10-Q 1 kl03004_form10q.txt FORM 10-Q QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ------------- |X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended January 31, 2002 |_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ____ to ____ Commission File No. 000-24996 INTERNET COMMERCE CORPORATION (Exact name of registrant as specified in its charter) Delaware 13-3645702 (State of incorporation) (I.R.S. Employer Identification Number) 805 Third Avenue, 9th Floor New York, New York 10022 (Address of principal executive offices, including zip code) (212) 271-7640 (Registrant's telephone number, including area code) 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 |_| As of February 28, 2002 the registrant had outstanding 11,144,288 shares of Class A Common Stock. INTERNET COMMERCE CORPORATION INDEX TO FORM 10-Q PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets as of January 31, 2002 (unaudited) and July 31, 2001.................................................. 3 Consolidated statements of operations and comprehensive loss for the three and six months ended January 31, 2002 (unaudited) and January 31, 2001 (unaudited)....................... 4 Consolidated statements of cash flows for the six months ended January 31, 2002 (unaudited) and January 31, 2001 (unaudited)........................................................ 5 Notes to consolidated financial statements............................... 6-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 13-18 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 18 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............. 19 Item 6. Exhibits and Reports on Form 8-K ............................... 19 SIGNATURES............................................................... 20
INTERNET COMMERCE CORPORATION Consolidated Balance Sheets January 31, July 31, 2002 2001 ------------- ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,959,906 $ 2,223,487 Marketable securities 446,212 665,552 Accounts receivable, net of allowance for doubtful accounts of $250,887 and $224,022, respectively 1,485,119 1,588,242 Prepaid expenses and other current assets 524,646 401,334 ------------ ------------ Total current assets 4,415,883 4,878,615 Restricted cash 204,107 276,635 Property and equipment, net 1,492,688 1,920,662 Software development costs, net 441,556 425,471 Goodwill, net 3,904,684 2,194,067 Other intangible assets, net 3,585,000 5,917,854 Other assets 125,004 60,794 ------------ ------------ Total assets $ 14,168,922 $ 15,674,098 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 559,892 $ 713,670 Accrued expenses 1,885,551 2,381,788 Accrued dividends - preferred stock 38,827 273,289 Deferred revenue 202,420 306,764 Capital lease obligation 257,320 328,480 Other liabilities 204,274 228,189 ------------ ------------ Total current liabilities 3,148,284 4,232,180 Capital lease obligation - less current portion 217,835 255,009 ------------ ------------ Total liabilities 3,366,119 4,487,189 ------------ ------------ Commitments and contingencies Stockholders' Equity: Preferred stock: Preferred stock - 5,000,000 shares authorized, including 10,000 shares of series A, 10,000 shares of series C and 175 shares of series S: Series A preferred stock - par value $.01 per share, 175 and 225 shares issued and outstanding, respectively (liquidation value of $179,947) 2 2 Series C preferred stock - par value $.01 per share, 44.76 votes per share; 10,000 shares issued and outstanding (liquidation value of $10,033,880) 100 100 Common stock: Class A - par value $.01 per share, 40,000,000 shares authorized, one vote per share; 11,144,288 and 9,770,180 shares issued and outstanding, respectively 111,443 97,702 Class B - par value $.01 per share, 2,000,000 shares authorized, six votes per share; 1,930 shares issued and outstanding in 2001 -- 19 Additional paid-in capital 84,326,480 80,750,153 Accumulated deficit (73,388,356) (69,261,320) Accumulated other comprehensive loss (246,866) (209,728) Deferred compensation - restricted stock -- (190,019) ------------ ------------ Total stockholders' equity 10,802,803 11,186,909 ------------ ------------ Total liabilities and stockholders' equity $ 14,168,922 $ 15,674,098 ============ ============
See notes to consolidated financial statements. 3
INTERNET COMMERCE CORPORATION Consolidated Statements of Operations and Comprehensive Loss (unaudited) Three Months Ended Six Months Ended January 31, January 31, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Revenue: Services $ 2,689,599 $ 2,582,385 $ 5,735,526 $ 3,898,770 ------------ ------------ ------------ ------------ Expenses: Cost of services (excluding non-cash compensation of $40,371 and $133,429 for the three months and six months ended January 31, 2002, respectively) 2,146,638 2,521,194 4,629,091 3,580,209 Product development and enhancement 254,588 285,445 499,330 437,642 Selling and marketing (excluding non-cash compensation of $6,904 and $23,109 for the three months and six months ended January 31, 2002, respectively) 924,717 1,526,128 1,900,273 2,704,046 General and administrative (excluding non-cash compensation of $10,765 and $33,481 for the three and six months ended January 31, 2002, respectively, and $450,110 for the six months ended January 31, 2001) 1,294,456 3,062,939 2,654,280 5,022,301 Non-cash charges for stock-based compensation and services 58,040 -- 190,019 450,110 ------------ ------------ ------------ ------------ 4,678,439 7,395,706 9,872,993 12,194,308 ------------ ------------ ------------ ------------ Operating loss (1,988,840) (4,813,321) (4,137,467) (8,295,538) ------------ ------------ ------------ ------------ Interest and investment income 4,345 159,230 76,930 377,029 Interest expense (25,965) (22,710) (54,979) (38,647) Other income (loss) (11,520) -- (11,520) -- ------------ ------------ ------------ ------------ (33,140) 136,520 10,431 338,382 ------------ ------------ ------------ ------------ Net loss $ (2,021,980) $ (4,676,801) $ (4,127,036) $ (7,957,156) ============ ============ ============ ============ Dividends on preferred stock (102,492) (106,083) (165,538) (212,309) ------------ ------------ ------------ ------------ Loss attributable to common stockholders $ (2,124,472) $ (4,782,884) $ (4,292,574) $ (8,169,465) ============ ============ ============ ============ Basic and diluted loss per common share $ (0.19) $ (0.52) $ (0.41) $ (1.03) ============ ============ ============ ============ Weighted average number of common shares outstanding-- basic and diluted loss per share 11,005,793 9,262,204 10,407,658 7,946,713 ============ ============ ============ ============ COMPREHENSIVE LOSS: ------------------ Net loss $ (2,021,980) $ (4,676,801) $ (4,127,036) $ (7,957,156) Other comprehensive (loss) income: Unrealized (losses) gains 22,424 56,942 (37,138) (18,488) ------------ ------------ ------------ ------------ Comprehensive loss $ (1,999,556) $ (4,619,859) $ (4,164,174) $ (7,975,644) ============ ============ ============ ============
See notes to consolidated financial statements. 4
INTERNET COMMERCE CORPORATION Consolidated Statements of Cash Flows (unaudited) Six Months Ended January 31, ------------------------------ 2002 2001 ------------ -------------- Cash flows from operating activities: Net loss $ (4,127,036) $ (7,957,156) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,113,424 1,241,099 Allowance for doubtful accounts 126,884 -- Gain on sale of marketable securities (64,637) -- Non-cash charges for equity instruments issued for compensation and services 190,019 450,110 Changes in: Accounts receivable (23,761) (369,291) Prepaid expenses and other assets (128,180) (38,908) Accounts payable (153,778) (311,204) Accrued expenses (438,111) (43) Deferred revenue (104,344) (341,502) Other liabilities (23,915) 41,234 ------------ ------------ Net cash used in operating activities (3,633,435) (7,285,661) ------------ ------------ Cash flows from investing activities: Payment for purchase of acquisition, net of cash acquired -- (22,055) Capitalization of software development costs (134,733) -- Purchases of property and equipment (36,998) (50,125) Purchase of certificate of deposits -- (18,162) Proceeds from maturity of certificate of deposits 72,528 -- Proceeds from sales of marketable securities 246,839 -- ------------ ------------ Net cash provided by (used in) investing activities 147,636 (90,342) ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock and warrants, net 3,107,269 -- Proceeds from exercise of employee stock options 215,312 196,265 Proceeds from exercise of warrants 59,775 -- Payments of capital lease obligations (160,138) (150,404) ------------ ------------ Net cash provided by financing activities 3,222,218 45,861 ------------ ------------ Net (decrease) in cash and cash equivalents (263,581) (7,330,142) Cash and cash equivalents, beginning of period 2,223,487 14,003,329 ------------ ------------ Cash and cash equivalents, end of period $ 1,959,906 6,673,187 ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 54,979 14,084 Noncash investing and financing activities: Issuance of common stock for services performed 77,400 -- Issuance of common stock for dividends on preferred stock 400,000 -- Property acquired under capital lease 51,804 -- Amounts related to business acquisition: Fair value of assets acquired, net of cash acquired -- 27,842,257 Less: Liabilities assumed -- 1,921,092 Fair value of equity instruments issued -- 20,529,624 Note receivable 5,000,000 Transactions costs paid in prior period -- 369,486 ------------ ------------ -- 27,820,202 ------------ ------------ Payment for purchase of acquisitions, net of cash acquired -- 22,055
See notes to consolidated financial statements. 5 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Internet Commerce Corporation (the "Company" or "ICC") have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information. In the opinion of management, such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, the accompanying financial statements do not include all the disclosures required by GAAP for annual financial statements. While the Company believes that the disclosures presented are adequate to make the information not misleading, these interim consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company's Annual Report on Form 10-K for the year ended July 31, 2001. Operating results for the three and six-month periods ended January 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2002. Certain 2001 items have been reclassified to conform to their 2002 presentation. 2. ORGANIZATION AND NATURE OF BUSINESS The Company was incorporated under the name Infosafe Systems, Inc. in November 1991 in the State of Delaware. ICC provides Internet-based services for the electronic commerce business-to-business communication services market. ICC.NET, our global Internet-based value added network, or VAN, provides supply chain connectivity solutions for electronic data interchange, or EDI, and electronic commerce and offers users a vehicle to securely send and receive files of any format and size. The ICC.NET system uses the Internet and proprietary technology to deliver customers' documents and data files to members of their trading communities, many of which have incompatible systems, by translating such documents and data files into any format required by the receiver. The ICC.Net system can be accessed using a standard web browser or virtually any other communications protocol. The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November 6, 2000, gives the Company the capability to facilitate the development and operations of comprehensive business-to-business electronic commerce solutions. RTCI specializes in electronic commerce solutions involving EDI and EAI (Enterprise Application Integration) by providing mission critical electronic commerce consulting, electronic commerce software, outsourced electronic commerce services and technical resource management. Through the acquisition of Intercoastal Data Corporation ("IDC") on August 3, 2000, ICC expanded its capabilities to include an EDI service bureau, which provides EDI services to small and mid-sized companies. These services include the conversion of electronic forms into hard copies and the conversion of hard copies to an EDI format. IDC also provides Universal Product Code, or UPC, services and maintains UPC catalogs for our customers. In October 2001, we sold in a private placement 1,159,716 shares of class A common stock and warrants to purchase 347,915 additional shares of class A common stock for gross proceeds of $3,189,219. The warrants expire in October 2006 and are immediately exercisable at $3.58 per share. As of January 31, 2002, we had cash and cash equivalents and marketable securities of $2,406,000. We believe these resources provide us with sufficient liquidity to continue in operation through July 31, 2002. However, if our cost reductions do not achieve sufficient savings, if our expenses increase more than anticipated, if our revenue does not increase as anticipated because of competitive or other reasons or because we lose existing customers because the new interconnection arrangements we have provided are inadequate for our customers' business purposes (see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview") or if our accounts receivable increase as a result of a lengthening of the collection cycle, our cash resources may not be sufficient and we will require additional financing. There can be no assurances that any financing will be available or that the terms will be acceptable to us, or that any financing will be consummated. 6 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. Revenue recognition: The Company derives its revenue from subscriptions to its ICC.NET service, which include transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees and interconnection fees. Implementation fees are recognized over the life of the subscription period, generally one year. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. The Company also provides a broad range of professional services consisting of EDI and electronic commerce consulting, data mapping services and EDI education and training at seminars hosted by leading universities around the United States. Revenue from EDI and electronic commerce consulting and education and training are recognized when the services are provided. Revenue from data mapping services are recognized when the map has been completed and delivered to the customer. Revenues from fixed fee professional service contracts are recognized using contract accounting based on the estimated percentage of completion. The Company also derives revenue from its service bureau. Service bureau revenues are comprised of EDI services, including data translation services, purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC services, including UPC number generation, UPC catalog maintenance and UPC label printing. The service bureau also derives revenue from software licensing and provides software maintenance and support. Revenues from the EDI services and UPC services are recognized when the services are provided. The Company accounts for its EDI software license sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition." Revenues from software licenses are 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. Revenues from software maintenance and support contracts are recognized ratably over the life of the contract. The Company's software license revenues were not significant in any of the periods presented. Deferred revenue: Deferred revenue is comprised of deferrals for subscription fees, professional services, license fees and maintenance associated with contracts for which amounts have been received in advance of services to be performed or prior to the shipment of software. Recent Accounting Pronouncements: In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations subsequent to June 30, 2001, be accounted for under the purchase method of accounting. SFAS No.141 also requires that the fair value of an assembled workforce acquired be included in the amount initially recorded as goodwill. The Company reclassified $1,710,617 initially recorded as other intangible assets related to the value of the assembled workforce of RTCI into goodwill as required by this statement. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease; and instead, the carrying value of goodwill will be evaluated for impairment on at least an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, the Company has adopted this standard as of the beginning of its 2002 fiscal year, August 1, 2001, as permitted under the provisions of SFAS No. 142. See Note 8 for the effects of adoption of this standard. The Company has evaluated goodwill for impairment and has determined that no impairment exists at August 1, 2001. 7 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002 3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (continued) In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Company is required to adopt SFAS No. 144 by the first quarter of fiscal 2003. The Company is currently evaluating the potential impact of SFAS No. 144 on its results of operations and financial position. In November 2001, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A consensus was reached that reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. The Company currently includes the reimbursements and costs for out-of-pocket expenses in cost of services. The adoption of this issue will result only in the reclassification of reimbursements from cost of services to revenue. Management believes that the adoption of this standard will not have a significant impact on the Company's financial position or results of operations. 4. PRIVATE PLACEMENT OF COMMON STOCK On October 29, 2001, the Company sold 1,159,716 shares of class A common stock and warrants to purchase 347,915 shares of class A common stock for gross proceeds of $3,189,219. The warrants are immediately exercisable and have an exercise price of $3.58 per share. The warrants are exercisable for a five-year period. The Company may redeem the warrants, at its option, at any time beginning 180 calendar days after the sale if the closing bid price of the class A common stock exceeds 200% of the exercise price for a period of 30 consecutive trading days. The redemption price is ten cents per warrant. In connection with the private placement the Company incurred fees of $152,511. Of such fees, $35,000 has been paid in cash and $117,511 will be paid by issuing warrants to purchase 50,000 shares of class A common stock. The warrants will have substantially the same terms and conditions as the warrants issued in the private placement. 5. CONTINGENCY In October 2000, Thomas Lipscomb, a former President and Chief Executive Officer of the Company, commenced an action against Alan Alpern, a former officer of the Company, and against Arthur Medici, a former officer and a current director of the Company, in the Supreme Court of the State of New York, County of New York. In the action, Mr. Lipscomb claims that Messrs. Alpern and Medici tortuously interfered with his employment agreement with the Company. Mr. Lipscomb seeks compensatory damages of $672,000 and punitive damages of $1 million. Both Messrs. Alpern and Medici have requested that the Company indemnify them pursuant to its by-laws. The Company is currently considering such requests. It is the Company's understanding that both Messrs. Alpern and Medici intend to defend the action vigorously. The Company is unable to predict the ultimate outcome of this claim since this action is in its preliminary stage. Subsequently, by Demand for Arbitration dated November 30, 2001, Mr. Lipscomb commenced an arbitration against the Company arising out of the same alleged breach of his employment agreement that formed the underlying basis for his suit against Messrs. Alpern and Medici. In the arbitration, Mr. Lipscomb seeks recovery of $614,000 before interest, costs and attorneys' fees. The Company intends to defend the arbitration vigorously and is unable to predict the ultimate outcome of this claim. 8 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002 6. CONCENTRATION OF CREDIT RISK For the three and six-month periods ended January 31, 2002, no single customer accounted for more than 10% of the Company's revenue. One customer accounted for 12.8% of the Company's revenue for the six months ended January 31, 2001. No single customer accounted for more than 10% of the Company's revenue for the three months ended January 31, 2001. No single customer accounted for more than 10% of the Company's accounts receivable as of January 31, 2002 or July 31, 2001. 7. BUSINESS SEGMENT INFORMATION The Company has three operating segments. These three operating segments are: ICC.NET service - Our ICC.NET service, the Company's global Internet-based value added network, or VAN, uses the Internet and our proprietary technology to deliver our customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver. 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 services bureau also licenses EDI software. Professional Services - Our professional services segment provides comprehensive business-to-business electronic commerce solutions including electronic commerce infrastructure solutions and data mapping services. Our professional services segment also conducts a series of product-independent one-day EDI seminars for electronic commerce users. The tables on pages 10 and 11 summarize information about operations and long-lived assets of our operating segments as of and for the three and six-months ended January 31, 2002 and 2001. 9 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002
7. BUSINESS SEGMENT INFORMATION (CONTINUED) Service Professional ICC.NET Bureau Services Total ------- ------ -------- ----- Three Months - January 31, 2002 Revenues from external customers $ 1,452,991 $ 378,804 $ 857,804 $ 2,689,599 =========== =========== =========== =========== Operating loss (1,435,216) (47,480) (506,144) (1,988,840) Other income, net (14,383) -- (18,757) (33,140) ----------- ----------- ----------- ----------- $(1,449,599) $ (524,901) $ (47,480) $(2,021,980) =========== =========== =========== =========== Supplemental segment information: Amortization and depreciation $ 201,142 $ 19,027 $ 330,774 $ 550,943 Non-cash charges for stock-based compensation -- -- 58,040 58,040 Six Months - January 31, 2002 Revenues from external customers $ 3,020,741 $ 798,392 $ 1,916,393 $ 5,735,526 =========== =========== =========== =========== Operating loss (2,637,277) (61,574) (1,438,616) (4,137,467) Other income, net 52,929 -- (42,498) 10,431 ----------- ----------- ----------- ----------- $(2,584,348) $ (61,574) $(1,481,114) $(4,127,036) =========== =========== =========== =========== Supplemental segment information: Amortization and depreciation $ 405,775 $ 40,342 $ 667,307 1,113,424 Non-cash charges for stock-based compensation -- -- 190,019 190,019 As of January 31, 2002 Property and equipment, net $ 808,070 $ 39,966 $ 644,652 1,492,688 Software development costs, net 118,648 322,908 -- 441,556 Goodwill, net 26,132 2,167,935 1,710,617 3,904,684 Other intangible assets, net -- -- 3,585,000 3,585,000 ----------- ----------- ----------- ----------- Long lived assets, net $ 952,850 $ 2,530,809 $ 5,940,269 $ 9,423,928 =========== =========== =========== ===========
10 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002
7. BUSINESS SEGMENT INFORMATION (CONTINUED) Service Professional ICC.NET Bureau services (A) Total ------------ ------------ -------------- ------------ Three Months - January 31, 2001 Revenues from external customers $ 1,034,918 $ 345,959 $ 1,201,508 $ 2,582,385 ============ ============ ============ ============ Operating loss (2,628,147) (29,591) (2,155,583) (4,813,321) Other income, net 96,976 -- 39,544 136,520 ------------ ----------- ------------ ------------ (2,531,171) $ (29,591) $ (2,116,039) $ (4,676,801) ============ ============ ============ ============ Supplemental segment information: Amortization and depreciation $ 44,266 $ -- $ 995,425 $ 1,039,691 Six Months - January 31, 2001 Revenues from external customers $ 1,940,078 $ 757,184 $ 1,201,508 $ 3,898,770 ============ ============ ============ ============ Operating loss (6,130,024) (9,931) (2,155,583) (8,295,538) Other income, net 298,838 -- 39,544 338,382 ------------ ------------ ------------ ------------ (5,831,186) $ (9,931) $ (2,116,039) $ (7,957,156) ============ ============ ============ ============ Supplemental segment information: Amortization and depreciation $ 245,674 $ -- $ 995,425 $ 1,241,099 Non-cash charges for stock-based compensation 450,110 -- -- 450,110 As of January 31, 2001 Property and equipment, net 1,014,721 $ 79,931 $ 1,139,305 $ 2,233,957 Software development costs, net 355,944 -- -- 355,944 Goodwill, net 104,530 2,305,618 16,046,334 18,456,482 Other intangible assets, net -- -- 9,526,600 9,526,600 ------------ ------------ ------------ ------------ Long lived assets, net $ 1,475,195 $ 2,385,549 $ 26,712,239 $ 30,572,983 ============ ============ ============ ============
(A) The Company's professional services segment was acquired on November 6, 2000. 11 INTERNET COMMERCE CORPORATION Notes to Consolidated Financial Statements January 31, 2002 8. GOODWILL - EFFECT OF ADOPTION OF SFAS 142 The following table reports the amounts that net loss and loss per basic and diluted share would have been in all periods presented exclusive of goodwill amortization expense recognized in those periods.
Three Months Ended Six Months Ended January 31, January 31, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------- ------------- ------------ ------------- Reported net loss $ (2,021,980) $ (4,676,801) $ (4,127,036) $ (7,957,156) Add: Goodwill amortization -- 511,159 -- 611,190 ------------- ------------- ------------- ------------- Adjusted net loss $ (2,021,980) $ (4,165,642) $ (4,127,036) $ (7,345,966) ============= ============= ============= ============= Reported basic and diluted loss per common share $ (0.19) $ (0.52) $ (0.41) $ (1.03) Add: Goodwill amortization -- 0.06 -- 0.08 ------------- ------------- ------------- ------------- Adjusted basic and diluted $ (0.19) $ (0.46) $ (0.41) $ (0.95) loss per share ============= ============= ============= =============
9. SUBSEQUENT EVENT On February 18, 2002, 234,140 class A warrants and 263,835 class B warrants expired. The warrants were exercisable for an aggregate of 1,002,200 shares of the Company's class A common stock. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q 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 Quarterly Report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "continue" and "intend," and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These "cautionary 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 listed below the heading "Overview" 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. Based upon changing conditions, 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 Quarterly Report as anticipated, believed, estimated, expected or intended. Overview We are a leader in the electronic commerce business-to-business communication services market that provides complete electronic commerce infrastructure solutions. Our business operates in three segments: our ICC.Net service, our professional services and our service bureau. Our ICC.NET service, the Company's global Internet-based value added network, or VAN, uses the Internet and our proprietary technology to deliver our customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver. We believe that our ICC.NET service has significant advantages over traditional VANs, and email-based and other Internet-based systems, because our service has a lower cost, greater transmission speed and more features, including authentication and audit services. Our professional services segment facilitates the development and operations of comprehensive business-to-business electronic commerce solutions. Our service bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies. Through July 2000, our business was entirely focused on our ICC.NET service. During fiscal 2001, we made two acquisitions that enable us to offer a more complete range of services and allow our customers to expand their electronic commerce trading communities and bridge their legacy systems to the Internet. In August 2000, we acquired IDC through which we acquired our service bureau. IDC is engaged in the development, marketing, sale and other exploitation of business-to-business EDI standards-based applications for standard-based EDI exchange over VANs, private networks, exchanges, extranets and the Internet. In November 2000, we completed the acquisition of RTCI, through which we acquired our professional services segment. RTCI is an electronic commerce infrastructure solutions company serving the business-to-business electronic commerce market. RTCI helps its clients conduct business electronically through a continuum of services including eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking. RTCI has developed a business model that offers remote service delivery, fixed and value-based pricing and reusable solutions. Subsequent to the acquisition, due to a reduction of the workforce of RTCI, a steep decline in value of companies similar to RTCI, continued operating losses and a significant reduction in the forecasted future operating profits of our professional services segment, management determined that triggering events had occurred related to certain intangible assets. Projected cash flow analysis related to those assets determined that the assets had been impaired. These intangible assets were written down to fair value based on the related discounted expected future cash flows in fiscal year 2001. 13 Our revenues are derived from subscriptions to our ICC.NET service, which include transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees and interconnection fees. Implementation fees are recognized over the life of the subscription period, generally one year. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. We also provides a broad range of professional services consisting of EDI and electronic commerce consulting, data mapping services and EDI education and training at seminars hosted by leading universities around the United States. Revenue from EDI and e-commerce consulting and education and training are recognized when the services are provided. Revenue from data mapping services are recognized when the map has been completed and delivered to the customer. Revenues from fixed fee professional service contracts are recognized using contract accounting based on the estimated percentage of completion. We also derive revenue from our service bureau. Our service bureau revenues are comprised of EDI services, including data translation services, purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC services, including UPC number generation and UPC catalog maintenance and UPC label printing. Our service bureau also derives revenue from software licensing and provides software maintenance and support. Revenues from our EDI services and UPC services are recognized when the services are provided. Revenues from software licenses are 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. Revenues from software maintenance and support contracts are recognized ratably over the life of the contract. Our software license revenues were not significant in any of the periods presented. We rely on many of our competitors to interconnect, at reasonable cost, with our service. We have interconnection arrangements with more than 50 business-to-business networks for the benefit of our customers. Two of the largest networks, GE Global Exchange Services ("GXS") and Sterling Commerce have chosen to discontinue their interconnect arrangements with the Company. GXS discontinued its interconnection with our service in September 2001 and Sterling Commerce will discontinue its interconnection with our service on April 8, 2002. We have entered into arrangements with Peregrine Systems, Inc. and IBM Corporation so our customers can continue to communicate through us with their trading communities. As a result of these new interconnection arrangements, we will incur additional costs and may lose existing customers if the arrangements we have provided are inadequate for their business purposes. We believe, however, that the arrangements we have made will satisfy our existing customers and that our business and financial condition will not be materially and adversely affected as a result of these new arrangements. Deferred revenue is comprised of deferrals for subscription fees, professional services, license fees and maintenance associated with contracts for which amounts have been received in advance of services to be performed or prior to the shipment of software. Results of Operations and Financial Condition Three Months Ended January 31, 2002 Compared with Three Months Ended January 31, 2001. Our revenue was $2,690,000 in the quarter ended January 31, 2002 ("2002 Quarter") and $2,582,000 in the quarter ended January 31, 2001 ("2001 Quarter"). Revenue related to our ICC.NET service was $1,453,000, or 54% of the 2002 Quarter revenue. Our ICC.NET service revenue increased $418,000 in the 2002 Quarter from the 2001 Quarter. The 2001 Quarter included $250,000 of fees from Triaton GmbH, a subsidiary of ThyssenKrupp Information Services GmbH, under a Joint Services Agreement dated July 28, 2000. No such fees were recognized in the 2002 Quarter. Transaction fees from our ICC.NET service increased $730,000 as a result of a larger billable customer base and increased volume usage by new and existing customers. Revenue in the amount of $379,000, or 14% of the 2002 Quarter revenue, was generated from our service bureau compared to revenue of $346,000 in the 2001 Quarter. The service bureau's revenue was primarily generated from services performed, customer support and licensing fees. Professional services, acquired in November 2000, accounted for $858,000, or approximately 32% of the 2002 Quarter revenue compared to revenue of $1,202,000 in the 2001 Quarter. Revenue generated from professional services consists of consulting, educational and mapping services. 14 Cost of services decreased to $2,147,000 in the 2002 Quarter from $2,521,000 in the 2001 Quarter. Cost of services relating to our ICC.NET service was $1,039,000, or 72% of revenue derived from the service in the 2002 Quarter, compared to $854,000, or 82% of revenue in the 2001 Quarter. Salaries and employee benefits related to the ICC.NET service increased $96,000. Data lines and support increased $103,000, primarily due to additional fees incurred to offer our customers and their trading partners enhanced connectivity. Depreciation and amortization decreased $26,000, consulting fees decreased $31,000 and facility charges increased $41,000 in the 2002 Quarter from the 2001 Quarter. We anticipate that our ICC.NET cost of services will continue to 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 service to increase. Cost of services relating to our service bureau totaled $219,000, or 58% of revenue derived from the service bureau in the 2002 Quarter, compared to $135,000, or 39% of revenue derived from the service bureau in the 2001 Quarter. The increase was primarily the result of a $51,000 increase in salaries and employee benefits as a result of hiring temporary employees to stabilize our workforce. In addition, in the 2002 Quarter we paid a larger percentage of the cost of medical benefits for employees of the service bureau. This was done to provide a consistent level of benefits throughout the Company. Cost of services relating to professional services were $888,000, or 104% of revenue derived from professional services in the 2002 Quarter, compared to $1,533,000, or 128% of revenue in the 2001 Quarter. Salaries and employee benefits relating to our professional services decreased $419,000 in the 2002 Quarter, compared to the 2001 Quarter due to a reduction in the workforce. Cost of software and hardware purchased for resale decreased $220,000 and facility charges increased $68,000 in the 2002 Quarter. Product development and enhancement costs related to the maintenance and improvement of our products and services decreased to $255,000 in the 2002 Quarter from $285,000 in the 2001 Quarter. Product and development and enhancement costs related to our ICC.NET service were $213,000 in the 2002 Quarter, compared to $193,000 in the 2001 Quarter. The increase was primarily the result of a $35,000 increase in salaries and employee benefits. Product development and enhancement costs incurred by our service bureau were $42,000 in the 2002 Quarter, compared to $92,000 in the 2001 Quarter. The decrease was primarily attributable to a decrease in salaries and employee benefits of $36,000 and a decrease in consulting fees of $20,000. Selling and marketing expenses decreased to $925,000 in the 2002 Quarter from $1,526,000 in the 2001 Quarter. Selling and marketing expenses related to our ICC.NET service were $759,000 in the 2002 Quarter compared to $1,176,000 in the 2001 Quarter. Salaries and employee benefits related to our ICC.NET service decreased $298,000, primarily due to the elimination of our telesales force. Consulting fees decreased $48,000, travel, meals and entertainment decreased $24,000 and facility charges decreased $42,000 in the 2002 Quarter. Selling and marketing expenses related to our service bureau were $32,000 in the 2002 Quarter, compared to $19,000 in the 2001 Quarter. Selling and marketing expenses related to professional services were $134,000 in the 2002 Quarter, compared to $332,000 in the 2001 Quarter. The decrease was primarily attributable to a decrease in salaries and benefits of $154,000 primarily due to a reduction in the workforce, and a decrease in advertising of $44,000. General and administrative costs decreased to $1,294,000 in the 2002 Quarter from $3,063,000 in the 2001 Quarter. General and administrative expenses supporting our ICC.NET service decreased to $877,000 in the 2002 Quarter, compared to 1,440,000 in the 2001 Quarter. Salaries and related employee benefits decreased $374,000, due to a reduction in the workforce. Legal and professional fees decreased $69,000, consulting fees decreased $93,000 primarily as a result of a consulting contract with a former officer of the Company that resulted in a charge in the 2001 Quarter. No such charge was required in the 2002 Quarter. Also, depreciation and amortization decreased $53,000. General and administrative expenses supporting our service bureau were $134,000 in the 2002 Quarter, compared to $130,000 in the 2001 Quarter. General and administrative expenses supporting our professional services were $284,000 in the 2002 Quarter, compared to $1,493,000 in the 2001 Quarter. The decrease was primarily attributable to a decrease in depreciation and amortization of $665,000, a result of the Company's implementation of SFAS No. 142, effective August 1, 2001, which requires goodwill to be tested for impairment on a periodic basis and no longer permits the amortization of goodwill. In addition, depreciation and amortization also decreased due to the write-off of certain identifiable intangibles for which impairment charges were recorded in the third and fourth quarters of 2001. In addition, salaries and employee benefits decreased $239,000, primarily due to a reduction in the workforce, and a decrease in facility charges of $134,000. Non-cash charges for compensation and services were $58,000 in the 2002 Quarter. In the 2002 Quarter, we recognized $58,000 of stock-based compensation expenses related to assumed unvested restricted shares issued to RTCI employees in connection with our acquisition of RTCI. In the 2001 Quarter, there were no such charges. 15 Interest and investment income decreased to $4,000 in the 2002 Quarter from $159,000 in the 2001 Quarter. The decrease was due to lower average cash balances in the 2002 Quarter, compared to the 2001 Quarter. Six Months Ended January 31, 2002 Compared with Six Months Ended January 31, 2001. Our revenue was $5,736,000 in the six months ended January 31, 2002 ("2002 Six Months") and $3,899,000 in the six months ended January 31, 2001 ("2001 Six Months"). Revenue related to our ICC.NET service was $3,021,000, or 53% of the 2002 Six Months revenue. Our ICC.NET service revenue increased $1,081,000 in the 2002 Six Months from the 2001 Six Months. The 2001 Six Months includes $500,000 of fees from Triaton GmbH, a subsidiary of ThyssenKrupp Information Services GmbH, under a Joint Services Agreement dated July 28, 2000. No such fees were recognized in the 2002 Six Months. Transaction fees from our ICC.NET service increased $1,545,000 as a result of a larger billable customer base and increased volume usage by new and existing customers. Revenue in the amount of $798,000, or 14% of the 2002 Six Months revenue, was generated from our service bureau, compared to $757,000 in the 2001 Six Months. The service bureau's revenue was primarily generated from the services performed, customer support and licensing fees. Professional services, acquired in November 2000, accounted for $1,916,000, or approximately 33% of the 2002 Six Months revenue. Revenue generated from professional services consists of consulting, educational and mapping services. Revenue related to professional services for the 2001 Six Months in the amount of $1,202,000, reflects the results of operations of our professional services group from November 6, 2000, the acquisition date of RTCI. Cost of services increased to $4,629,000 in the 2002 Six Months from $3,580,000 in the 2001 Six Months. Cost of services relating to our ICC.NET service was $1,973,000, or 65% of revenue derived from the service in the 2002 Six Months, compared to $1,753,000, or 90% of revenue, in the 2001 Six Months. Salaries and employee benefits related to the ICC.NET service increased $238,000. Data lines and support increased $140,000, primarily due to additional fees incurred to offer our customers and their trading partners enhanced connectivity. Depreciation and amortization decreased $52,000 and consulting fees decreased $119,000 in the 2002 Six Months from the 2001 Six Months. We anticipate that our ICC.NET cost of services will continue to 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 service to increase. Cost of services relating to our service bureau totaled $455,000, or 57% of revenue derived from the service bureau in the 2002 Six Months, compared to $295,000, or 39% of revenue derived from the service bureau in the 2001 Six Months. Consulting fees increased $37,000, facility charges increased $20,000 and salaries and employee benefits relating to our service bureau increased $89,000 as a result of hiring temporary employees to stabilize our workforce. In addition, in the 2002 Six Months we paid a larger percentage of the cost of medical benefits for employees of the service bureau. This was done to provide a consistent level of benefits throughout the Company. Cost of services relating to professional services were $2,201,000, or 115% of revenue derived from professional services in the 2002 Six Months. Cost of services related to professional services for the 2001 Six Months, in the amount of $1,533,000, reflects the results of operations of our professional services group from November 6, 2000, the acquisition date of RTCI. Product development and enhancement costs related to the maintenance and improvement of our products and services increased to $499,000 in the 2002 Six Months from $438,000 in the 2001 Six Months. Product and development and enhancement costs related to our ICC.NET service were $412,000 in the 2002 Six Months compared to $251,000 in the 2001 Six Months. Consulting fees related to our ICC.NET service decreased $21,000, facility charges decreased $38,000 and salaries and employee benefits increased $238,000. Product development and enhancement costs incurred by our service bureau were $87,000 in the 2002 Six Months versus $187,000 in the 2001 Six Months. The decrease was primarily attributable to a decrease in salaries and employee benefits of $48,000 and a decrease in consulting fees of $51,000. Selling and marketing expenses decreased to $1,900,000 in the 2002 Six Months from $2,704,000 in the 2001 Six Months. Selling and marketing expenses related to our ICC.NET service were $1,484,000 in the 2002 Six Months compared to $2,330,000 in the 2001 Six Months. Salaries and employee benefits related to our ICC.NET service decreased $475,000, primarily due to the elimination of our telesales force. Consulting fees decreased $133,000, travel, meals and entertainment decreased $107,000, facility charges decreased $73,000 and advertising expense decreased $53,000. Selling and marketing expenses related to our service bureau were $62,000 in the 2002 Six Months compared to $42,000 in the 2001 Six Months. Selling and marketing expenses related to professional services were $355,000 in the 2002 Six Months. Selling and marketing related to professional services, for the 2001 Six Months, in the amount of $332,000, reflects the results of operations of our professional services group from November 6, 2000, the acquisition date of RTCI. 16 General and administrative costs decreased to $2,654,000 in the 2002 Six Months from $5,022,000 in the 2001 Six Months. General and administrative expenses supporting our ICC.NET service decreased to $1,749,000 in the 2002 Six Months from $3,286,000 in the 2001 Six Months. Salaries and related employee benefits decreased $929,000 in the 2002 Six Months, due to a reduction in the workforce. Legal and professional fees decreased $298,000, consulting fees decreased $207,000 and depreciation and amortization decreased $106,000. General and administrative expenses supporting our service bureau were $256,000 in the 2002 Six Months, compared to $244,000 in the 2001 Six Months. General and administrative expenses supporting our professional services in the 2002 Six Months were $609,000. General and administrative costs related to professional services, for the 2001 Six Months, in the amount of $1,493,000, reflects the results of operations of our professional services group from November 6, 2000, the acquisition date of RTCI. Non-cash charges for compensation and services decreased to $190,000 in the 2002 Six Months from $450,000 in the 2001 Six Months. In the 2002 Six Months, we recognized $190,000 of stock-based compensation expenses related to assumed unvested restricted shares issued to RTCI employees in connection with our acquisition of RTCI. In March 2000, ICC granted an option to purchase 100,000 shares of class A common stock pursuant to a consulting agreement with a former executive officer and board member. Non-cash consulting charges for this stock option amounted to $450,000 in the 2001 Six Months. Interest and investment income decreased to $77,000 in the 2002 Six Months from $377,000 in the 2001 Six Months. The decrease was due to lower average cash balances in the 2002 Six Months, compared to the 2001 Six Months. Liquidity and Capital Resources Our principal sources of liquidity, which consists of cash and cash equivalents and marketable securities, decreased to $2,406,000 as of January 31, 2002 from $2,889,000 as of July 31, 2001. We believe these resources provide us with sufficient liquidity to continue in operation through July 31, 2002. However, if our cost reductions do not achieve sufficient savings, if our expenses increase more than anticipated, if our revenue does not increase as anticipated because of competitive or other reasons or because we lose existing customers because the new interconnection arrangements we have provided are inadequate for our customers' business purposes (see "Overview") or if our accounts receivable increase as a result of a lengthening of the collection cycle, our cash resources may not be sufficient and we will require additional financing. There can be no assurances that any financing will be available or that the terms will be acceptable to us, or that any financing will be consummated. We anticipate losses through fiscal 2002 as we continue to expand the commercial markets for our ICC.NET service and service bureau. Our cash and cash equivalents decreased to $1,960,000 as of January 31, 2002 from $2,223,000 as of July 31, 2001. This decrease is primarily the result of net proceeds of $3,107,000 from a private placement of class A common stock and warrants to purchase class A common stock in October 2001, $275,000 raised from the exercise of options and warrants and the sale of marketable securities and the maturity of certificates of deposit of $319,000 offset by cash used in operating activities of $3,633,000, payments of capital lease obligations of $160,000 and capital investments for property, equipment and software development costs of $172,000. Net cash used in operating activities was $3,633,000 for the 2002 Six Months, compared to $7,286,000 for the 2001 Six Months. The decrease in cash used in operating activities was primarily the result of the decreased operating losses. Our operating losses decreased as a result of a combination of a decrease in operating expenses of $2,321,000 and an increase in revenues of $1,837,000 in the 2002 Six Months compared to the 2001 Six Months. Cash flows provided by investing activities were $148,000 in the 2002 Six Months compared to $90,000 used in investing activities in the 2001 Six Months. The increase in cash flows provided from investing activities was primarily due to the proceeds from the sale of marketable securities of $247,000 offset by additions to software development costs of $135,000. Net cash provided by financing activities was $3,222,000 in the 2002 Six Months, compared to $46,000 provided by financing activities in the 2001 Six Months. The cash provided by financing activities in the 2002 Six Months was primarily the result of proceeds from the October 2001 private placement described below. No such transactions occurred in the 2001 Six Months. Working capital increased to $1,268,000 as of January 31, 2002 from $646,000 as of July 31, 2001. 17 We have financed our operations through private placements during fiscal 1994, our initial public offering during fiscal 1995 (the "IPO"), a private placement in March 1997, a private placement of bridge note units during fiscal 1998 and 1999, a private placement of series A preferred stock in April 1999, private placements of our class A common stock, series C preferred stock and warrants in November 1999 and a private placement of our class A common stock and warrants in October 2001. We sold in the October 2001 private placement 1,159,716 shares of class A common stock and warrants to purchase 347,915 additional shares of class A common stock for gross proceeds of $3,189,219. The warrants expire in October 2006 and are exercisable at $3.58 per share, subject to adjustment pursuant to customary antidilution adjustments for stock splits, dividends and combinations. In connection with the private placement the Company incurred fees of $152,511. Of such fees, $35,000 has been paid in cash and $117,511 will paid by issuing warrants to purchase 50,000 shares of class A common stock. The warrants will have substantially the same terms and conditions as the warrants issued in the private placement. We have a net operating loss carryforward of approximately $74 million to offset future taxable income for federal income tax purposes. The utilization of the loss carryforward to reduce any such future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards. The carryforward expires from 2007 to 2021. The Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder contain provisions which limit the use of available net operating loss carryforwards in any given year should significant changes (greater than 50%) in ownership interests occur. Due to the IPO, the net operating loss carryover of approximately $1.9 million incurred prior to the IPO is subject to an annual limitation of approximately $400,000 until that portion of the net operating loss is utilized or expires. Due to the private placement of series A preferred stock in April 1999, the net operating loss carryover of approximately $18 million incurred prior to the private placement is subject to an annual limitation of approximately $1 million until that portion of the net operating loss is utilized or expires. Also, due to the 100% ownership change when we acquired RTCI, RTCI's net operating loss of approximately $6.5 million incurred prior to the ownership change is subject to an annual limitation of approximately $1.4 million until that portion of the net operating loss is utilized or expires. In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations subsequent to June 30, 2001 be accounted for under the purchase method of accounting. SFAS No.141 also requires that the fair value of an assembled workforce acquired be included in the amount initially recorded as goodwill. As required by this statement, the Company reclassified into goodwill $1,710,617 initially recorded as other intangible assets related to the value of the assembled workforce of RTCI. SFAS No. 142 requires that upon adoption, amortization of goodwill will cease, and instead, the carrying value of goodwill will be evaluated for impairment on at least an annual basis. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001; however, the Company has adopted this standard as of the beginning of its 2002 fiscal year, August 1, 2001 as permitted under the provisions of SFAS No. 142. The adoption of this standard resulted in no charges for amortization of goodwill in the 2002 Quarter and the 2002 Six Months. Amortization expense in the amount of $511,000 and $611,000 were charged in the 2001 Quarter and 2001 Six Months, respectively, prior to the adoption of SFAS No. 142. The Company has evaluated goodwill for impairment and has determined that no impairment exists at August 1, 2001 as permitted under the provisions of SFAS No. 142. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. The Company is required to adopt SFAS No. 144 by the first quarter of fiscal 2003. The Company is currently evaluating the potential impact of SFAS No. 144 on its results of operations and financial position. Item 3: Quantitative and Qualitative Disclosures About Market Risk During the second quarter ended January 31, 2002, there were no significant changes related to the Company's market risk exposure. 18 PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders The 2001 Annual Meeting of the Stockholders of the Company was held on December 6, 2001. For more information on the following proposals, reference is made to the Company's proxy statement dated November 5, 2001. The following items were voted upon and passed. The stockholders elected the following Class I directors for a term of two years expiring at the second succeeding annual meeting of stockholders in 2003: Name Votes For Votes Against ---- --------- ------------- Spencer I Browne 6,967,490 7,093 Kim D. Cooke 6,965,813 8,770 Charles C. Johnston 6,965,813 8,770 The stockholders elected the following Class II directors for a term of three years expiring at the third succeeding annual meeting of stockholders in 2004: Name Votes For Votes Against ---- --------- ------------- G. Michael Cassidy 6,967,336 7,247 Arthur R. Medici 6,965,813 8,770 The stockholders elected the following Class III directors for a term of one year expiring at the next annual meeting of stockholders in 2002: Name Votes For Votes Against ---- --------- ------------- Peter J. Boni 6,969,013 5,570 Sarah Byrne-Quinn 6,965,813 8,770 In addition, the following item was voted upon and passed: The appointment of Deloitte & Touche LLP as the Company's independent public accountants for the fiscal year ending July 31, 2002 was ratified. Votes For Votes Against Abstentions --------- ------------- ----------- 6,963,154 7,349 4,080 Item 6: Exhibits and Reports on Form 8-K (a) Exhibits. -------- None. (b) Reports on Form 8-K -------------------- On January 30, 2002, we filed a Current Report on Form 8-K to report an agreement with IBM Corporation that will allow ICC to offer enhanced connectivity to all of ICC's customers and their trading partners. The Current Report also disclosed that Sterling Commerce will terminate its interconnection arrangement with ICC on March 9, 2002. The termination date has subsequently been changed to April 8, 2002. 19 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERNET COMMERCE CORPORATION ----------------------------- (Registrant) Date: March 1, 2002 By: /s/ Walter M. Psztur -------------------------------- Walter M. Psztur Chief Financial Officer (Principal Financial and Accounting Officer) 20