of initiatives and
programs and facilitation of the on-going alignment within business strategies.
o ICC EDI Infrastructure and Process Outsourcing: We offer a
cost-effective alternative to internal management of the day-to-day
operations and projects required to exchange supply chain
information with trading partners. By leveraging our extensive
experience in the industry, knowledge of industry trends and
direction and understanding of trading partner requirements, we
manage our customers' operational environments and transaction
workflows as well as strategic projects, from concept through
solution delivery, to optimize the extended supply chains.
o ICC Trading Partner Enablement and Management: We utilize our
resources, experience and service offerings to help manage the
complex tasks and various requirements associated with integrating
our customers' trading partners into their supply chains. Our
process begins with a survey that is designed to develop the
information required to customize a program based upon the readiness
of the trading partner participants. As a result of the survey, we
develop, implement and manage an integrated solution that allows our
customers and its trading partners to communicate electronically
in an efficient and effective way.
Our Managed Services involve customized pricing that can include a
combination of fixed pricing, hourly fees, set-up fees and transaction fees.
Consulting and Professional Services. We offer consulting and professional
services that assist customers with all phases of an e-commerce communication
and connectivity initiative, including planning, analyzing, designing and
constructing solutions. Our professional services unit assists clients to
conduct business electronically through a continuation of services including
e-Consulting, data transformation mapping (EDI, EAI, XML) and internetworking.
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o e-commerce Consulting: We bring subject matter expertise to help
customers achieve the intended results of their initiatives. The
professionals in our consulting teams conduct an independent,
fact-based business assessment and analysis of the customer's
current systems to identify gaps in technology, resources and
skills required to enable business-to-business connectivity through
e-commerce. At the conclusion of the consulting engagement, our
consultants deliver a blue print to achieve the desired state of
supply chain compliance, coordination and collaboration.
o EDI Mapping Factory(R): Our technical experts provide EDI data
mapping services to enable the translation between different data
formats. The EDI Mapping Factory conducts mapping using a variety of
translators on multiple platforms and employs data transformation
services for database conversions, customer-specific files, and
other tasks involved in the care and movement of documents and data
files.
Our Consulting and Professional Services are charged on an hourly basis,
although occasionally we enter into fixed price contracts for these services.
Service Bureau Segment
EC Service Center. At our EC Service Center, our professionals serve as an
extension of our customers' organizations by performing activities that enable
participation in the extended supply chain, including:
o EDI-to-Fax - We receive our customers' electronic formatted
information, convert it into a fax-readable file and route that
information to our customers' fax machines or email accounts.
o Fax-to-EDI - When the customers are ready to respond, we receive
their information via a fax or email. That information is then
entered into a Web form and transmitted to the trading partner in a
format that is consistent with trading partner specifications.
o Labels - For suppliers who are required to send an Advanced Ship
Notice to comply with retailers' requirements, we generate and print
UCC-128 case labels. Those printed labels are sent to our customers
so they can be applied to the cartons that will be shipped to a
retailer. We also print UPC stickers, tickets and hang tags for our
customers.
o UPC Catalog - We update on-line UPC catalogs for our customers. Once
we have received our customer's electronic or hard-copy product
information, we use that information to generate the necessary EDI
transaction and send it to the catalog service provider. Through
this process, our customer's product information is added, updated
or deleted from the UPC catalog.
Our Service Center enables customers to source electronic commerce
solutions reliably, without excessive investments. Our customers are billed
monthly for only the services they use.
Software Solutions. We also offer software solutions that are designed to
enable the management and exchange of vital information between trading partners
and that address a range of requirements for operations within the extended
supply chain. The applications operate on Microsoft Windows computing platforms,
feature "plug-and-play" installation, inter-operate with many pre-packaged
accounting systems and integrate easily to existing processes. Our software
includes:
o Performance EDI: The software enables the connection and
communication with trading partners cost-effectively by providing a
comprehensive solution for EDI translation. Performance EDI is an
easy-to-use application featuring a large collection of
pre-configured transaction maps, and connectivity to public and
private transaction networks. Key benefits include the ability to:
(1) implement rapidly using pre-configured trading partner
information; (2) keep up-to-date with new mandates by downloading
new maps directly into the application; and (3) comply with trading
partner mandates through support for all major EDI documents and
standards.
o Order Manager Software: We simplify and improve order management in
the front and back offices, while enabling the exchange of orders as
standards-based electronic transactions within trading communities.
Order Manager Software automates the handling, processing,
transmission and receipt of orders, Advanced Ship Notices and
invoices in accordance with preferred formats and specified
instructions. Key benefits include the ability to: (1) pick and pack
according to specified instructions; (2) catch errors in the picking
process by matching the item to the order; (3) create Advance Ship
Notice and invoice for each sales order; (4) generate UCC128 case
labels
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and batch print using a thermal transfer printer; (5) combine case
and shipping information for consistent record keeping; and (6)
translate EDI information to an in-house format and visa versa.
o Retail Product Manager: This application integrates seamlessly into
our other software products and provides the automation to keep UPC
codes up-to-date. Key benefits include the ability to: (1) keep
existing UPC codes current and generate new ones in accordance with
the proper standards; (2) create, add, track and delete UPC codes
for the retailers' catalogs; (3) utilize National Retail Foundation
guidelines to track active, inactive and dead UPC codes; (4)
transform UPC information into an electronic format for trading
partner information exchange; and (5) print UPC codes on bar code
labels for warehouse handling.
With our software solutions, we offer our customers timely upgrades and
enhancements for technology advancements, improved functionality, new industry
standards and trading partner compliance. This customer support program is
available for an annual fee, paid in advance.
Hosted Web Applications. We also offer hosted Web applications, giving our
customers an alternative to operating and supervising an electronic data
interchange environment. Simply by accessing a Web browser, our customers have
the technology required to participate in electronic data interchange with their
trading partners. Our hosted Web applications include:
o ICC Order Management Services: For suppliers and manufacturers, we
simplify the retailers' compliance mandates. ICC Order Management
Services provide our customers with immediate access to ready-made
EDI-to-forms and forms-to-EDI that comply with the retailers'
preferred formats and standards. By utilizing our connections in the
retail industry and employing our Web application development
expertise, we keep abreast of changes in the retailers' formats and
industry's standards and automatically incorporate those changes in
our Order Management Service.
In addition to helping meet retailer mandates, our Order Management
Services add sales order processing functionality. Using a standard
Web browser, we automate the receipt of electronic transactions,
giving the warehouse visibility to orders that require packing and
shipping, and we complete the order process by preparing and sending
invoices and shipping notices. Customers can also print their UCC128
case labels.
o ICC Sell-Thru, Analysis & Reporting: We provide a Web application
that presents sell-through data compiled from the items sold,
inventory on-hand and product levels for current and prior periods
at retail locations in an easy-to-navigate interface. The
easy-to-navigate interface offers a mechanism for the interpretation
of valuable data on product movement and retail performance.
Our hosted Web applications are available for set-up and service fees. We
charge additional transaction fees for Order Management Services.
Global Data Synchronization. At the end of fiscal year 2004, we launched a
solution that leverages the services offered in both our business segments to
capitalize on a supply chain initiative, commonly referred to as Global Data
Synchronization, to eliminate the inefficient and error-prone approaches for
exchanging and updating item information in buyer and seller systems.
Our broad range of solutions to address Global Data Synchronization meet
the needs of customers of all sizes in retail, distribution, and manufacturing
industries. As a certified UCCnet(TM) Solution Partner, we have completed a
certification process to ensure standards-compliance, technical expertise,
solution requirements and implementation tasks in accordance with UCCnet
standards.
o Education: We deliver education designed to help customers
understand the Global Data Synchronization program. The course
includes an overview of data synchronization, an explanation of the
GLN and GTIN numbering systems, a synopsis of data pools and the
global data registry and an examination of a data synchronization
implementation plan. At the conclusion of the class, customers have
explored all aspects of data synchronization and examined
alternative strategies for implementation.
o Consulting: We help develop an overall strategy and determine the
best technical approach for becoming data-sync-enabled. Working with
the customer, we conduct a business assessment and analyze the
customer's current systems to identify gaps in technology, resources
and skills required to align data items, create a master catalog,
connect to UCCnet and synchronize the information. At the conclusion
of the consulting engagement, the customer has a blueprint to
achieve UCCnet compliance.
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o EDI Mapping Factory: We provide the expertise required to establish
and apply the data conversion rules to convert the flat file to XML
for outbound transmission and the XML to HTML or flat file for
inbound messages.
o Connectivity: ICC.NET network service, which has received Drummond
Group approval and UCC certification for UCCnet services, utilizes
its AS2 connectivity capabilities to transmit data reliably,
securely and efficiently between the source / recipient data pools
and the UCCnet global registry.
o Outsourcing: Using UCCnet certified software, we will provide a
hosted solution that offers a simplified way to allow many
retailers, distributors and manufactures to receive the expertise
from trained professionals and technology from a certified solution
partner to validate item data, push information to UCCnet registry
and receive compliance to mandates.
o Software: We have partnered with a leading software company to
provide an integration solution for supply-side companies. The
software, a UCCnet certified solution, is a full-function
application for maintaining, managing and synchronizing item data.
It includes the ability to integrate business systems with disparate
data sources.
ICC Organizations
The following company wide organizations play key roles in our delivery of
value to customers in both our business segments.
Product Development
Our product development efforts are focused on adding enhanced and new
functionality to existing products, integrating the various product offerings
into our services delivery, supporting new and advanced technologies and
developing new products. Our success will depend in part upon our ability to
adopt technology and industry trends, respond to customer requirements and
market opportunities and incorporate emerging standards into our existing and
new products and services. To that end, our development efforts center on
requirements and features that have been identified through market research,
customer interactions, standards announcements and competitive analysis. As a
result, we intend to continue to offer products and services with increasing
functionality and scalability to meet the needs of customers regardless of size
and technical sophistication.
We conduct our development efforts in the United States. Most of our
development projects are performed internally; however, some projects require
specialized skills that are acquired through an outsourced arrangement with
contractors based in the United States.
Our research and development expenses for the years ended July 31, 2004,
2003 and 2002 were approximately $953,000, $1,111,000 and $977,000,
respectively.
Customer Support, Technical Support and Maintenance
By offering U.S.-based customer and technical support, we help our
customers maximize their investment in the offerings that connect them to their
trading partners and enable electronic information exchange. Our goal is to
ensure customer satisfaction each time a customers calls us to set up an
account, solve a problem, answer a question and provide a product upgrade.
Our Customer and Technical Support Centers consist of teams of
professionals who work together to provide dependable and timely resolution to
customer support and technical inquiries. For complex problems, our Customer and
Technical Support Center teams have immediate access to the experts in our
development laboratories, consulting organizations and IT operations, as
required.
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Sales and Marketing
We employ a hybrid sales strategy to leverage a complementary and adequate
coverage structure, capitalize on a balanced cost model and establish a
comprehensive management system. Deployed in conjunction with a customer
relationship management system, this hybrid model allows us to measure and
refine the allocation of resources to more effectively manage account coverage
and sales structure costs.
We support how customers buy today while providing them with a knowledge
base to gain customer confidence. Our multi-disciplined direct sales team
consists of regional sales managers, inside sales representatives, technical
sales representatives and a sales support professional. Matching sales skills to
selling models, we deploy our inside sales resources to complete most of the
transactional selling while utilizing our regional sales manager resources for
consultative / strategic selling. Our technical sales representatives and sales
support professional work with the regional sales managers and inside
sales representatives to increase sales by performing the pre-sales and sales
support activities associated with generating new business, ensuring customer
satisfaction and strengthening customer relationships. In addition, our senior
management takes an active role in our sales efforts.
Although direct selling has been our primary focus, we intend to
significantly increase our efforts to utilize indirect sales channels. Through
arrangements with agents, resellers and other solution providers, we intend to
sell to companies around the world and expand our reach into markets that we do
not service directly. We believe that our broad array of innovative service
offerings enable a wide variety of companies to recommend, market and sell our
services.
Our marketing efforts consist of a variety of programs to support our
sales efforts, including:
o Customer marketing arrangements
o Direct mail
o e-Marketing
o Channel marketing
o Publicity
o Sales literature, presentations and tools
o Seminars
o Speaking engagements
o Trade shows
o Web site marketing
Customers
To date, our customers have been retailers, manufacturers, distributors,
and transportation providers in a variety of industries, including apparel,
consumer packaged goods, financial, grocery, media, pharmaceutical, publishing,
retail, third-party logistics and transportation. As of July 31, 2004, we
provided services to approximately 2,200 customers, of which approximately 1,115
subscribed to our ICC.NET value added network service. The following table sets
forth a representative list of our customers as of July 31, 2004.
Ace Hardware Nordstrom.com
Aerosoles Omni Sporting Goods
Alstom Power Philip Morris
Bed, Bath & Beyond Pearson Education
Birds Eye Foods Random House
CIT Group Reinhart FoodService
Colgate Palmolive Revlon Consumer Products
CVS Sealy Incorporated
Eveden Incorporated Simon and Schuster
GlaxoSmithKline Shamrock Foods Staples
Happy Kids The Sak
Harper Collins Publisher Time Warner Book Group
Ingram Entertainment Trustmark National Bank
Lady John Union Planters National Bank
Linens-n-Things University of Alabama
Jones Apparel Group USA ViewSonic Corporation
McGraw Hill Verizon Wireless
Modine Manufacturing Winn-Dixie Stores
National Industries for the Blind
9
For the fiscal years ended July 31, 2004 and 2003, no single customer
accounted for more than 10% of our consolidated revenue.
Competition
Our products and services are targeted at customers who utilize e-commerce
business-to-business transactions, which is a mature, fragmented and competitive
industry described by the following characteristics:
o Competitive pressures are intense, focusing on an increase in market
share;
o Growth and increasing profitability require companies to take
market share away from competitors;
o The industry is consolidating to a smaller number of key
participants;
o Severe price competition leads to lower revenues and profits for all
participants; and
o Profitability erosion has forced companies out of the industry.
We believe that we compete favorably in each of the foregoing seven
principal factors. We also believe that the combination of our technology,
performance and breadth of offerings is an important competitive factor.
The principal competitive factors affecting our market are:
o Compliance with industry standards;
o Functionality and features of offerings;
o Level of customer and technical support;
o Price of services;
o Reliability, security and availability of services;
o Technical and industry expertise; and
o Vendor and offering reputations.
We believe that we compete favorably in each of the foregoing seven
principal factors. We also believe that the combination of our technology,
performance and breadth of offerings is an important competitive factor.
We face a significant number of competitors, ranging from very large
enterprises or divisions of very large companies to a number of relatively small
organizations, including:
o Corporate Information Technology departments of current customers or
prospects that are capable of internal solution development and
support;
o Large companies with broad and diverse offerings, including a
division that offers business-to-business information exchange
services, such as IBM;
o Large e-Commerce business-to-business vendors with a broad array of
service offerings, including Global eXchange Services (GXS),
Sterling Commerce and Inovis, Inc.; and
o Small companies with a core competence in a particular industry,
including companies such as Pubnet in the publishing industry and
Covisint in the automotive industry.
These competitors are diverse in terms of their histories, business
models, corporate strategies, financial strength, name recognition, company
reputation, customer base and breadth of offerings.
Many of our large competitors have more history, significantly greater
financial resources, larger customer bases and more easily recognized names than
we do. However, those companies also carry legacy infrastructures that may add
cost to their business models. We believe that we have a cost advantage because
we do not have a legacy infrastructure to maintain.
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, GXS and Sterling Commerce, which we believe to account for
approximately 60% of the estimated EDI users, discontinued their interconnect
arrangements with us. GXS discontinued its interconnection with our service in
September 2001 and Sterling Commerce discontinued its interconnection with our
service in April 2002.
Patents and Trademarks
We hold four U.S. patents as of July 31, 2004. Those patents expire in
years 2012 through 2014 and are not currently material to our business.
Although ICC owns these patent rights, 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." We have made
no determination as to the patentability of these trade secrets and will
continue to evaluate, on a case-by case basis, whether applying for additional
10
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 us 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 rights 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.
We have obtained U.S. federal trademark registration for seven word marks,
including ICC.NET, INFOSAFE and EDI MAPPING FACTORY. We believe that our
trademark of ICC.NET is material to our operations in the U.S. 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.
Employees
As of July 31, 2004, we had 91 employees. Of these employees, 14 engaged
in executive and administrative functions, 19 engaged in sales and marketing
activities, and 58 provided technical and technology support. All of our
employees are located in the United States, and none of our employees is covered
by a collective bargaining agreement. We consider our relations with our
employees to be satisfactory.
11
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New York
under a lease that expires on January 31, 2005 and provides for annual base rent
of approximately $510,000. The lease covers approximately 12,300 square feet.
On September 28, 2004, we announced that the Board of Directors approved
the relocation of our executive offices to Atlanta, Georgia.
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, 2009 and provides for annual base rent of approximately
$222,000. The lease covers approximately 8,900 square feet.
Our service bureau maintains locations in Carrollton and Norcross,
Georgia. The lease at the Carrollton location expires on July 31, 2009 and
covers approximately 8,000 square feet at an annual base rent of approximately
$96,000. The lease at the Norcross location expires on July 31, 2005 and covers
approximately 2,300 square feet at an annual base rent of approximately $45,000.
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
$600,000. The lease covers approximately 27,300 square feet. Effective August 1,
2002, we entered into an agreement with the landlord of the Cary facility that
reduced the base rent with respect to approximately 13,000 square feet to
approximately $445,000 and the landlord recaptured the balance of the space and
released it to new tenants. We have subleased approximately 6,580 square feet of
our remaining space at an annual rent of $100,000. Effective February 1, 2004,
we entered into an agreement with the landlord of the Cary facility that further
reduced the base rent on our space to $315,000. As part of the February 1, 2004
agreement, we extended the lease with respect to 6,470 square feet for 3 years
until October 31, 2007 at an annual rent of $103,500.
Our main 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. In addition, we maintain a data center for our service bureau
operations in Atlanta, Georgia under a month-to-month agreement with Level(3)
Communications, Inc. cancelable by either party with sixty days notice.
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, 2004.
12
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, our class A common stock
was traded on the Nasdaq National Market under the symbol ICCA. Since January
30, 2003, the class A common stock has traded on the Nasdaq SmallCap Market
under the symbol ICCA. The following table sets forth the high and low closing
prices of our class A 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:
--------------------------
2004 2003
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
- --------------------
First Quarter $ 1.66 $ 1.12 $ 3.17 $ 1.30
Second Quarter $ 1.34 $ 0.90 $ 2.10 $ 1.15
Third Quarter $ 2.55 $ 1.35 $ 1.41 $ 0.80
Fourth Quarter $ 1.54 $ 1.16 $ 2.04 $ 1.15
(b) Holders
As of October 27, 2004, there were approximately 231 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 these stockholders.
(c) Dividends
We have not paid any cash dividends on our class A common stock and do 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 January 1st
of each year. We issued 361,702 shares of class A common stock in payment of the
dividend due January 1, 2004 and 302,343 shares of class A common stock in
payment of the dividend due on January 1, 2003. On October 14, 2004, the Board
of Directors declared a dividend on the series C preferred stock payable on
January 1, 2005 in shares of class A common stock in the amount of $400,000.
Pursuant to the terms of an Accounts Receivable Financing Agreement
between the Company and Silicon Valley Bank entered into in May 2003, without
the prior written consent of Silicon Valley Bank, we are not permitted to pay
any dividends or make any distribution or payment or redeem, retire or
repurchase any capital stock, other than in connection with the dividends
payable on our shares of Series C Preferred Stock in an amount not to exceed
$400,000 in any fiscal year or dividends payable in shares of our capital stock.
13
(d) Securities Authorized for Issuance under Equity Compensation Plans
Plan Category Shares of class A Weighted-average Shares of class A
common stock to be exercise price common stock
issued upon exercise of outstanding remaining
of outstanding options, available for
options, warrants warrants and future issuance
and rights (in rights under equity
thousands) compensation plans
(excluding
securities
reflected in
column (a)) (in
thousands)
(a) (b) (c)
- --------------------------------------------------------------------------------
Equity compensation 5,087 $2.87 941
plans approved by
security holders (1)
Equity compensation 732 $14.05 -
plans not approved
by security holders (2)
- --------------------------------------------------------------------------------
Total 5,819 $4.28 941
(1) Includes stock options to purchase 65,134 shares of class A common stock
with a weighted average exercise price of $5.62 per share under the
Employee Stock Option plan of Research Triangle Commerce, Inc, or RTCI,
which was assumed in connection with our acquisition of RTCI on November
6, 2000.
(2) Includes stock options to purchase 150,000 shares of class A common stock
and warrants to purchase 582,310 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 10, Stockholders'
Equity, of the Notes to Consolidated Financial Statements included
elsewhere in this annual report on Form 10-K. The issuance of all the
warrants set forth in Note 10 under the captions 2001 Private Placement
Commission Warrants, ING Warrants, 2003 Private Placement Commission
Warrants, Silicon Valley Bank Warrants and 2004 Private Placement
Commission Warrants constitute individual compensation arrangements. In
addition, warrants to purchase 38,460 shares of class A common stock set
forth in Note 10 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 the fiscal year ended July 31, 2004, we issued a total of 104,382
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, 2004, we issued 361,702 shares of class A common stock in
payment of the dividends due on our series C preferred stock.
14
Item 6. Selected Consolidated Financial Data
Our selected consolidated statement of operations data for each of the
years in the five-year period ended July 31, 2004 is presented below. Our
selected balance sheet data is presented below as of July 31, 2004, 2003, 2002,
2001 and 2000. 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,
----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- -------- -------- -------- --------
(In thousands, except per share data)
Statements of Operations Data:
Revenues $ 11,705 $ 12,083 $ 14,222 $ 9,743 $ 1,303
-------- -------- -------- -------- --------
Expenses:
Cost of services 6,736 7,622 8,776 9,354 2,514
Impairment of software inventory -- 248 -- -- --
Impairment of capitalized software 45 148 -- -- --
Product development and enhancement 953 1,111 977 931 702
Selling and marketing 3,070 3,035 3,499 5,384 3,273
General and administrative 4,205 4,439 5,849 9,683 4,814
Non-cash charges for stock-based
compensation, services and legal
settlements 802 139 250 991 5,161
Impairment of goodwill and acquired
intangibles -- 982 1,711 16,708 --
-------- -------- -------- -------- --------
Total operating expenses 15,811 17,724 21,062 43,051 16,464
-------- -------- -------- -------- --------
Operating loss (4,106) (5,641) (6,840) (33,308) (15,161)
-------- -------- -------- -------- --------
Other income (expense), net 19 (363) 292 523 675
-------- -------- -------- -------- --------
Loss before income taxes (4,087) (6,004) (6,548) (32,785) (14,486)
Income tax benefit -- -- -- 1,930 --
-------- -------- -------- -------- --------
Net Loss (4,087) (6,004) (6,548) (30,855) (14,486)
Dividends on preferred stock (401) (400) (365) (420) (458)
Dividends to preferred stockholders for
beneficial conversion feature -- (107) -- -- (4,549)
Beneficial conversion feature from repricing
and issuance of warrants -- -- (461) -- --
-------- -------- -------- -------- --------
Loss attributable to common stockholders $ (4,488) $ (6,511) $ (7,374) $(31,275) $(19,493)
======== ======== ======== ======== ========
Basic and diluted loss per common share $ (0.30) $ (0.53) $ (0.68) $ (3.57) $ (4.49)
======== ======== ======== ======== ========
Weighted average common shares outstanding -
basic and diluted 15,026 12,303 10,867 8,768 4,337
======== ======== ======== ======== ========
July 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
--------- ------- ------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents $ 3,790 $ 2,283 $ 2,088 $ 2,223 $ 14,003
Working capital 4,198 1,700 2,622 646 17,831
Total assets 11,429 8,598 12,625 15,674 22,332
Capital lease obligations 55 194 374 255 231
Total liabilities 1,994 2,758 3,244 4,487 2,242
Stockholders' equity 9,434 5,840 9,381 11,187 20,090
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This annual report on Form 10-K contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act 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 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
As the Company approaches cash flow break-even, we are strengthening the
executive management team by the addition of a new Chief Executive Officer and
Chief Operating Officer in order to capitalize on the individual skills of
senior management and more precisely align those skills with the many new
opportunities currently developing. We are focusing on the future direction of
the markets in which we compete, mergers and acquisitions and the development of
important strategic relationships, such as our Microsoft Business Network
opportunity, that have potential to increase our revenues and profits.
We are a pioneer in the use of the Internet for business-to-business (B2B)
e-commerce solutions. Thousands of customers rely on our solutions, expertise
and support to help balance cost, fit and function required to meet their
individual requirements for coordinating communications with their trading
partners in compliance with the specifications of their trading partners. We are
a trusted provider of business-to-business solutions to businesses, regardless
of size and level of technical sophistication. With our sophisticated
technological capabilities, industry-focused initiatives and expertise, focus on
business requirements and an expert support team, we help enable our customers'
strategies to conduct business electronically.
Organizationally, our operations are comprised of two segments:
o ICC.NET(TM) segment, which provides a variety of services,
including Network Services, Managed Services and Consulting and
Professional Services. ICC.NET is a complete value added network
solution which meets electronic data interchange requirements in a
secure, reliable, available and flexible environment.
o Service Bureau segment, which offers a variety of services including
our EC Service Center, Software Solutions and Hosted Web
Applications.
These segments are complementary to each other and support our ability to
provide solutions to many different kinds of enterprises, from sole
proprietorships to large corporations, operating in a variety of industries and
business model formats. For a description of our business segment, see "Products
and Services" under Item 1, beginning on page 3 of this annual report.
Prior to February 2004, we also operated a professional services segment.
Our professional services unit assists clients to conduct business
electronically through a continuum of services including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking. In response to
continuing weak demand for our professional services, in February 2004 we
combined these activities with ICC.NET to reduce operating costs. As a result,
effective February 2004, we no longer report the results for our professional
services activities in a separate segment and include these results in the
ICC.NET segment. These activities were previously reported in the Professional
Services segment.
The Company completed its acquisition of Electronic Commerce Systems, Inc.
(ECS) on June 22, 2004. The operating results of ECS will be included in the
Service Bureau segment. ECS provides Internet-based services, software and
service bureau services for the e-commerce business-to-business communication
service market. We
16
believe that the integration of ECS into our Service Bureau segment will
substantially strengthen this operating segment and provide positive cash flow
from its operating activities.
The Value Added Network business has become significantly more price
competitive over the past year, with major networks restructuring to reduce
their overhead costs to be better positioned to compete on a price point basis
against Internet based networks such as ICC.NET. We have been successful in
maintaining, and in fact have improved, our margins, but we have experienced
some price erosion in competing for larger customers. Although we expect to
continue to add new customers and increase the volume of data transmitted
through our service, we do not expect our revenue from VAN services to continue
to grow as rapidly as in the past. This trend is expected to continue in the
short term until such time as a cost-based pricing floor is reached by our
larger competitors. To counteract this negative impact on our revenue growth,
management has deployed a new dual pronged strategy. We have added revenue
through the acquisition of ECS and have developed new product and service
offerings (AS2 and Data Synchronization) to improve our value proposition. AS2
capabilities have refocused the attention of industry. AS2 is a service offering
on the Internet, which handles primary XML documents, which are an extension of
traditional EDI. We have incorporated this communication methodology into our
standard network services and are achieving success in stemming a migration of
our customers' network traffic to those who could otherwise purchase an AS2
software offering.
Data synchronization has forced the industry to change its focus from cost
savings to compliance. Data synchronization is a methodology by which
descriptive data identifying an item or items is stored in a central depository
resulting in one common source of agreed-upon information about the product
description. We believe this will be an industry focus for a year or so and
thereafter be a standard business practice. We have become a certified data
synchronization solutions and connectivity provider and are currently offering
training and consulting services to capitalize on this emerging initiative.
During the quarter ended July 31, 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 fiscal
2002, continued operating losses and a significant reduction in forecasted
future operating profits, the Professional Services segment was tested for
impairment during the quarter ended July 31, 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 quarter ended July 31, 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 recasted for 2003 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 us. 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 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.
17
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. 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 our critical accounting policies:
Revenue Recognition: We derive revenue from subscriptions to our 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. We also derive 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. We have a limited number of fixed fee data mapping
services contracts. Under these arrangements we are required to provide a
specified number of maps for a fixed fee. Revenue from such arrangements is
recognized using the percentage-of-completion method of accounting (see below).
Service Bureau revenue is comprised of EDI services including data
translation services, 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. We
account for 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 our part. Our multiple
element arrangements generally consist of a software license and post contract
support. We allocate the aggregate revenue from multiple element arrangements to
each element based on vendor specific objective evidence. We have 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 we enter 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.
18
We also provide 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. We 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. Our reporting units utilized for evaluating the recoverability of
goodwill are the same as its operating segments.
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. We did not have any indefinite lived intangible assets other than
goodwill that were not subject to amortization.
Impairment of long-lived assets: Our long-lived assets, 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,
we test 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, we 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: In January 2004, the Company adopted the fair
value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 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
19
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 our 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 2004, 2003 and 2002 that required the use of
significant management estimates.
We have entered into several transactions involving the issuance of
warrants and options to purchase shares of our 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.
In connection with the private placement that closed in April 2004, we
incurred fees which were paid by issuing warrants to purchase 283,170 shares of
class A common stock at an exercise price of $2.22 per share. The fair value of
the warrants was determined by management to be $225,905 by utilizing the
Black-Scholes option pricing model.
In January 2004, we implemented a voluntary stock option exchange program
whereby we offered to exchange certain outstanding options to purchase shares of
class A common stock held by eligible employees, with exercise prices per share
greater than or equal to $11.50, for new options to purchase shares of class A
common stock. Under this exchange program, the 26 participating employees agreed
to cancel as of January 30, 2004 their existing options to purchase 823,500
shares of the class A common stock and were granted options to purchase 494,100
shares of class A common stock with an exercise price of $1.25 per share, the
closing market price per share on January 20, 2004. In addition, under this
exchange program, two directors cancelled as of January 30, 2004 existing
options to purchase 250,000 shares of class A common stock and were granted
options to purchase 150,000 shares of the class A common stock with an exercise
price of $2.00 per share. Management estimated the value of the options granted
under the exchange program using the Black Scholes option-pricing model.
On May 30, 2003, we executed an Accounts Receivable Financing Agreement
("Financing Agreement") with Silicon Valley Bank ("Bank") with a term of 1 year.
On October 22, 2003 and August 31, 2004, we amended the Financing Agreement to
extend its term to August 31, 2004 and December 29, 2004, respectively. In
connection with the Financing Agreement, the we issued the Bank warrants to
purchase 40,000 shares of 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 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.
On March 10, 2003, we 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 by utilizing the Black-Scholes option pricing model.
The allocation of the proceeds from the sale of the series D preferred
stock and warrants issued in our 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, we 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 by
utilizing the Black-Scholes option pricing model.
20
In connection with a warrant exchange offer in April 2002, we valued the
repriced and newly issued warrants at $461,084 using the Black-Scholes
option-pricing model. This amount has been added to our 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 to purchase shares of our class A common stock,
providing the holders the right to receive, upon exercise, an aggregate of
394,905 shares of 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 our 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, 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. We allocate 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 in an amount equal to that excess.
We estimate the fair value of our 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
our weighted average cost of capital. Estimating the 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 we prepared our
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 our reporting units.
Impairments of goodwill and acquired intangibles in the amount of $982,000
and $1,711,000 were as recorded during the years ended July 31 2003 and 2002,
respectively. 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, our professional services
reporting unit 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 reporting unit was
estimated using the net present value of expected future cash flows. 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 and Financial Condition
Fiscal Year Ended July 31, 2004 Compared with Fiscal Year Ended July 31, 2003.
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
subsidiaries.
21
Year Ended
July 31,
-----------------------------
Loss before income taxes: 2004 2003 (1)
------------ -------------
ICC.NET $ (3,974,708) $ (4,872,216)
Service Bureau (111,901) (1,132,102)
------------ -------------
Consolidated loss before income taxes $ (4,086,609) $ (6,004,318)
============ =============
(1) Recasted to include the results of professional services activities in the
ICC.NET segment. These activities were previously reported in the Professional
Services segment.
Results of Operations - ICC.NET
The ICC.NET service, our 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. In addition, ICC.NET facilitates the
development and operation of comprehensive business-to-business e-commerce
solutions. These professional services assist our clients to conduct business
electronically through a continuum of services including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking. The following table
summarizes operating results for ICC.NET:
22
Year Ended
July 31,
----------------------------
2004 2003 (1)
------------ ------------
Revenues:
VAN services $ 9,065,373 $ 8,237,525
Professional services 907,706 1,728,447
Mapping services 300,731 571,063
Services to Triaton -- 58,333
------------ ------------
10,273,810 10,595,368
Expenses:
Cost of services 5,940,278 6,886,672
Impairment of software inventory -- 248,092
------------ ------------
Total cost of services 5,940,278 7,134,764
Product development and enhancement 789,535 975,583
Selling and marketing 2,953,102 2,899,315
General and administrative 3,785,157 3,955,108
Non-cash charges for stock-based compensation 800,840 139,415
------------ ------------
14,268,912 15,104,185
------------ ------------
Operating loss $ (3,995,102) $ (4,508,817)
Other (expense) income, net 20,394 (363,399)
------------ ------------
Loss before income taxes $ (3,974,708) (4,872,216)
------------ ------------
(1) Recasted to include the results of professional services activities in the
ICC.NET segment. These activities were previously reported in the Professional
Services segment.
Revenues - ICC.NET - Revenues from ICC.NET were 88% of our total
consolidated revenues for both the fiscal year ended July 31, 2004 ("2004") and
the fiscal year ended July 31, 2003 ("2003"). Total ICC.NET revenue decreased
$322,000 in 2004 from 2003, or approximately 3%. Revenue from VAN services and
services to Triaton increased $770,000, or approximately 9%, in 2004 from the
prior year. The increase in VAN services revenue is attributable to an increase
in transaction volume and an increase in mailbox fees. Professional services
revenue decreased $821,000 in 2004 from 2003 or approximately 47%; revenue from
EDI educational services and seminars decreased $450,000 and revenue from other
professional services decreased $371,000 in 2004 from 2003. We discontinued our
EDI educational services and seminars in January 2004; the decrease in revenue
from other professional service is attributable to continued slow demand for
these services resulting from increased in-house performance by potential
customers and from a highly competitive environment. Mapping services revenue
decreased $270,000 or approximately 47% in 2004 from 2003 primarily due to
continued slow demand for these services resulting from overseas competition.
Cost of services - ICC.NET - Cost of services relating to ICC.NET was 58%
of revenue derived from the ICC.NET service in 2004, compared to 67% of revenue
derived from this service in 2003. Excluding the impairment of software
inventory, the total cost of services was 58% of revenue derived from this
service in 2004 compared to 65% of this revenue in 2003. Cost of services
related to ICC.NET consists primarily of salaries and employee benefits,
contract labor, connectivity fees, amortization, rent and product development
and enhancement allocation. Cost of services excluding impairment of software
inventory decreased $946,000 in 2004 from 2003. Salaries and employee benefits
decreased $636,000 primarily due to a reduction of personnel to 25 at the end of
2004 from 36 at the beginning of 2003. Contract labor decreased $217,000 in 2004
from 2003 due to a decrease in the use of consultants attributable to a decrease
in the number of professional services projects. Cost of services relating to
VAN services decreased to $3,568,000 in 2004 from $3,744,000 in 2003. Cost of
services relating to
23
mapping services increased to $1,452,000 in 2004 from $1,424,000 in 2003. There
were no costs of services relating to services provided to Triaton in 2004 or
2003. Impairment of software inventory of $248,000 in 2003 represents an
impairment for software inventory held by the professional services reporting
unit resulting from insufficient historical and projected revenue from these
products to support the recoverability of that carrying value. We anticipate
that 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 VAN service to increase.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to ICC.NET consist primarily of salaries and employee
benefits. Product development and enhancement costs decreased $186,000 in 2004
from 2003. Salaries and employee benefits decreased $123,000 in 2004 from 2003
due primarily to a reduction in headcount to 9 at the end of 2004 from 10 at the
end of 2003. Consulting costs decreased $22,000 in 2004 from 2003 due to
increased reliance on staff. In addition, allocation of product development and
enhancement salaries to non-development departments increased $29,000 in 2004
from 2003.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to ICC.NET service consist primarily of salaries and employee benefits,
travel-related costs, rent and advertising and trade show costs. Selling and
marketing expenses related to ICC.NET service increased $54,000 in 2004 from
2003. Consulting costs increased $59,000 in 2004 from 2003 primarily due to the
use of a consultant for trade shows. Rent increased $41,000 in 2004 from 2003
primarily due to an allocation of rent to selling and marketing departments in
2004. Publications, dues and subscription expenses increased $34,000 in 2004
from 2003 due to increased use of industry publications and services. Travel and
entertainment expenses increased $22,000 in 2004 from 2003 due to more travel to
sales calls and trade shows. Allocation of product development and enhancement
salaries to selling and marketing increased $18,000 in 2004 from 2003 due to
increased technical sales activity. Severance payments were $12,000 in 2004 and
there were no such payments in 2003. These increases were partially offset by a
decrease in salaries and benefits of $188,000 in 2004 from 2003 due to a
reduction in headcount to 14 at the end of 2004 from 17 at the end of 2003.
General and administrative - ICC.NET - General and administrative expenses
supporting ICC.NET consist primarily of salaries and employee benefits, legal
and professional fees, facility costs, travel meals and entertainment,
depreciation, amortization and telephone charges. General and administrative
costs supporting the ICC.NET service decreased $170,000 in 2004 from 2003.
Depreciation decreased $202,000 in 2004 from 2003 primarily as a result of fewer
assets being acquired and more assets becoming fully depreciated. Equipment
rental and maintenance expense decreased $98,000 in 2004 from 2003 as a result
of an increased proportion of these expenses being allocated to non-general and
administrative departments. Investor relation fees decreased $78,000 in 2004
from 2003 as a result of discontinuing the use of an external public relations
firm and performing public relations functions in house. These decreases were
partially offset by increases in salaries and employee benefits of $224,000 due
primarily to the strengthening of executive management through the addition of a
new Chief Executive Officer and Chief Operating Officer. Commencing in the
quarter ended January 31, 2003, ICC.NET began allocating the costs of executive
management, human resources, accounting and finance tasks to the Service Bureau
segment based on the level of services provided. In 2004, these allocations
totaled $180,000.
Non-cash charges - ICC.NET - In 2004, we recorded non-cash charges of
$801,000. The adoption of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," resulted in an expense of $656,000 in 2004. In January 2004, we
implemented a voluntary stock option exchange program under which we offered to
exchange certain outstanding options to purchase shares of our class A common
stock held by eligible employees, with exercise prices per share greater than or
equal to $11.50 per share, for new options to purchase shares of class A common
stock. The fair value method has been applied prospectively to all employee and
director awards granted, modified, or settled after July 31, 2003. In 2004,
Director's fees paid to nonemployee board members payable in shares of class A
common stock resulted in an expense of $130,000. In 2003, we recorded non-cash
charges of $139,000. In 2003, Director's fees paid to nonemployee board members
payable in shares of class A common stock resulted in an expense of $79,000. In
addition, $60,000 of expense was recognized during 2003 for class A common stock
and options issued to a non-employee member of our board of directors as
compensation for consulting services.
24
Other income, net - ICC.NET - The sale of marketable securities held for
investment resulted in investment income of $68,000 in 2004 and in investment
loss of $19,000 in 2003. 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.
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. On June 22, 2004 we acquired Electronic Commerce Systems, Inc., the
operating results of which are reported in the service bureau segment. The
following table summarizes operating results for our service bureau:
Year Ended
July 31,
--------------------------
2004 2003
----------- -----------
Revenues:
Services $ 1,430,993 $ 1,487,946
Expenses:
Cost of services 796,212 735,136
Impairment of capitalized software 44,983 148,479
----------- -----------
Total cost of services 841,195 883,615
Product development and enhancement 163,478 135,358
Selling and marketing 117,328 135,411
General and administrative 420,158 483,522
Impairment of acquired intangible -- 982,142
----------- -----------
1,542,159 2,620,048
----------- -----------
Operating income (loss) $ (111,166) $(1,132,102)
----------- -----------
Other income, net (735) --
----------- -----------
Income (loss) before income taxes $ (111,901) $(1,132,102)
=========== ===========
Revenues - Service Bureau - Revenue related to our service bureau were 12%
of our total consolidated revenue in 2004 and in 2003. The service bureau's
revenue was primarily generated from services performed, customer support and
software licensing fees. Revenue decreased $57,000 or approximately 4% in 2004
from 2003.
Cost of services - Service Bureau - Cost of services related to our
service bureau consists primarily of salaries and employee benefits, costs of
software, product development and enhancement allocation and rent. Total cost of
services relating to our service bureau was 59% of revenue derived from the
service bureau in 2004 compared to 58% of these revenues in 2003. Excluding
impairment of capitalized software, cost of services was 56% of service bureau
revenue in 2004 compared to 49% of service bureau revenue in 2003. Excluding the
capitalized software impairment charge, cost of services increased $61,000 in
2004 from 2003. The cost of sales of ECS software made prior to the acquisition
of ECS in June 2004 increased $92,000 in 2004 from 2003 due to increased sales.
Salaries and employee benefits decreased $39,000 in 2004 from 2003. Excluding
the effects of the acquisition of ECS, salaries and employee benefits decreased
$94,000 in 2004 from 2003 due to a reduction in headcount to 7 at the end of
2004 from 14 at the end of 2003, and the acquisition of ECS resulted in an
increase in salaries and employee benefits of $55,000 in 2004. Cost of services
- - Charges for impairment of capitalized software for in-process projects that
management decided, due to unfavorable market conditions continuing into the
foreseeable future, not to complete were $45,000 in 2004 and $148,000 in 2003.
25
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
increased $28,000 in 2004 from 2003. In 2003, $16,000 of product development and
enhancement salaries were capitalized, and no salaries were capitalized in 2004.
The acquisition of ECS resulted in an increase in salaries and employee benefits
of $12,000 in 2004.
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 expenses decreased $18,000 in 2004 from
2003. Excluding the acquisition of ECS, salaries and employee benefits decreased
$50,000 in 2004 from 2003 due to a reduction in headcount to 1 at the end of
2004 from 3 at the end of 2003, and the acquisition of ECS resulted in an
increase in salaries and employee benefits of $47,000 in 2004.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, office expenses, depreciation, telephone and rent. General
and administrative costs decreased $63,000 in 2004 from 2003. Excluding the
acquisition of ECS, salaries and employee benefits decreased $180,000 in 2004
from 2003 due to a reduction in headcount to 1 in 2004 from 4 in 2003, and the
acquisition of ECS resulted in an increase in salaries and employee benefits of
$41,000 in 2004. This was offset by an increase of $45,000 in general and
administrative support staff salary and benefits allocated to the service bureau
in 2004 from 2003. See "General and administrative - ICC.NET" above for a
discussion of the allocation of general and administrative expenses between
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.
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.
26
Year Ended
July 31,
------------------------------
Income (loss) before income taxes: 2003 (1) 2002 (1)
----------- -----------
ICC.NET $(4,872,216) $(6,552,502)
Service Bureau (1,132,102) 4,949
----------- -----------
Consolidated loss before income taxes $(6,004,318) $(6,547,553)
=========== ===========
(1) Recasted to include the results of professional services activities in the
ICC.NET segment. These activities were previously reported in the Professional
Services segment.
Results of Operations - ICC.NET
ICC.NET includes our global Internet-based value added network, or VAN,
which 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. In addition, ICC.NET facilitates the
development and operation of comprehensive business-to-business e-commerce
solutions. These professional services assist our clients to conduct business
electronically through a continuum of services including eConsulting, data
transformation mapping (EDI, EAI, XML) and internetworking. The following table
summarizes operating results for ICC.NET:
27
Year Ended
July 31,
--------------------------------
2003 2002
------------ ------------
Revenues:
VAN services $ 8,237,525 $ 6,266,277
Mapping services 571,063 1,064,387
Services to Triaton 58,333 105,626
Professional services 1,728,447 2,152,323
Technology license -- 3,000,000
------------ ------------
10,595,368 12,588,613
Expenses:
Cost of services 6,886,672 7,936,337
Impairment of software inventory 248,092 --
------------ ------------
Total cost of services 7,134,764 7,936,337
Product development and enhancement 975,583 822,314
Selling and marketing 2,899,315 3,376,400
General and administrative 3,955,108 5,337,983
Non-cash charges for stock-based compensation