-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PNSDjA2uVPwRTRP8WyxEI9E23W7lqPDnivDNdWq9thjXueC3T8h/DsA3PUuQBKgU AMGXIYY7ed+n2ZojynZVGQ== 0000922423-04-001364.txt : 20040819 0000922423-04-001364.hdr.sgml : 20040819 20040819165827 ACCESSION NUMBER: 0000922423-04-001364 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040618 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 20040819 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERNET COMMERCE CORP CENTRAL INDEX KEY: 0000894738 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 133645702 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24996 FILM NUMBER: 04986889 BUSINESS ADDRESS: STREET 1: 805 THIRD AVE STREET 2: STE 622 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2122717640 MAIL ADDRESS: STREET 1: 805 THIRD AVENUE STREET 2: 342 MADISON AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: INFOSAFE SYSTEMS INC DATE OF NAME CHANGE: 19940914 8-K 1 kl08069_8k.txt FORM 8-K CURRENT REPORT U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K _____________ CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) June 18, 2004 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) None (Former name or former address, if changed since last report.) ITEM 5. OTHER EVENTS EXCEPT AS EXPRESSLY INDICATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES, "INTERNET COMMERCE", "WE", "OUR", OR "US" MEANS INTERNET COMMERCE CORPORATION, A DELAWARE CORPORATION, AND ITS SUBSIDIARY. We are filing this Current Report on Form 8-K to revise the presentation in our Annual Report on Form 10-K for the year ended July 31, 2003 ("2003 Annual Report") of our segment financial information for our ICC.NET and Professional Services segments for fiscal years 2003, 2002 and 2001 to reflect a change in our reportable segment structure effective as of the third quarter of 2004, discussed below. Prior to February 1, 2004, we reported the results of our operations in three segments: ICC.NET, Service Bureau and Professional Services. 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 1, 2004, we no longer reported the results for our professional services activities in a separate segment and included these results with the ICC.NET segment. This report conforms certain information contained in "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements and Supplementary Data," included in Item 1 of Part I and Items 7 and 8, respectively, of Part II of our 2003 Annual Report to reflect our change in segment reporting as set forth on Exhibits 99.1, 99.2 and 99.3, respectively, and incorporated by reference herein. No attempt has been made in this current report to modify or update any other disclosures presented in our 2003 Annual Report. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS See Exhibit Index. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Internet Commerce Corporation By: /s/ Michael Piccininni - --------------------------- Michael Piccininni Corporate Controller Date: August 19, 2004 Internet Commerce Corporation CURRENT REPORT ON FORM 8-K Dated August 19, 2004 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 23.1 Consent of Deloitte & Touche LLP 99.1 Business 99.2 Management's Discussion and Analysis of Financial Condition and Results of Operations 99.3 Financial Statements and Supplementary Data EX-23 2 kl08069_ex23-1.txt EXHIBIT 23.1 CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement Nos. 333-80043, 333-93301, 333-45868, 333-52450, 333-75760, 333-99059 and 333-115029 of Internet Commerce Corporation on Form S-3 and Registration Statement Nos. 333-49364, 333-49372, 333-39854 and 333-86565 of Internet Commerce Corporation on Form S-8 of our report dated October 27, 2003 (June 18, 2004 as to Note 14) (which report expresses an unqualified opinion and includes an explanatory paragraph referring to the Company's adoption of the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," effective August 1, 2001), appearing in this Current Report on Form 8-K of Internet Commerce Corporation. /s/Deloitte & Touche LLP New York, New York August 19, 2004 EX-99 3 kl08069_ex99-1.txt EXHIBIT 99.1 BUSINESS Exhibit 99.1 Overview Internet Commerce Corporation is in the e-commerce business-to-business communication services market, providing electronic commerce ("EC") infrastructure solutions. References in this annual report to the "Company," "ICC," "we" or "us" mean Internet Commerce Corporation, a Delaware corporation, and its subsidiary on a consolidated basis, unless the context otherwise requires. Our business operates in two segments. These two segments are: o ICC.NET - ICC.NET includes the Company's 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. We believe that our ICC.NET service has significant advantages over traditional VANs, email-based and other Internet-based software systems, because our service is provided at a low cost, generally with greater transmission speed in nearly real-time and offers more features. ICC.NET provides the following services: o Traditional VAN services -- our ICC.NET service provides the full suite of traditional VAN services, but uses the Internet to provide cost savings and increased capabilities for our customers; o Electronic data interchange ("EDI") for web-based retailers -- our ICC.NET service provides an electronic document and data file delivery link between web-based retailers and their vendors that require documents and data files to be transmitted using EDI format; o AS2 capability -- ICC supports the EDI-INT standard for those customers that are required to communicate via this protocol.; o EDI-to-fax service -- our ICC.NET service can translate electronic documents into fax format and send the documents by fax to our customers' trading partners that are not equipped to receive electronically transmitted documents; o Data mapping -- our data mapping capabilities maximize the value of our network by providing in-line data translation facilities to our customers; o Large-scale electronic document management and delivery -- our ICC.NET service can transmit large-scale non-EDI electronic documents and data files and provide real-time delivery, archiving, security, authentication and audit services; o Point-of-Sale service -- the exchange of Point-of-Sale data is growing in the retail industry to improve supply chain efficiency. Up to now, the cost of moving large amounts of Point-of-Sale information electronically has been prohibitive. ICC offers a Point-of-Sale service that allows retailers and their suppliers to exchange data quickly and effectively utilizing the ICC.NET service; o ICC.CATALOG - our web-based electronic product catalog service transforms static vendor product information into a pro-active purchasing tool through the direct creation of EDI compliant purchase orders that can be transmitted over the ICC.NET service by synchronizing trading partner data in real-time, including graphic images of all products and by offering sophisticated navigation and advanced search capabilities to streamline product comparison and order information; and o HIPAA.ICC.NET -- our HIPAA.ICC.NET is a highly secure Internet-based low cost network that reliably moves all EDI healthcare documents between providers and payers in real-time over the ICC.NET service and provides users with a specialized user interface. o EC infrastructure solutions by providing mission critical e-commerce consulting, software, outsourced services and technical resource management; o HIPAA (Health Insurance Portability and Accountability Act) impact and data gap analysis for health care providers and payers. We can design, build, test and rollout systems to ensure compliance with Federally mandated standards for health care data. Through strategic alliances with industry leading partners, including Emanio, Inc., a leading provider of translator software; HCEC a leading healthcare E-business collaborative that markets ICC's services to its member organizations; and ACOM, a leading provider of tactical back-office technology solutions that integrates financial/ERP systems to form comprehensive Electronic Purchasing-to-Payment (EP2P) systems, we offer third-party translators, combined with our ICC.NET data mapping capabilities; and o A series of product-independent EDI seminars for e-commerce users. The seminars are hosted by leading universities and training facilities across the United States. We also develop in-house EDI training programs and offer public seminars for understanding and implementing HIPAA regulations. o Service Bureau - Our Service Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides the following services and software products: o Receives electronic purchase orders from large retailers and converts the purchase orders into hard copies or other alternative formats and delivers those documents to their suppliers that are our customers; o Converts paper or other alternatively formatted invoices from our customers into EDI format that is transmitted to their trading partners; and o Software - ICC markets a broad range of Windows-based software products used by suppliers to reach large retailers including ScanPak Professional, which provides UPC (Universal Product Code) services for ASN (Advanced Ship Notice) Casing & UCC (Uniform Code Council) 128 labels. Development of Our Business Through July 2000, our business was primarily focused on our VAN service. Our ICC.NET service is currently in use by our customers for the secure exchange of business-to-business electronic forms and data files. In addition to the continued development and enhancement of our ICC.NET service, we made two acquisitions during fiscal 2001. These acquisitions have enabled us to offer a more complete range of services to allow our customers to expand their EC trading communities and bridge their legacy systems to the Internet. In August 2000, we acquired Intercoastal Data Corporation, referred to as IDC, through which we acquired our service bureau segment. IDC is engaged in the development, marketing, sale and other exploitation of business-to-business EDI standard-based applications for standard-based EDI exchange over VANs, private networks, exchanges, extranets and the Internet. In November 2000, we completed the acquisition of Research Triangle Commerce, Inc., referred to as RTCI, through which we acquired certain components of our ICC.NET segment. RTCI is an EC infrastructure solutions company serving the business-to-business e-commerce market. RTCI assists its clients to conduct business electronically through a continuum of services, including eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking. RTCI developed a business model that offers remote service delivery, fixed and value-based pricing and reusable solutions. Data transformation mapping has subsequently been integrated into the ICC.NET service offerings. Services and Products ICC.NET includes our global Internet-based value added network, or VAN, which provides complete supply chain connectivity solutions for electronic data interchange, or EDI, and e-commerce and offers users a sophisticated vehicle to send and receive files of any format and size securely. We also offer a broad range of consulting services and associated mapping and XML technology, custom application development, comprehensive e-commerce education and an EDI service bureau. The following summarizes the principal services and products offered by our two operating segments, namely ICC.NET and service bureau. ICC.NET ICC.NET services provide a solution to the communication difficulties caused by the differences in data formats, networks and communications methods used by the members of trading communities by bridging the gap in technological capabilities and enabling seamless electronic business communication. ICC.NET services can translate incompatible files into a format any user is capable of receiving and uses the Internet to transmit the data file by EDI, fax or other formats. Users of ICC.NET services can thus improve their productivity and reduce their costs by enabling electronic business-to-business transactions between parties with different systems. ICC.NET services improve the basic infrastructure of business-to-business electronic communications by providing intelligent messaging and routing using the Internet, which, improves the security, reliability, ease of use and acceptability of using the Internet for business-to-business electronic commerce. ICC.NET performs these functions without requiring that the user purchase software and at prices that are highly competitive. We designed our ICC.NET services to avoid what we believe are inefficiencies in traditional VAN services, software products and phone and manual fax processes, including higher costs, slower transmission and greater difficulty in operation than our ICC.NET services. ICC.NET incorporates proprietary technology and is immediately accessible using a standard Internet connection and a web browser. ICC.NET services facilitate the development and operations of comprehensive business-to-business electronic commerce solutions. We specialize in electronic commerce, or EC, solutions involving EDI and EAI (Enterprise Application Integration) by providing mission critical EC consulting, EC software, outsourced EC services, technical resource management and HIPAA gap analysis ICC.NET services use the Internet to deliver more features than traditional VANs, including the following: o Documents are delivered up to 100 times faster, depending upon the speed of the customer's Internet connection; o Our customers can more effectively track, monitor and process business documents and other data files using our real-time document management java-applet screen displays; o Our ICC.NET services allow us to consistently provide confirmed delivery of documents and other data files; o Documents can be delivered either in real-time or retrieved when convenient for the customer. Real-time delivery reduces the potential for document corruption, bottlenecks and other problems associated with batch delivery modes, which are traditionally store-and-forward and in some cases can take several hours to be delivered; o ICC.NET services can handle data transmissions other than standard business documents, such as images, engineering drawings, architectural blueprints, audio and certain types of video; and o Our customers enjoy flexibility in creating different document types and formats for various business applications. For example, our customers can add their business logo to their documents and can use their own format for each document type. In addition, we believe our ICC.NET services offer advantages over e-mail and other Internet-based electronic commerce systems, such as a full range of VAN services, translation of a wide variety of data into customer-specified formats, management of business documents or data files of virtually any size and of a wide variety, including purchase orders, invoices, statements, inventory tracking and shipping documents, images, engineering drawings, architectural blueprints, audio and certain types of video. Our ICC.NET services also provides a complete audit trail of content delivery and customer selection from a variety of security methods. ICC.NET is one of the only Internet-based data transmission services that communicates to over sixty-five traditional VANs, private networks and exchanges that currently provide EDI services for approximately 90% of companies that are capable of using EDI. As a result, we can handle EDI traffic between our customers and any of their trading partners that choose to continue to use a traditional VAN and a customer that uses a traditional VAN and its trading partners that do not. The ability to reach these networks provides our customers with the possibility of maximum penetration into their trading partner community. EDI Mapping Factory(R). We are a provider of EDI mapping services to enable translation between different data formats.. Our EDI Mapping Factory(R) provides off-site mapping using a variety of translators on multiple platforms. Our experience includes mapping for ANSI ASC X12 and UN/EDIFACT Transaction Sets, XML and other standards, including support for SAP IDOCs. We provide expert data mapping services for HIPAA compliance initiatives. We can also provide data transformation services for database conversions, client specified files and other tasks involving the care and movement of data. Our systems and technicians can handle many operating system environments, including Windows NT, UNIX, AS/400 and mid-range systems. XML Services. The industry standardization of XML continues to evolve slowly, with no clear winners for a single business-to-business, or B2B, standard. New proposed standards emerge periodically, and consolidation we believe may be some time away. Our experience with XML, in many forms, allows us to provide the flexibility and interoperability our customers require in this changing environment. We provide a complete spectrum of services, from design through inline translation between XML, EDI, and flat file formats, and full end-to-end B2B solutions. We have participated in the development of several standards for the use of XML in B2B and EDI environments, and remain in the forefront of this technology. EDI for web-based retailers. We provide an electronic document and data file delivery link between web-based retailers and their vendors. We believe that many larger vendors require that product orders and other documents be transmitted using EDI. Web retailers can use our ICC.NET service to meet these requirements and thus reduce their costs and improve their ability to locate, order, track and deliver products. Our ICC.NET service can process purchase orders, invoices, order status reports and other files transmitted between web-based shopping portals of electronic retailers and their vendors, distributors and manufacturers and can also manage critical logistics delivery files. EDI for the health care industry. We offer services for the implementation of EDI healthcare transactions mandated by the administrative simplification regulations of the Health Insurance Portability and Accountability Act (HIPAA). Standards developed by ANSI (American National Standards Institute) apply to health plans, clearinghouses and healthcare providers that transmit information electronically. By combining our expertise in traditional EDI and HIPAA requirements with our client's knowledge of its operations and systems, we offer solutions that enable our clients to comply with the HIPAA regulations. We have also formed partnerships aimed at HIPAA compliance that couple third-party translators with our data mapping capabilities. Our ICC.NET service can facilitate the exchange of healthcare eligibility and enrollment forms, care review, patient information and claim status and payments. Large-scale electronic document management and delivery. Our ICC.NET service can electronically transmit large-scale EDI and non-EDI electronic documents and other large files, which may include catalogs, Point-of-Sale data, engineering drawings, graphics and some types of video. ICC.NET allows customers to manage and distribute large files in real-time and provides archiving, security, authentication and audit services. ICC.NET will support both a publish/subscribe configuration, in which a customer can publish any number of files for subscribers authorized by the customer to view and/or download, and a point-to-point-delivery configuration that operates like our ICC.NET VAN service. ICC's Point-of-Sale service allows retailers and their suppliers to exchange information quickly and effectively. ICC.CATALOG. ICC provides a web-based electronic product catalog ("ICC.CATALOG") service for use in the retailer-vendor business community. The ICC.CATALOG enables vendors that supply goods to retailers to create, store and maintain a web-based online database of their product information. Users can electronically access and selectively download the product information and generate EDI compliant purchase orders. Both the retailer and the vendor can access the service worldwide using the Internet and can perform real-time updates. ICC.CATALOG complies with industry standards and is designed to reduce the costs of both retailers and vendors through ease of use, advanced features, functions and low cost pricing. The ICC.CATALOG integrates seamlessly with our ICC.NET service. HIPAA.ICC.NET. ICC offers leading-edge services for EDI healthcare transactions mandated by HIPAA. By combining our expertise in EDI and HIPAA requirements, we offer clients best of breed, one-stop solutions. HIPAA.ICC.NET is based on the low-cost, proven ICC.NET transaction exchange system. and provides users with a specialized browser interface. ICC.NET reliably moves healthcare claims, eligibility and enrollment forms, and all the other HIPAA transactions, including NCPDP. EDI-to-fax service. Traditional EDI users convert electronic documents into a faxable format and fax the documents manually to their trading partners that are unable to receive electronically transmitted documents in EDI format. Our ICC.NET IP-based worldwide fax service allows our customers to send a document electronically, which we then electronically convert to faxable format and fax to any of our customer's trading partners that are unable to receive electronically transmitted documents in EDI format. AS2 Connectivity. We continue to invest in leading edge technology to meet the changing requirements of our customers. An example of this is AS2, which is one of the newest standards associated with moving information across the Internet. We have incorporated AS2 technology into our service offerings so that our customers can utilize the technology without a significant up-front investment in software. By using ICC's AS2 solution, our customers avoid the support costs associated with purchasing an AS2 software product. Custom Solutions. Our custom solutions group provides programming solutions designed to fit our customers' specific needs. We can build web-based applications for both customer end-users and servers. We provide a comprehensive and integrated design or redesign of our customers' entire internal EC/EDI environment. Consulting Services. Our consulting services group brings industry specific experience and high-level expertise to our customers. We have the EC consulting experience to support our customers' information technology functions. We have also initiated a special focus on the healthcare industry involving the analysis, design and construction of solutions that address HIPAA compliance. Education. We offer EC and EDI education and training resources through a series of product-independent seminars hosted by leading universities around the United States. These seminars address the basic components of EDI, software, networks, standards, trading partner issues, business management issues and specific industry-related issues. Custom courses can be arranged for our customers at their locations. We also offer public and private seminars that focus on healthcare EDI and HIPAA requirements. Building on our core education program, these seminars emphasize the use of EDI within the healthcare industry by addressing standards and using exercises to upgrade knowledge of claim processing and remittance transactions. The Service Bureau ICC's Service Bureau allows vendors to comply with its customers' electronic commerce needs. ICC's fees are generally more cost effective than establishing an in-house EDI department. ICC's Service Bureau is focused on the retail industry and is capable of exchanging business transactions with most major retailers. Customers can view account activity on-line through the use of the Internet. The primary features of the Service Bureau include: o Purchase Order, Invoice and Product Activity Data Processing; o UPC Maintenance; o UPC and UCC 128 Label Service and Ship Notices; and o Automated packing process using ScanPak Professional. Our Service Bureau also offers an assortment of software products. Our principal software products are: o ScanPak Professional is a Windows-based warehouse management tool providing an automated Advanced Ship Notice and UCC/EAN-128 label solution. ScanPak Professional allows our customers to scan merchandise and automatically generate bar code labels for each case as it is packed. Keyboard use at packing stations can be eliminated. This software electronically matches the contents of each case against purchase orders. From the casing information created by ScanPak Professional, our customers can generate and transmit accurate EDI ship notices to retailers or third party EDI software products. ScanPak Professional interfaces with ICC.NET and other third party EDI software products. o EZ-EDI(TM) translator package receives electronic purchase orders via the major networks, prints purchase orders, holds the orders in an open orders file for possible changes and sends electronic invoices back to the retailer. It allows our customers to manage their orders with ease - changing quantities and prices as needed, adding manual orders, backordering and deleting orders that cannot be filled. o UPC Manager(TM)allows our customers to create an 832 EDI document (sales catalog) and provides an automatic link to network UPC catalogs. UPC Manager(TM)allows our customers to add, change and delete information in their in-house UPC catalogs, the local repository of their UPC product information. UPC Manager(TM) automatically generates proper UPC numbers for products that do not have UPC numbers assigned and accepts current UPC numbers for products with them. Tracking active, inactive UPC numbers for the appropriate time intervals, UPC Manager(TM)also provides extensive error checking on in-house catalog data to ensure that information sent to the networks is valid. EX-99 4 kl08069_ex99-2.txt EXHIBIT 99.2 MANAGEMENT'S DISCUSSION & ANALYSIS Exhibit 99.2 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This annual report on form 10-K contains a number of "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Specifically, all statements other than statements of historical facts included in this annual report regarding our financial position, business strategy and plans and objectives of management for future operations are forward-looking statements. These forward-looking statements are based on the beliefs of management, as well as assumptions made by and information currently available to management. When used in this Report, the words "anticipate," "believe," "estimate," "expect," "may," "will," "continue" and "intend," and words or phrases of similar import, as they relate to our financial position, business strategy and plans, or objectives of management, are intended to identify forward-looking statements. These statements reflect our current view with respect to future events and are subject to risks, uncertainties and assumptions related to various factors including, without limitation, those described below the heading "Overview", those described starting on page 32 of this annual report under the heading "Risk Factors" and in our registration statements and periodic reports filed with the SEC under the Securities Act and the Exchange Act. Although we believe that our expectations are reasonable, we cannot assure you that our expectations will prove to be correct. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in this annual report as anticipated, believed, estimated, expected or intended. Overview We are in the e-commerce business-to-business communication services market providing complete EC infrastructure solutions. Our business operates in two segments: namely, our ICC.NET service and our Service Bureau. ICC.NET includes the Company's 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. We believe that our ICC.NET service has significant advantages over traditional VANs, email-based and other Internet-based software systems, because our service is provided at a low cost, with greater transmission speed in nearly real-time and offers more features. Professional Services facilitates the development and operations of comprehensive business-to-business e-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 to allow our customers to expand their e-commerce trading communities and bridge their legacy systems to the Internet. In August 2000, we acquired IDC, an EDI service bureau. IDC delivers business-to-business EDI standards-based documents for companies that do not have EDI departments. In November 2000, we acquired RTCI, thereby expanding our professional services capability. RTCI was an e-commerce infrastructure solutions company serving the business-to-business e-commerce market. RTCI assists its clients to conduct business electronically through a continuum of services including eConsulting, data transformation mapping (EDI, EAI, XML) and internetworking. RTCI developed a business model that offered remote service delivery, fixed and value-based pricing and reusable solutions. Subsequent to the acquisition in fiscal 2001, due to a reduction of the workforce of RTCI, a steep decline in value of companies similar to RTCI, continued operating losses and a significant reduction in the forecasted future operating profits of our professional services reporting unit, management determined that triggering events had occurred related to certain intangible assets. Projected cash flow analysis related to those assets determined that the assets had been impaired. These intangible assets were written down to fair value during the fourth quarter of 2001 based on the related discounted expected future cash flows. During the fourth quarter of fiscal 2003 the goodwill of the Service Bureau was tested for impairment due to a significant decline in revenues and operating income resulting primarily from the bankruptcy of its largest customer. An impairment loss of $982,142 was recognized as a result of this evaluation. The fair value of the Service Bureau reporting unit was estimated using the net present value of expected future cash flows. Due to a continued decline in its revenues throughout the course of 2002, continued operating losses and a significant reduction in forecasted future operating profits, the Professional Services reporting unit was tested for impairment during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was recognized as a result of this evaluation. The fair value of the Professional Services reporting unit was estimated using the net present value of expected future cash flows. We rely on many of our competitors to interconnect, at reasonable cost, with our service. We have interconnection arrangements with more than 65 business-to-business networks for the benefit of our customers. Two of the largest networks, Global eXchange Services ("GXS") and Sterling Commerce, which we believe to account for approximately 60% of the estimated EDI users, discontinued their interconnect arrangements with the Company. GXS discontinued its interconnection with our service in September 2001 and Sterling Commerce discontinued its interconnection with our service in April 2002. We have entered into arrangements with Inovis, Inc. (formerly a division of Peregrine Systems, Inc. and now an idependent company) and IBM Corporation so our customers can continue to communicate through us with their trading communities. As a result of these interconnection arrangements, we will continue to incur additional costs and may lose existing customers if the arrangements we have provided are inadequate for their business purposes. We believe, however, that the arrangements we have made satisfy our existing customers. Critical Accounting Policies and Significant Use of Estimates in Financial Statements Critical accounting policies are those policies that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. The following list of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in note 2 of the notes to the consolidated financial statements included elsewhere in this annual report on Form 10-K for the year ended July 31, 2003. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for management's judgment in their application. There are also areas in which management's judgment in selecting any available alternative would not produce a materially different result. We have identified the following to be critical accounting policies of the Company: Revenue Recognition: The Company derives revenue from subscriptions to its ICC.NET service, which includes transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period, generally three to six months. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees, interconnection fees and by providing data mapping services to its customers. Implementation fees are recognized over the life of the subscription period. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. Revenue from data mapping services is recognized when the map has been completed and delivered to the customer. The Company has a limited number of fixed fee data mapping services contracts. Under these arrangements the Company is required to provide a specified number of maps for a fixed fee. Revenue from such arrangements is recognized using the percentage-of-completion method of accounting (see below). Service Bureau revenue is comprised of EDI services including data translation services, EDI-to-print and print-to-EDI purchase order and invoice processing, UPC services including UPC number generation, UPC catalog maintenance and UPC label printing. The Service Bureau also derives revenue from licensing software and providing software maintenance and support. Revenue from EDI services and UPC services is recognized when the services are provided. The Company accounts for its EDI software license sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software licenses is recognized when all of the following conditions are met: (1) a non-cancelable non-contingent license agreement has been signed; (2) the software product has been delivered; (3) there are no material uncertainties regarding customer acceptance; and (4) collection of the resulting receivable is probable. Revenue from software maintenance and support contracts is recognized ratably over the life of the contract. The Service Bureau's software license revenue was not significant in any of the periods presented. In addition, SOP 97-2 generally requires that revenue from software arrangements involving multiple elements be allocated among each element of the arrangement based on the relative fair values of the elements, such as software licenses, post contract customer support, installation or training. Furthermore, SOP 97-2 requires that revenue be recognized as each element is delivered with no significant performance obligation remaining on the part of the Company. The Company's multiple element arrangements generally consist of a software license and post contract support. The Company allocates the aggregate revenue from multiple element arrangements to each element based on vendor specific objective evidence. The Company has established vendor specific objective evidence for each of the elements as it sells both the software and post contract customer support independent of multiple element agreements. Customers are charged standard prices for the software and post contract customer support and these prices do not vary from customer to customer. If the Company enters into a multiple element agreement for which vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until all elements of the arrangement are delivered. Service revenue from maintenance contracts is recognized ratably over the term of the maintenance contract, on a straight-line basis. Other service revenue is recognized at the time the service is performed. The Company also provides a broad range of professional services consisting primarily of EDI, electronic commerce consulting, EDI education and training at seminars throughout the United States. Revenue from EDI and electronic commerce consulting and education and training are recognized when the services are provided. Revenue from fixed fee data mapping and professional service contracts is recognized using the percentage-of-completion method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The percentage of completion for each contract is determined based on the ratio of direct labor hours incurred to total estimated direct labor hours required to complete the contract. The Company may periodically encounter changes in estimated costs and other factors that may lead to a change in the estimated profitability of a fixed-price contract. In such circumstances, adjustments to cost and profitability estimates are made in the period in which the underlying factors requiring such revisions become known. If such revisions indicate a loss on a contract, the entire loss is recorded at such time. Amounts billed in advance of services being performed are recorded as deferred revenue. Certain fixed-fee contracts may have substantive customer acceptance provisions. The acceptance terms generally include a single review and revision cycle for each deliverable to incorporate the customer's suggested or required modifications. Deliverables are considered accepted upon completion of the review and revision and revenue cycle is recognized upon acceptance. Goodwill: Goodwill consists of the excess purchase price over the fair value of identifiable net assets of acquired businesses. The carrying value of goodwill is evaluated for impairment on an annual basis. Management also reviews goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. If it is determined that an impairment in value has occurred, goodwill is written down to its implied fair value. The Company's reporting units utilized for evaluating the recoverability of goodwill are the same as its operating segments. Other Intangible Assets: Other intangible assets are carried at cost less accumulated amortization. Other intangible assets are amortized on a straight-line basis over their expected lives, which are estimated to be five years. The Company did not have any indefinite lived intangible assets other than goodwill that were not subject to amortization. Impairment of long-lived assets: Long-lived assets of the Company, including amortizable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management also reevaluates the periods of amortization of long-lived assets to determine whether events and circumstances warrant revised estimates of useful lives. When such events or changes in circumstances occur, the Company tests for impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss. The amount of the impairment loss will be determined by comparing the carrying value of the long-lived asset to the present value of the net future operating cash flows to be generated by the asset. Stock-based compensation: The Company accounts for stock-based compensation with its employees using the intrinsic value method in accordance with the provisions of Account Principles Board Opinion No. 25, Accounting for Stock Issued to Employees" and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). SFAS No. 123 establishes a fair-value method of accounting for stock-based compensation plans. Stock-based awards to non-employees are accounted for at fair value in accordance with SFAS No. 123.Income Taxes: Deferred income taxes are determined by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided based on the weight of available evidence, if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant accounting estimates used in the preparation of the Company's consolidated financial statements include the fair value of equity securities underlying stock based compensation, the realizability of deferred tax assets, the carrying value of goodwill, intangible assets and long-lived assets, and depreciation and amortization. The following discussion reviews items incorporated into our financial statements for the years ended July 31 2003, 2002 and 2001 that required the use of significant management estimates. The Company has entered into several transactions involving the issuance of warrants and options to purchase shares of the Company's class A common stock to consultants, lenders, warrant holders, placement agents and other business associates and vendors. The issuance of these securities required management to estimate their value using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires management to make certain estimates for values of variables used by the model. Management estimated the values for stock price volatility, the expected life of the equity instruments and the risk free rate based on information that was available to management at the time the Black-Scholes option-pricing calculations were performed. Changes in such estimates could have a significant impact on the estimated fair value of those equity instruments. On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term of 1 year. On October 22, 2003, the Company and Silicon Valley Bank amended the Financing Agreement to extend the term of the agreement to August 31, 2004. In connection with the Financing Agreement, the Company issued the Bank warrants to purchase 40,000 shares of the Company's class A common stock. The warrants are immediately exercisable at an exercise price of $1.39 per share, equal to the fair market value of the Company's class A common stock on the date of closing of the Financing Agreement. The warrants are exercisable for a seven-year period. The value of the warrants in the amount of $34,000 is being amortized over the life of the Financing Agreement. On March 10, 2003, the Company issued options to purchase 100,000 shares of class A common stock to a non-employee member of the board of directors as compensation for consulting services. The estimated fair value of the options was determined by management to be $42,000. The allocation of the proceeds from the sale of the series D preferred stock and warrants issued in the Company's April 30, 2003 private placement between the fair value of the series D preferred stock and the fair value of the detachable warrants required management to estimate the fair value of the warrants. Management's estimate resulted in a beneficial conversion feature in the amount of $106,730. The discount was immediately accreted and treated as a deemed dividend to the holder of the series D preferred as all of the series D preferred stock was eligible for conversion upon issuance. In connection with the private placement that closed during April and May of 2003, the Company incurred fees which were paid by issuing warrants to purchase 110,680 shares of class A common stock at an exercise price of $1.47 per share. The fair value of the warrants was determined by management to be $87,800. In connection with a warrant exchange offer in April 2002, the Company valued the repriced and newly issued warrants at $461,084 using the Black-Scholes option-pricing model. This amount has been added to the Company's net loss to increase the net loss attributable to common stockholders during fiscal 2002. In connection with the acquisition of RTCI on November 6, 2000, issued and outstanding options and warrants to purchase RTCI common stock were exchanged for options and warrants of ICC, providing the holders the right to receive, upon exercise, an aggregate of 394,905 shares of ICC class A common stock and $343,456 of cash. The options and warrants were valued using the Black-Scholes option-pricing model. The fair value of the vested portion of the options was included in the purchase price for RTCI. Goodwill is evaluated for impairment at least annually and whenever events or circumstances indicate impairment may have occurred. The assessment requires the comparison of the fair value of each of the Company's reporting units to the carrying value of its respective net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, the Company must perform a second test to measure the amount of impairment. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized by the Company in an amount equal to that excess. The Company estimates the fair value of its reporting units based on the net present value of expected future cash flows. The use of this method requires management to make estimates of the expected future cash flows of the reporting unit and the Company's weighted average cost of capital. Estimating the Company's weighted average cost of capital requires management to make estimates for long-term interest rates, risk premiums, and beta coefficients. Management estimated these items based on information that was available to management at the time the Company prepared its estimate of the fair value of the reporting unit. Changes in either the expected cash flows or the weighted average cost of capital could have a significant impact on the estimated fair value of the Company's reporting units. Impairments of goodwill and acquired intangibles in the amount of $982,000, $1,711,000 and $16,708,000 were as recorded during the years ended July 31 2003, 2002 and 2001, respectively. During fiscal 2001, due to a significant reduction of the workforce of the professional reporting unit, a steep decline in the value of companies similar to it, continued operating losses and a significant reduction in the forecasted future operating profits, management determined that triggering events had occurred related to the certain acquired intangible assets of the Professional Services reporting unit, namely its assembled workforce, its customer list and goodwill. The projected cash flow analysis related to those assets determined that the assets had been impaired. These intangible assets were written down to fair value based on the discounted expected future cash flows from the intangible assets over their remaining estimated useful lives. An impairment loss of $16,708,000 was recognized as a result of this evaluation. During fiscal 2002, due to a continued decline in its revenues throughout the course of 2002, continued operating losses and a significant reduction in forecasted future operating profits, the Professional Services 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, 2003 Compared with Fiscal Year Ended July 31, 2002. Results of Operations - Consolidated The following table reflects consolidated operating data by reported segment. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiary. Year Ended July 31, -------------------------------- Income (loss) before income taxes: 2003 2002 -------------- ------------ ICC.NET $ (4,872,216) $ (6,552,502) Service Bureau (1,132,102) 4,949 ------------- ------------ Consolidated loss before income taxes $ (6,004,318) $ (6,547,553) ============= ============ Results of Operations - ICC.NET ICC.NET includes the Company's 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: 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 139,415 250,008 Impairment of acquired intangibles -- 1,710,617 ============ ============ 15,104,185 19,433,659 ============ ============ Operating loss $ (4,508,817) $ (6,845,046) Other (expense) income, net (363,399) 292,544 ============ ============ Loss before income taxes $ (4,872,216) $ (6,552,502) ============ ============ Revenues - ICC.NET - Revenues from ICC.NET were 88% of our total consolidated revenues for the fiscal year ended July 31, 2003 ("2003") compared to 89% for the fiscal year ended July 31, 2002 ("2002"). Total ICC.NET revenue decreased $1,993,000 in 2003 from 2002, or approximately 16%. VAN and services to Triaton revenues increased $1,924,000, or approximately 30%, in 2003 from the prior year. The increase in VAN services revenue is attributable to an increase in the number of customers to approximately 1,100 in July 2003 from approximately 600 in July 2002. Approximately 300 of these new customers signed up for our service during the month of April 2003. Mapping services decreased $493,000 or approximately 46% in 2003 compared to 2002 primarily due to the continued slowdown in the economy. Revenue generated from professional services consists of consulting and educational services. As a result of the continued slowdown in the economy, which has resulted in a decrease in capital expenditures for information technology and related services, revenue from our professional services decreased $424,000 in 2003 from 2002. During 2002, we recognized technology license revenue of $3,000,000 from Triaton GmbH, a subsidiary of Thyssen Krupp Information Services, GmbH, for the license of our ICC.NET service. Under the terms of the July 2002 license agreement, we granted Triaton a non-exclusive license to use ICC's electronic data interchange system in its most recent version anywhere in the continent of Europe, Great Britain and Ireland for a five-year term. Triaton has the right to use and provide the ICC.NET service to its customers. Triaton paid us $1,500,000 in July 2002 and an additional $1,500,000 in October 2002 under this license agreement. ICC will not report any additional revenues under the July 2002 agreement with Triaton, except that, at Triaton's request, ICC will provide sales support, customer support and software support on ICC's standard terms and conditions. 2002 included $105,000 of fees from Triaton under a July 2001 agreement. Cost of services - ICC.NET - Cost of services relating to our ICC.NET was 67% of revenue derived from the ICC.NET service in 2003, compared to 63% of revenue in 2002. Excluding the impairment of software inventory, the total cost of services was 65% of revenue in 2003 compared to 63% of revenue in 2002. Cost of services related to our ICC.NET consists primarily of salaries and employee benefits, contract labor, connectivity fees, amortization and rent. Cost of services excluding impairment of software inventory decreased $1,050,000 in 2003 from 2002. Salaries and employee benefits decreased $470,000 primarily due to a reduction of personnel to 36 at the end of 2003 from 62 at the beginning of 2002. Product development personnel who were temporarily assigned to cost of services during 2002 represented $278,000 of this decrease. These employees were used to implement alternative connectivity solutions for the ICC.NET service when GXS and Sterling disconnected our service from their networks during 2002. Amortization decreased $246,000 in 2003 compared to 2002 primarily due to certain capitalized software costs becoming fully amortized during 2002. In addition, consulting costs decreased $159,000 in 2003 from 2002 due primarily to decrease in costs associated with technology license revenue from Triaton. Travel, meals and entertainment decreased $104,000 in 2003 from 2002 due to lower travel requirements associated with projects. In addition, costs for rental of space for educational seminars decreased $62,000 in 2003 from 2002 due to the use of lower cost facilities. However, these savings were partially offset by increased connectivity costs of $306,000 in 2003 compared to 2002. The increase in connectivity fees was primarily due to additional fees incurred to offer our customers and their trading partners alternative connectivity when GXS and Sterling disconnected our service from their networks during 2002. Cost of services relating to VAN services decreased to $3,744,000 in 2003 from $4,009,000 in 2002. Cost of services relating to mapping services decreased to $1,424,000 in 2003 from $1,683,000 in 2002. Cost of services relating to services provided to Triaton was $53,000 in 2002 compared to no costs in 2003. Impairment of software inventory of $248,000 in 2003 represents an impairment for software inventory held by 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 our ICC.NET cost of services will decline as a percentage of revenue in future periods due to increased utilization of our existing communications infrastructure as we expect the use of our VAN service to increase. Product development and enhancement - ICC.NET - Product development and enhancement costs relating to our ICC.NET consist primarily of salaries and employee benefits. The increase of $153,000 in 2003 over 2002 was primarily attributable to an increase of $267,000 of costs relating to product development personnel who had been temporarily assigned to cost of services during 2002. The personnel were utilized to implement alternative connectivity solutions for our ICC.NET when GXS and Sterling disconnected our service from their networks during 2002. The prior year allocation was partially offset by a decrease of $78,000 in salaries and employee benefits as a result of reduction in staff to 8 at the end of 2003 from 14 at the beginning of 2002. Also, consulting costs decreased $17,000 in 2003 compared to 2002 due to increased reliance on staff. Selling and marketing - ICC.NET - Selling and marketing expenses relating to our ICC.NET consist primarily of salaries and employee benefits, advertising and trade show costs and travel-related costs. Selling and marketing expenses related to our ICC.NET service were reduced $477,000 in 2003 from 2002. The decrease in selling and marketing expenses was primarily attributable to a decrease in salaries and benefits of $196,000 in 2003. Advertising and trade show costs were reduced $175,000 because we attended fewer trade shows and placed fewer print advertisements. In addition, rent, travel and entertainment and severance decreased $28,000, $26,000 and $21,000, respectively, in 2003 from 2002. General and administrative - ICC.NET - General and administrative expenses supporting our ICC.NET consist primarily of salaries and employee benefits, facility costs, legal and professional fees, depreciation, amortization and telephone charges. General and administrative costs supporting our ICC.NET decreased $1,383,000 in 2003. Legal fees decreased $465,000 in 2003 relating to our disconnection from other VAN's and resolution of a legal matter in 2002. Rent expense of $393,000 as a result of the renegotiation of our leases. In addition, salary and benefits decreased $258,000 primarily due to a reduction in personnel in our professional service reporting unit to 3 at the end of 2003 from 6 at the end of 2002 and 10 at the beginning of 2002. Bad debt expense decreased $173,000 in 2003 from 2002 due to a decrease in customer defaults from the prior year. In addition, depreciation and amortization decreased $93,000 in 2003 from 2002 due to assets reaching the end of their depreciable or amortizable lives. These decreases were partially offset by an increase in accounting fees of $130,000 in 2003 over 2002 due to services provided in connection with SEC filings and other matters. For cost reduction purposes, the Company's executive management, human resources, accounting and finance functions for both segments of the Company were centralized and are now performed by ICC.NET personnel. Commencing in the second fiscal quarter of 2003, ICC.NET began allocating the costs of executive management, human resources, accounting and finance tasks to the Service Bureau segment based on the level of services provided. In 2003, these allocations totaled $135,000. Non-cash charges - ICC.NET - Non-cash charges decreased $111,000 in 2003 from 2002. In 2003, $60,000 of expense was recognized for common stock and options issued to a non-employee member of our board of directors as compensation for consulting services. In addition, expense recognized for common stock to be issued to non-employee members of our board of directors as compensation increased $19,000 in 2003 from 2002. Non-cash charges of $190,000 in 2002 consisted of stock-based compensation expense related to assumed unvested restricted shares issued to RTCI employees in connection with our acquisition of RTCI. Other income, net - ICC.NET - Other expenses increased $656,000 in 2003 compared to 2002. An impairment charge of $318,000 was recorded in 2003 for the write down of available-for-sale marketable securities due to an other than temporary decline in value. In 2002 other income includes a legal settlement from a competitor of $63,000 and the favorable settlement of an acquisition-related liability of $145,000. In addition, net gains from the disposition of marketable securities decreased $140,000 in 2003 from 2002. Results of Operations - Service Bureau Our service bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides various EDI and UPC (universal product code) services. Our service bureau also licenses EDI software. The following table summarizes operating results for our service bureau: Year Ended July 31, ---------------------------- 2003 2002 ----------- ----------- Revenues: Services $ 1,487,946 $ 1,633,183 Expenses: Cost of services 735,136 839,217 Impairment of capitalized software 148,479 -- ----------- ----------- Total cost of services 883,615 839,217 Product development and enhancement 135,358 154,589 Selling and marketing 135,411 123,100 General and administrative 483,522 511,328 Impairment of acquired intangible 982,142 ----------- ----------- 2,620,048 1,628,234 ----------- ----------- Operating income (loss) (1,132,102) 4,949 ----------- ----------- Other income, net -- -- ----------- ----------- Income (loss) before income taxes $(1,132,102) $ 4,949 =========== =========== Revenues - Service Bureau - Revenue related to our service bureau was 12% of our consolidated revenue in 2003 compared to 11% of consolidated revenue in 2002. The service bureau's revenue was primarily generated from services performed, customer support and licensing fees. The decrease in revenue of $145,000 in 2003 compared to 2002 was primarily the result of a decrease in service revenue of $122,000 due to a large customer ceasing operations. Cost of services - Service Bureau - Total cost of services relating to our Service Bureau was 58% of revenue derived from the service bureau in 2003 compared to 51% in 2002. Excluding the impairment of the capitalized software, costs of services was 49% of revenue derived from the Service Bureau in 2003 compared to 51% of revenue derived from the Service Bureau in 2002. Cost of services related to our service bureau consists primarily of salaries and employee benefits and rent. Cost of services, excluding the capitalized software impairment charge, decreased $104,000 in 2003. This decrease in cost of services was primarily the result of an $80,000 decrease in the use of consultants for customer service and support and data entry services and a decrease in salary and benefits of $22,000. Delivery charges to customers decreased $11,000 in 2003 compared to 2002 due to customers paying these cost directly to the delivery agent. Cost of services - impairment of capitalized software of $148,000 in 2003 represents an impairment of capitalized software for in-process projects that management decided, due to unfavorable market conditions continuing into the foreseeable future, not to complete. Product development and enhancement - Service Bureau - Product development and enhancement costs consist primarily of salaries and employee benefits and rent. Product development and enhancement costs incurred by our service bureau decreased $19,000 in 2003 from 2002. This decrease was primarily attributable to a decrease in salaries and employee benefits of $16,000 as a result of reduced staffing to 4 at the end of 2003 from 5 at the beginning of 2002. Selling and marketing - Service Bureau - Selling and marketing expenses relating to our service bureau consist primarily of salaries and employee benefits and rent. Selling and marketing increased $12,000 in 2003 primarily due to an increase in salaries and employee benefits of $8,000, and a $5,000 severance payment in 2003. General and administrative - Service Bureau - General and administrative expenses relating to our service bureau consist primarily of salaries and employee benefits, depreciation, rent, telephone and office expenses. General and administrative costs decreased $28,000 in 2003 from 2002. Salaries decreased $160,000 in 2003 from 2002 as a result of a reduction in staff to 1 at the end of 2003 from 4 at the end of 2002, and 6 at the beginning of 2002. This was offset by an increase of $135,000 in general and administrative support staff salary and benefits allocated by ICC.NET to the Service Bureau in 2003. See "General and administrative - ICC.NET" above for a discussion of the allocation of general and administrative expenses among segments. Impairment of Acquired Intangibles - Service Bureau - During the fourth quarter of fiscal 2003 the goodwill of the Service Bureau was tested for impairment due to a significant decline in revenues and operating income resulting primarily from the bankruptcy of its largest customer. An impairment loss of $982,142 was recognized as a result of this evaluation. The fair value of the Service Bureau reporting unit was estimated using the net present value of expected future cash flows. Results of Operations and Financial Condition Fiscal Year Ended July 31, 2002 Compared with Fiscal Year Ended July 31, 2001. Results of Operations - Consolidated The following table reflects consolidated operating data by reported segment. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiary. Year Ended July 31, ------------------------------- Income (loss) before income taxes: 2002 2001 ------------ ------------ ICC.NET $ (6,552,502) $(32,394,191) Service Bureau 4,949 (391,048) ------------ ------------ Consolidated loss before income taxes $ (6,547,553) $(32,785,239) ============ ============ Results of Operations - ICC.NET ICC.NET includes the Company's 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: Year Ended July 31, ------------------------------ 2002 2001 ------------ ------------ Revenues: VAN services $ 7,330,664 $ 4,690,919 Services to Triaton 105,626 1,068,500 Professional services 2,152,323 2,521,012 Technology license 3,000,000 -- ------------ ------------ 12,588,613 8,280,431 Expenses: Cost of services 7,936,337 8,685,819 Product development and enhancement 822,314 625,279 Selling and marketing 3,376,400 5,278,202 General and administrative 5,337,983 8,909,115 Non-cash charges 250,008 991,048 Impairment of acquired intangible 1,710,617 16,708,479 ------------ ------------ 19,433,659 41,197,942 ------------ ------------ Operating loss (6,645,046) $(32,917,511) ------------ ------------ Other income, net 292,544 523,320 ------------ ------------ Loss before income taxes $ (6,552,502) $(32,394,191) ============ ============ Revenues - ICC.NET - Revenues from ICC.NET were 89% of our total consolidated revenues for the fiscal year ended July 31, 2002 ("2002"). ICC.NET revenues increased $4,308,000 in 2002 from the fiscal year ended July 31, 2001 ("2001"). VAN revenues increased $2,640,000 in 2002, or 56% from the prior year. ICC.NET revenue included $1,064,000 attributable to mapping and XML services in 2002 as compared to $913,000 in 2001. This increase is the result of a larger customer base and increased volume. Services to Triaton decreased from $1,069,000 under the original agreement in 2001 to $106,000 in 2002. Revenues from professional services consist of consulting and educational services. As a result of the continuing economic slowdown, revenues from professional services decreased $369,000 in 2002 from 2001 for consulting services primarily as a result of a reduced number of consulting projects. During 2002, we recognized technology license revenue of $3,000,000 from Triaton for the license of ICC.NET .. Under the terms of the July 2002 license agreement, we granted Triaton a non-exclusive license to use ICC's electronic data interchange system in its most recent version anywhere in the continent of Europe, Great Britain and Ireland for a five-year term. Triaton has the right to provide and use the ICC.NET service to its customers. Triaton paid us $1,500,000 in July 2002 and an additional $1,500,000 in October 2002 under this license agreement. ICC will not report any additional revenues under the amended agreement with Triaton, except that, at Triaton's request, ICC will provide sales support, customer support and software support on ICC's standard terms and conditions. Cost of services - ICC.NET - Cost of services relating to ICC.NET was 63% of revenues derived from the service in 2002, compared to 105% of revenues derived from the service in 2001. These costs consist primarily of salaries and employee benefits, data lines, consultants, travel related expenses, amortization and off-site facilities. ICC.NET cost of services included $1,683,000 attributable to mapping and XML services in 2002 as compared to $1,905,000 in 2001. Cost of services decreased $750,000 in 2002 from the prior year. We reduced our cost of services personnel to 41 at the end of 2002 from 62 at the end of 2001 and as a result we were able to reduce salaries and employee benefits by $679,000. The reduction in the number of employees did not affect the quality or reliability of our service. Amortization expense decreased $472,000 from the prior year. As required by FAS 142, we reclassified the workforce intangible from other intangible assets to goodwill and as a result, no such amortization charge was incurred in 2002. In addition, facility-related costs and computer equipment rentals decreased $170,000 in 2002 compared to the prior year. Connectivity fees are those costs that we incur to transmit data electronically. These fees include charges from other VANs and charges from Internet service providers. Total connectivity fees increased $370,000 in 2002. The increase in connectivity fees was primarily due to additional fees incurred to offer our customers and their trading partners alternate connectivity as a result of GXS and Sterling disconnecting our service from their networks. In addition, amortization expense relating to mapping technology increased $239,000 in 2002. This was primarily due to the acquisition of RTCI. Because the acquisition took place at the beginning of the second quarter of 2001, only nine months of mapping technology amortization was recognized in 2001 compared to twelve months of amortization recognized in 2002. We anticipate that our ICC.NET cost of services will continue to decline as a percentage of revenues in future periods due to increased utilization of our existing infrastructure as we expect the use of our ICC.NET service to increase. Product development and enhancement - ICC.NET - Product development and enhancement costs relating to ICC.NET consist primarily of salaries and employee benefits. The increase of $197,000 in 2002 from 2001 was primarily caused by an increase in salaries and employee benefits of $317,000 partially offset by reductions in facility-related costs of $72,000, travel expenses which were reduced $22,000 and computer equipment rental costs which were reduced $27,000. These reductions were the result of our cost reduction measures. Selling and marketing - ICC.NET - Selling and marketing expenses relating to ICC.NET consist primarily of salaries and employee benefits, advertising, trade shows, travel-related costs and amortization. Selling and marketing expenses related to our ICC.NET were reduced $1,902,000 in 2002 from 2001. Salaries and employee benefits related to ICC.NET decreased $723,000, primarily due to the elimination of our telesales force. Consulting and professional fees were reduced $275,000, advertising and trade show expenses were reduced $233,000, rent and facility-related costs were reduced $157,000 and travel-related costs were reduced $141,000--all as a result of our cost reduction measures. In addition, as part of our cost reduction measures, our professional service reporting unit reduced travel-related expenses, tradeshow fees, advertising expenses and office expenses by $272,000 in 2002 compared to the prior year. Amortization expense for the acquired customer list was no longer recognized during 2002 as an impairment charge for the full carrying value of this asset was recognized in the fourth quarter of 2001. This resulted in a decrease of $61,000 in amortization expense in 2002 from 2001. General and administrative - ICC.NET - General and administrative expenses supporting ICC.NET consist primarily of salaries and employee benefits, rent, depreciation, telephone, insurance, amortization and consulting and professional fees. General and administrative expenses supporting ICC.NET decreased $3,571,000 in 2002 from the prior year. Salaries and related employee benefits decreased $1,474,000 in 2002 due to a reduction in workforce. Amortization and depreciation decreased $1,005,000, primarily as a result of the Company's implementation of SFAS No. 142, effective August 1, 2001, which requires goodwill to be tested for impairment on a periodic basis and no longer permits amortization of goodwill. Consulting and professional fees decreased $643,000 in 2002 primarily as a result of the termination of a consulting contract with a former officer of the Company that was recognized in 2001. Severance payments of $448,000, primarily due to the termination of an officer, were included in 2001. In addition, recruiting fees decreased $137,000. These decreases were offset by a lease abandonment charge of $193,000 in 2002. Non-cash charges - ICC.NET - During 2002, the non-employee members of our Board of Directors received class A common stock with a value of $60,000 as compensation for their services. No such compensation was paid in 2001. In March 2000, ICC granted an option to purchase 100,000 shares of class A common stock pursuant to a consulting agreement with a former executive officer and board member of ICC. Non-cash consulting charges for this stock option amounted to $450,000 in 2001. No such charges were incurred in 2002. Non-cash charges in 2002 consisted of $190,000 of stock-based compensation expenses related to 172,907 unvested restricted shares issued to RTCI employees in connection with our acquisition of RTCI. The value of the restricted shares was amortized from the date of acquisition through January 1, 2002. During 2001, our professional service reporting unit recognized $541,000 of stock based compensation expense related to these restricted shares. Other income, net - ICC.NET - Other income supporting ICC.NET decreased $231,000 in 2002 from the prior year. Interest and investment income decreased $364,000 in 2002 compared to 2001 as the result of lower average cash balances and interest rates compared to the prior year. This was partially offset by other non-operating income of $208,000 during 2002. This includes a legal settlement from a competitor of $63,000 and the favorable settlement of an acquisition liability of $145,000. No such settlements were recorded in 2001. Impairment of Acquired Intangibles -ICC.NET - During 2001, our professional services reporting unit recorded an impairment charge of $16,708,000 related to the intangibles acquired from RTCI. Due to a significant reduction of the workforce in the professional services reporting unit, a steep decline in the value of similar companies, continued operating losses and a significant reduction in forecasted operating profits, management determined that a triggering event related to certain acquired intangible assets of the professional services reporting unit had occurred, namely the assembled workforce, the customer list and goodwill. Projected cash flow analysis related to these assets determined that their value had been impaired. These intangible assets were written down in 2001 to fair value based on the related discounted expected future cash flows from the intangible assets. During 2002 management once again determined that triggering events had occurred related to goodwill. The carrying value of goodwill was reevaluated for impairment and an impairment charge of $1,711,000 was recognized in 2002. Results of Operations - Service Bureau Our service bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides various EDI and UPC (universal product code) services. Our service bureau also licenses EDI software. The following table summarizes operating results for our service bureau: Year Ended July 31, --------------------------- 2002 2001 ----------- ----------- Revenues: Services $ 1,633,183 $ 1,462,088 Expenses: Cost of services 839,217 668,535 Product development and enhancement 154,589 305,750 Selling and marketing 123,100 105,382 General and administrative 511,328 773,469 ----------- ----------- 1,628,234 1,853,136 ----------- ----------- Operating income (loss) 4,949 (391,048) ----------- ----------- Other income, net -- -- ----------- ----------- Income (loss) before income taxes $ 4,949 $ (391,048) =========== =========== Revenues - Service Bureau - Revenues of our service bureau were 11% of our consolidated revenues for 2002. The service bureau's revenues were primarily generated from services performed, customer support and licensing fees. The increase in revenues of $171,000 in 2002 as compared to 2001 was primarily the result of an increased demand for barcode label printing from existing customers. Cost of services - Service Bureau - Cost of services relating to our service bureau was 51% of revenues of the service bureau in 2002, compared to 46% of revenues in 2001. These costs consist primarily of salaries and employee benefits, data lines, rent and consultants. Salary and benefits increased by $112,000 in 2002 from 2001, primarily as a result of an increase in staff. Facilities related costs increased $29,000 and consulting expenses increased $10,000 from the prior year. Product development and enhancement - Service Bureau - Product development and enhancement costs relating to our service bureau consist primarily of salaries and employee benefits and rent. Product development and enhancement costs incurred by our service bureau decreased $151,000 in 2002 from 2001. The decrease was primarily attributable to capitalized labor costs for newly developed software in the amount of $92,000. Consulting fees were also reduced by $52,000. Selling and marketing - Service Bureau - Selling and marketing expenses relating to our service bureau consist primarily of salaries and employee benefits and rent, which increased $18,000 in 2002. General and administrative - Service Bureau - General and administrative expenses supporting our service bureau consist primarily of salaries and employee benefits, depreciation, amortization, rent, telephone and office expenses. Amortization decreased $241,000 in 2002 as compared to 2001, primarily as a result of the Company's implementation of SFAS No. 142, effective August 1, 2001, which requires goodwill to be tested for impairment on a periodic basis and no longer permits the amortization of goodwill. EX-99 5 kl08069_ex99-3.txt EXHIBIT 99.3 FINANCIAL STATEMENTS & SUPPLEMENTARY Exhibit 99.3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INTERNET COMMERCE CORPORATION Index to Consolidated Financial Statements and Schedule Page ---- Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders' Equity and Other Comprehensive Income F-5 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-8 Schedule II. Valuation and Qualifying Accounts F-32 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Internet Commerce Corporation New York, NY We have audited the accompanying consolidated balance sheets of Internet Commerce Corporation (the "Company") as of July 31, 2003 and 2002, and the related consolidated statements of operations, changes in stockholders' equity and other comprehensive income, and cash flows for each of the three years in the period ended July 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Internet Commerce Corporation as of July 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the Consolidated Financial Statements, the Company adopted the provision of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets," effective August 1, 2001. /s/ Deloitte & Touche LLP - ----------------------------- New York, New York October 27, 2003 (June 18, 2004 as to Note 14) F-2 INTERNET COMMERCE CORPORATION Consolidated Balance Sheets
July 31, ------------------------------ 2003 2002 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 2,283,339 $ 2,087,915 Marketable securities 91,941 130,691 Accounts receivable, net of allowance for doubtful accounts of $220,281 and $241,684, respectively 1,732,890 2,976,472 Prepaid expenses and other current assets 295,474 478,070 ------------ ------------ Total current assets 4,403,644 5,673,148 Restricted cash 128,607 157,103 Property and equipment, net 556,812 1,151,864 Software development costs, net 127,841 326,588 Goodwill 1,211,925 2,194,067 Other intangible assets, net 2,151,000 3,107,000 Other assets 18,507 15,166 ------------ ------------ Total assets $ 8,598,336 $ 12,624,936 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 918,337 $ 862,090 Accrued expenses 1,178,880 1,407,848 Accrued dividends - preferred stock 231,726 231,695 Deferred revenue 96,952 164,451 Capital lease obligation 148,189 181,870 Other current liabilities 129,985 203,454 ------------ ------------ Total current liabilities 2,704,069 3,051,408 Capital lease obligation - less current portion 46,120 192,298 Other non-current liabilities 8,011 -- ------------ ------------ Total liabilities 2,758,200 3,243,706 Commitments and contingencies Stockholders' Equity: Preferred stock - 5,000,000 shares authorized, including 10,000 shares of series A, 10,000 shares of series C, 250 shares of series D and 175 shares of series S: Series A preferred stock - par value $.01 per share, none issued and outstanding -- -- Series C preferred stock - par value $.01 per share, 44.76 votes per share; 10,000 shares issued and outstanding (liquidation value of $10,231,726) 100 100 Series D preferred stock - par value $.01 per share, 769 votes per share; 250 shares issued and outstanding (liquidation value of $250,000) in 2003 3 -- Common stock: Class A - par value $.01 per share, 40,000,000 shares authorized, one vote per share; 13,797,566 and 11,679,964 shares issued and outstanding, respectively 137,976 116,801 Class B - par value $.01 per share, 2,000,000 shares authorized, six votes per share; none issued and outstanding -- -- Additional paid-in capital 87,489,583 85,401,277 Accumulated deficit (81,813,191) (75,808,873) Accumulated other comprehensive income (loss) 25,665 (328,075) ------------ ------------ Total stockholders' equity 5,840,136 9,381,230 ------------ ------------ Total liabilities and stockholders' equity $ $8,598,336 $ 12,624,936 ============ ============
See notes to consolidated financial statements. F-3 INTERNET COMMERCE CORPORATION Consolidated Statements of Operations
Year Ended July 31, -------------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Revenues: Services $ 12,083,314 $ 11,221,796 $ 9,742,518 Technology License -- 3,000,000 -- ------------ ------------ ------------ Total revenues 12,083,314 14,221,796 9,742,518 ------------ ------------ ------------ Expenses: Cost of services (excluding non-cash compensation of $118, 762 and $325,834 in 2002 and 2001, respectively 7,621,823 8,775,553 9,354,354 Impairment of software inventory 248,077 -- -- Impairment of capitalized software 148,479 -- -- Product development and enhancement 1,110,941 976,903 931,028 Selling and marketing (excluding non-cash compensation of $29,690 and $94,294, in 2002 and 2001, respectively) 3,034,726 3,499,500 5,383,583 General and administrative (excluding non-cash compensation of $139,415, $101,556 and $570,920 in 2003, 2002 and 2001, respectively) 4,438,630 5,849,312 9,682,586 Non-cash charges for stock-based compensation, services and legal settlements 139,415 250,008 991,048 Impairment of goodwill and acquired intangibles 982,142 1,710,617 16,708,479 ------------ ------------ ------------ 17,724,233 21,061,893 43,051,078 ------------ ------------ ------------ Operating loss (5,640,919) (6,840,097) (33,308,560) ------------ ------------ ------------ Other income and (expense): Interest and investment income 12,923 27,154 428,432 Investment gain (loss) (19,072) 121,022 116,599 Interest expense (39,326) (69,385) (73,569) Impairment of marketable securities (317,924) -- -- Other income -- 213,753 51,859 ------------ ------------ ------------ (363,399) 292,544 523,321 ------------ ------------ ------------ Loss before income taxes (6,004,318) (6,547,553) (32,785,239) Income tax benefit -- -- 1,929,887 ------------ ------------ ------------ Net loss (6,004,318) (6,547,553) (30,855,352) Dividends on preferred stock (400,031) (364,987) (420,309) Beneficial conversation feature relating to series D preferred stock (106,730) -- -- Beneficial conversion feature for repricing and issuance of warrants in warrant exchange offer -- (461,084) -- ------------ ------------ ------------ Loss attributable to common stockholders $ (6,511,079) $ (7,373,624) $(31,275,661) ============ ============ ============ Basic and diluted loss per common share $ (0.53) $ (0.68) $ (3.57) ============ ============ ============ Weighted average number of common shares outstanding - basic and diluted $ 12,303,367 $ 10,867,447 $ 8,767,752 ============ ============ ============
See notes to consolidated financial statements. F-4 INTERNET COMMERCE CORPORATION Consolidated Statements of Changes in Stockholders' Equity and Other Comprehensive Income
Preferred Stock Common Stock -------------------------------------------------------------------------------------------- Series A Series C Series D Class A Class B -------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount -------------------------------------------------------------------------------------------- Balance - August 1, 2000 668 $ 7 10,000 $ 100 - $ - 6,388,445 $63,884 2,574 $ 26 Conversion of series A preferred stock (443) (5) 135,584 1,356 Exchange of common stock 644 7 (644) (7) Proceeds from exercise of employee stock options 169,280 1,693 Stock options issued for services Common stock issued for acquisitions 2,957,484 29,575 Options and warrants issued for acquisitions Unearned restricted stock issued to RTCI employees Amortization of deferred compensation for restricted stock Preferred stock dividends Common stock issued as payment for dividends on preferred stock 118,743 1,187 Net loss Unrealized loss - marketable securities Total comprehensive loss ------------------------------------------------------------------------------------------------- Balance - July 31, 2001 225 $ 2 10,000 $ 100 - $ - 9,770,180 $97,702 1,930 $ 19 Conversion of series A preferred stock (225) (2) 73,688 737 Proceeds from exercise of employee stock options 69,452 695 Forfeiture of cash related to options issued in acquisition Conversion of Class B common stock 1,930 19 (1,930) (19) Proceeds from exercise of warrants 23,910 239 Proceeds from warrant exchange offer 263,715 2,638 Proceeds from private placement of common stock and warrants 1,159,716 11,597 Common stock issued to directors 22,218 222 Forfeiture and cancellation of a former officer's restricted common stock (23,684) (237) Common stock issued to investment advisors 200,000 2,000 Common stock issued to consultants 20,000 200 Common stock issued as payment for dividends on preferred stock 98,839 989 Accrued dividends on preferred stock Amortization of deferred compensation for restricted stock Net loss Unrealized loss - marketable securities Total comprehensive loss --------------------------------------------------------------------------------------------- Balance - July 31, 2002 - $ - 10,000 $ 100 - $ - 11,679,964 $116,801 - $ - INTERNET COMMERCE CORPORATION Consolidated Statements of Changes in Stockholders' Equity and Other Comprehensive Income (Cont'd) Accumulated -------------------------------- Deferred Additional Other Compensation Total Paid-In Comprehensive Restricted Stockholders' Capital Deficit Loss Stock Equity --------------------------------------------------------------------------------- Balance - August 1, 2000 $58,432,187 $(38,405,968) $ - $ - $20,090,236 Conversion of series A preferred stock (1,351) - Exchange of common stock - Proceeds from exercise of employee stock options 371,986 373,679 Stock options issued for services 450,110 450,110 Common stock issued for acquisitions 19,828,610 19,858,185 Options and warrants issued for acquisitions 1,667,323 1,667,323 Unearned restricted stock issued to RTCI employees (730,957) (730,957) Amortization of deferred compensation for restricted stock 540,938 540,938 Preferred stock dividends (420,309) (420,309) Common stock issued as payment for dividends on preferred stock 421,597 422,784 Net loss (30,855,352) (30,855,352) Unrealized loss - marketable securities (209,728) (209,728) Total comprehensive loss ------------------------------------------------------------------------------------ Balance - July 31, 2001 $80,750,153 $(69,261,320) $(209,728) $(190,019) $11,186,909 Conversion of series A preferred stock (735) - Proceeds from exercise of employee stock options 223,187 223,882 Forfeiture of cash related to options issued in acquisition 106,979 106,979 Conversion of Class B common stock - Proceeds from exercise of warrants 59,536 59,775 Proceeds from warrant exchange offer 636,936 639,574 Proceeds from private placement of common stock and warrants 3,095,671 3,107,268 Common stock issued to directors 59,766 59,988 Forfeiture and cancellation of a former officer's restricted common stock (144,000) (144,237) Common stock issued to investment advisors 502,560 504,560 Common stock issued to consultants 77,200 77,400 Common stock issued as payment for dividends on preferred stock 399,011 400,000 Accrued dividends on preferred stock (364,987) (364,987) Amortization of deferred compensation for restricted stock 190,019 190,019 Net loss (6,547,553) (6,547,553) Unrealized loss - marketable securities (118,347) (118,347) ---------- Total comprehensive loss (6,665,900) ------------------------------------------------------------------------------------ Balance - July 31, 2002 $85,401,277 $(75,808,873) $(328,075) $ - $9,381,230
See notes to consolidated financial statements. F-5 INTERNET COMMERCE CORPORATION Consolidated Statements of Changes in Stockholders' Equity and Other Comprehensive Income
Preferred Stock Common Stock - ---------------------------------------------------------------------------------------------------------------------------------- Series A Series C Series D Class A Class B - ----------------------------------------------------------------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount - ---------------------------------------------------------------------------------------------------------------------------------- Balance - July 31, 2002 - $ - 10,000 $ 100 - $ - 11,679,964 $ 116,801 - $ - Proceeds from private placement of Series D preferred stock, common stock and warrants 250 3 1,682,683 16,827 Common stock and warrants issued for services 48,076 480 Common stock issued to directors 71,703 716 Proceeds from exercise of employee stock options 12,797 128 Accrued dividends on preferred stock Common stock issued as payment for dividends on preferred stock 302,343 3,024 Forfeiture of cash related to options issued in acquisition Stock options issued for consulting services Warrants issued in connection with accounts receivable financing agreement Net loss Reclassification of net unrealized loss on sale Unrealized gain on marketable securities Impairment of marketable securities Total comprehensive loss Balance - July 31, 2003 - $ - 10,000 $ 100 250 $ 3 13,797,566 137,976 - $ - ==================================================================================================================================== F-6 INTERNET COMMERCE CORPORATION Consolidated Statements of Changes in Stockholders' Equity and Other Comprehensive Income (Cont'd) Accumulated ---------------------------------- Deferred Additional Other Compensation Total Paid-In Comprehensive Restricted Stockholders' Capital Deficit Loss Stock Equity --------------------------------------------------------------------------------- Balance - July 31, 2002 $85,401,277 $(75,808,873) $ (328,075) $ - $9,381,230 Proceeds from private placement of Series D preferred stock, common stock and warrants 1,830,734 1,847,564 Common stock and warrants issued for services 49,520 50,000 Common stock issued to directors 83,950 84,666 Proceeds from exercise of employee stock options 3,258 3,386 Accrued dividends on preferred stock (400,031) (400,031) Common stock issued as payment for dividends on preferred stock 396,977 400,001 Forfeiture of cash related to options issued in acquisition 47,511 47,511 Stock options issued for consulting services 42,248 42,248 Warrants issued in connection with accounts receivable financing agreement 34,139 34,139 Net loss (6,004,318) (6,004,318) Reclassification of net unrealized loss on sale 19,072 19,072 Unrealized gain on marketable securities 16,744 16,744 Impairment of marketable securities 317,924 317,924 ---------- Total comprehensive loss (5,650,578) Balance - July 31, 2003 $87,489,583 $(81,813,191) $ 25,665 $ - $5,840,136 =============================================================================
See notes to consolidated financial statements. F-6 INTERNET COMMERCE CORPORATION Consolidated Statements of Cash Flows
Year Ended July 31, ---------------------------------------------------- 2003 2002 2001 ------------ ------------ ------------ Cash flows from operating activities: Net loss $ (6,004,318) $ (6,547,553) $(30,855,352) Adjustments to reconcile net loss to net cash used in operating activities: Impairment of goodwill and intangible assets 982,142 1,710,617 16,708,479 Impairment of software inventory 248,077 -- -- Impairment of capitalized software 148,479 -- -- Impairment of marketable securities 317,924 -- -- Depreciation and amortization 1,678,166 2,132,467 3,693,664 Bad debt expense 43,501 223,107 261,640 Non-cash interest expense 5,705 -- -- Loss on disposal of fixed assets -- 10,453 6,370 Realized loss (gain) on sale of marketable securities 19,072 (121,020) (116,599) Non-cash charges for equity instruments issued for compensation, services, change of control and legal settlement 139,415 250,008 991,048 Deferred taxes -- -- (1,929,887) Changes in: Accounts receivable 1,200,081 (1,611,337) (485,326) Prepaid expenses and other assets (40,388) (35,664) 253,854 Accounts payable 45,413 148,420 (300,042) Accrued expenses (350,961) (285,000) 497,875 Deferred revenue (67,499) (142,314) (201,990) Other liabilities (65,458) (24,735) 74,989 Net cash in operating activities (1,700,649) (4,292,551) (11,401,277) Cash flows from investing activities: Payment for acquisitions, net of cash acquired -- -- (22,055) Capitalization of software development costs (16,333) (175,034) (188,175) Purchases of property and equipment (60,513) (49,535) (641,671) Proceeds from sales of property and equipment -- 31,252 -- Proceeds from sales of marketable securities 55,494 537,535 270,720 Proceeds from maturity of certificates of deposits 28,496 119,532 247,228 ------------ ------------ ------------ Net cash provided by (used in) investing activities 7,144 463,750 (333,953) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of preferred stock and warrants, net 250,000 -- -- Proceeds from issuance of common stock and warrants, net 1,815,402 3,107,269 -- Proceeds from exercise of warrants -- 699,348 -- Proceeds from exercise of employee stock options 3,386 223,882 373,678 Payment of dividends -- (6,583) -- Payments of capital lease obligations (179,859) (330,687) (418,290) ------------ ------------ ------------ Net cash provided by (used in) financing activities 1,888,929 3,693,229 (44,612) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 195,424 (135,572) (11,779,842) Cash and cash equivalents, beginning of period 2,087,915 2,223,487 14,003,329 ------------ ------------ ------------ Cash and cash equivalents, end of period 2,283,339 2,087,915 2,223,487 ============ ============ ============ Supplemental disclosure of cash flow information: Cash paid for interest during the period $ 33,621 $ 69,385 $ 73,569
See notes to consolidated financial statements F-7 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 1. ORGANIZATION AND NATURE OF BUSINESS Internet Commerce Corporation ("ICC" or the "Company") provides Internet-based services for the e-commerce business-to-business communication services market. ICC.NET, our global Internet-based value added network, or VAN, provides supply chain connectivity solutions for electronic data interchange, or EDI, and e-commerce and offers users a vehicle to securely send and receive files of any format and size. The ICC.NET system uses the Internet and proprietary technology to deliver the Company's customers' documents and data files to members of their trading communities, many of which have incompatible systems, by translating the documents and data files into any format required by the receiver. The system can be accessed using a standard web browser or virtually any other communications protocol. Through the acquisition of Intercoastal Data Corporation ("IDC") on August 3, 2000, ICC expanded its capabilities to include an EDI service bureau, which provides EDI services to small and mid-sized companies. IDC's services include the conversion of electronic forms into hard copies and the conversion of hard copies to an EDI format. IDC also provides Universal Product Code ("UPC") services and maintains UPC catalogs for its customers. The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November 6, 2000, provided the Company with the capability to facilitate the development and operation of comprehensive business-to-business electronic commerce solutions. RTCI specializes in electronic commerce solutions involving EDI and EAI (Enterprise Application Integration) by providing mission critical electronic commerce consulting, electronic commerce software, outsourced electronic commerce services and technical resource management As of July 31, 2003, ICC had cash and cash equivalents and marketable securities of approximately $2,375,000. These resources, together with the Company's accounts receivable financing agreement (Note 11) are expected to provide the Company with sufficient liquidity to continue in operation through July 31, 2004. However, if expenses increase more than anticipated, or revenue does not increase as anticipated because of competitive or other reasons, cash resources may not be sufficient and the Company will require additional financing. There can be no assurances that any financing will be available or that the terms will be acceptable to the Company. 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. Revenue recognition: The Company derives revenue from subscriptions to its ICC.NET service, which includes transaction, mailbox and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period, generally three to six months. Usage fees are recognized in the period the services are rendered. The Company also derives revenue through implementation fees, interconnection fees and by providing data mapping services to its customers. Implementation fees are recognized over the life of the subscription period. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. Revenue from data mapping services is recognized when the map has been completed and delivered to the customer. The Company has a limited number of fixed fee data mapping services contracts. Under these arrangements the Company is required to provide a specified number of maps for a fixed fee. Revenue from such arrangements is recognized using the percentage-of-completion method of accounting (see below). F-8 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) The Company also provides a broad range of professional services consisting primarily of EDI and electronic commerce consulting, EDI education and training at seminars throughout the United States. Revenue from EDI and electronic commerce consulting and education and training are recognized when the services are provided. Revenue from fixed fee data mapping and professional service contracts are recognized using the percentage-of-completion method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." The percentage of completion for each contract is determined based on the ratio of direct labor hours incurred to total estimated direct labor hours required to complete the contract. The Company may periodically encounter changes in estimated costs and other factors that may lead to a change in the estimated profitability of a fixed-price contract. In such circumstances, adjustments to cost and profitability estimates are made in the period in which the underlying factors requiring such revisions become known. If such revisions indicate a loss on a contract, the entire loss is recorded at such time. Amounts billed in advance of services being performed are recorded as deferred revenue. Certain fixed-fee contracts may have substantive customer acceptance provisions. The acceptance terms generally include a single review and revision cycle for each deliverable to incorporate the customer's suggested or required modifications. Deliverables are considered accepted upon completion of the review and revision cycle and revenue is recognized upon that acceptance. Service Bureau revenue is comprised of EDI services, including data translation services, purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC services, including UPC number generation, UPC catalog maintenance and UPC label printing. The Service Bureau also derives revenue from software licensing and provides software maintenance and support. Revenue from the EDI services and UPC services is recognized when the services are provided. The Company accounts for its EDI software license sales in accordance with the American Institute of Certified Public Accountants' Statement of Position 97-2, "Software Revenue Recognition," as amended ("SOP 97-2"). Revenue from software licenses is recognized when all of the following conditions are met: (1) a non-cancelable, non-contingent license agreement has been signed; (2) the software product has been delivered; (3) there are no material uncertainties regarding customer acceptance; and (4) collection of the resulting receivable is probable. Revenue from software maintenance and support contracts is recognized ratably over the life of the contract. The Service Bureau's software license revenue was not significant in any of the periods presented. In addition, SOP 97-2 generally requires that revenue from software arrangements involving multiple elements be allocated among each element of the arrangement based on the relative fair values of the elements, such as software licenses, post contract customer support, installation or training. Furthermore, SOP 97-2 requires that revenue be recognized as each element is delivered and the Company has no significant performance obligations remaining. The Company's multiple element arrangements generally consist of a software license and post contract support. The Company allocates the aggregate revenue from multiple element arrangements to each element based on vendor specific objective evidence. The Company has established vendor specific objective evidence for each of the elements as it sells both the software and post contract customer support independent of multiple element agreements. Customers are charged standard prices for the software and post contract customer support and these prices do not vary from customer to customer. If the Company enters into a multiple element agreement where vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until all elements of the arrangement are delivered. Service revenue from maintenance contracts is recognized ratably over the term of the maintenance contract, on a straight-line basis. Other service revenue is recognized at the time the service is performed. F-9 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) Deferred revenue: Deferred revenue is comprised of deferrals for subscription fees, professional services, license fees, deposits for EDI education and training seminars and maintenance associated with contracts for which amounts have been received in advance of services to be performed or prior to the shipment of software. Depreciation and amortization: Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, generally three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful life of the asset. Loss per share of common stock: The Company calculates its loss per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual presentation of "basic" and "diluted" loss per share on the face of the statement of operations. In accordance with SFAS 128, basic loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is calculated by dividing net loss attributable to common stockholders by the weighted average of shares of common stock outstanding and all dilutive potential common shares that were outstanding during the period. The per share effects of potential common shares such as warrants, options and convertible preferred stock have been excluded from the calculation of diluted loss per share, as their effect would be antidilutive in all periods presented. Software development costs: The Company capitalizes software development costs under the provisions of either Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") or Statement of Financial Accounting Standards No. 86, "Computer Software to be Sold, Leased, or Otherwise Marketed" ("SFAS 86"), based on the intended use of the software. The Company capitalizes the costs of acquiring, developing and testing software to meet the Company's internal needs. Under the provisions of SOP 98-1, the Company capitalizes costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and management has authorized further funding for the project which it deems probable will be completed and used to perform the function intended. Capitalized costs include only (1) external direct costs of materials and services consumed in developing or obtaining internal-use software, (2) payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project and (3) interest costs incurred while developing internal-use software. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use. Software development costs are amortized using a straight-line method over a three-year period. Amortization of software development costs for internal use software amounted to $326,598, $273,017 and $237,296 for the years ended July 31, 2003, 2002 and 2001, respectively. Costs associated with the development of software for internal use have been capitalized in the amounts of $52,597 and $108,148 during the fiscal years ended July 31, 2002 and 2001, respectively. No amounts were capitalized in fiscal 2003. F-10 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) The Company capitalizes the costs of computer software to be sold or otherwise marketed in accordance with the provisions of SFAS 86. Costs related to the conceptual formulation and design of software are expensed as product development. Costs incurred subsequent to the establishment of technological feasibility are capitalized. Capitalization of costs ceases when the product is available for general release to customers. Capitalized software costs are amortized over the shorter of three years or the expected life of the product. Amortization of these software development costs amounted to $13,020 during the year ended July 31, 2003. The amounts amortized during 2002 were insignificant and no amounts were amortized in fiscal 2001 Development costs in the amount of $16,333, $122,437 and $80,027 were capitalized under the provisions of SFAS 86 during the fiscal years ended July 31, 2003, 2002 and 2001, respectively. During 2003, the Company recorded impairment charges of approximately $149,000 for previously capitalized software development costs related to in-process software development projects of its Service Bureau. The Company decided not to complete these projects due to unfavorable market conditions now and in the foreseeable future. Stock-based compensation: The Company accounts for stock-based compensation with its employees using the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees: and complies with the disclosure provisions of SFAS 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes a fair-value method of accounting for stock-based compensation plans. Stock-based awards to non-employees are accounted for at fair value in accordance with the provisions of SFAS 123. Had the compensation cost for the Company's stock options grants to employees been determined based on the fair value at the grant dates of awards consistent with the fair value method of SFAS 123, the Company's net loss attributable to common stockholders and basic and diluted loss per common share would have changed to the pro forma amounts indicated below: -------------------------------------------- 2003 2002 2001 -------------------------------------------- Net loss, as reported $ (6,004,318) $ (6,547,553) $(30,855,352) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (5,153,242) (9,755,547) (14,959,286) -------------------------------------------- Pro forma net loss $(11,157,560) $(16,303,100) $(45,814,638) ============================================ Basic and diluted loss per common share: As reported $ (0.53) $ (0.68) $ (3.57) Pro forma $ (0.91) $ (1.58) $ (5.23) Income taxes: Deferred income taxes are determined by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided based on the weight of available evidence, if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized. Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. F-11 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant accounting estimates used in the preparation of the Company's consolidated financial statements include the fair value of equity securities underlying stock based compensation, the realizability of deferred tax assets, the carrying value of goodwill, intangible assets and long-lived assets and depreciation and amortization. Impairment of long-lived assets: Long-lived assets of the Company, including amortizable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management also reevaluates the periods of amortization of long-lived assets to determine whether events and circumstances warrant revised estimates of useful lives. When such events or changes in circumstances occur, the Company tests for impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, the Company would recognize an impairment loss. The amount of the impairment loss will be determined by comparing the carrying value of the long-lived asset to the present value of the net future operating cash flows to be generated by the asset (See Note 3). Goodwill: Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Effective August 1, 2001 the Company adopted SFAS 141 "Business Combinations" ("SFAS 141") and SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that all business combinations subsequent to June 30, 2001, be accounted for using the purchase method of accounting. SFAS 141 also requires that the fair value of an assembled workforce acquired be included in the amount initially recorded as goodwill. Upon adopting the provisions of SFAS 141, the Company reclassified $1,710,617 into goodwill which was initially recorded as other intangible assets related to the value of the assembled workforce of RTCI. SFAS 142 requires that goodwill no longer be amortized; instead, goodwill is to be evaluated for impairment at least annually and whenever events or circumstances indicate impairment may have occurred. The assessment requires the comparison of the fair value of each of the Company's reporting units to the carrying value of its respective net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, the Company must perform a second test to measure the amount of impairment. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company allocates the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized by the Company in an amount equal to that excess (see Note 3). F-12 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) Marketable securities: Marketable securities are classified as available-for-sale securities. Unrealized holding gains and losses are recorded as other comprehensive income, net of any related tax effect. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income (See Note 5). Recent Accounting Pronouncements: In July 2001, the Financial Accounting Standard Board ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over the useful life of the asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Management adopted this standard on August 1, 2002. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 144 retains the requirements of SFAS 121 to recognize an impairment loss if the carrying value of a long-lived asset is not recoverable from its estimated undiscounted cash flows and to measure an impairment loss as the difference between the carrying value and fair value of the asset, but it establishes new standards for long-lived assets to be disposed of. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 on August 1, 2002. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that costs associated with an exit or disposal plan be recognized when incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted SFAS 146 on January 1, 2003. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others" which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of Interpretation No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company has provided information regarding commitments and contingencies relating to guarantees in Note 13. The adoption of this standard did not have a significant impact on the consolidated financial position or results of operations. F-13 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 2. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONT'D) In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. The EITF will be effective for revenue arrangements entered into in fiscal years and interim periods beginning after June 15, 2003. Management believes that the adoption of this consensus will not have a significant impact on the Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" ( "SFAS 148"). SFAS 148 amends SFAS 123, "Accounting for Stock-Based Compensation" to provide alternative methods to account for the transition from the intrinsic value method of recognition of stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" to the fair value recognition provisions under SFAS 123. SFAS 148 provides two additional methods of transition and will no longer permit the SFAS 123 prospective method to be used for fiscal years beginning after December 15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the pro-forma effects had the fair value recognition provisions of SFAS 123 been used for all periods presented. The adoption of SFAS 148 did not have a significant impact on the Company's consolidated financial position and results of operations. In January 2003, the FASB issued Interpretation No. 46 "Consolidation of Variable Interest Entities". Interpretation No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company adopted Interpretation No. 46 on January 31, 2003. The adoption of this standard did not have a significant impact on the Company's consolidated financial position or results of operations. In April 2003, the FASB issued SFAS 149 "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies accounting for derivative instruments, and for hedging activities under SFAS 133. Specifically, SFAS 149 requires that contracts with comparable characteristics be accounted for similarly. Additionally, SFAS 149 clarifies the circumstances in which a contract with an initial net investment meets the characteristics of a derivative and when a derivative contains a financing component that requires special reporting in the statement of cash flows. This Statement is generally effective for contracts entered into or modified after June 30, 2003 and did not have a significant impact on the Company's consolidated financial position or results of operations. In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement will become effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. For financial instruments created before the issuance date of this Statement and still existing at the beginning of the interim period of adoption, transition shall be achieved by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attribute required by this Statement. The adoption of this Statement is not expected to have a material impact on the Company's consolidated financial position or results of operations. F-14 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS On August 1, 2001, the Company adopted the provisions of SFAS 141, "Business Combinations" ("SFAS 141") and SFAS 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the fair value of an assembled workforce acquired be included in the amount initially recorded as goodwill. Upon adoption of SFAS 141, the Company reclassified $1,710,617 into goodwill which was initially recorded as other intangible assets related to the value of the assembled workforce of RTCI as required by this statement. SFAS 142 requires that intangible assets with indefinite useful lives no longer be amortized, but rather be tested at least annually for impairment. The Company evaluated goodwill for impairment at August 1, 2001 and determined no impairment existed at that date. The following table presents the net loss and loss per basic and diluted share that would have been recognized in all periods presented exclusive of goodwill amortization expense recognized in those periods.
Year Ended July 31, 2003 2002 2001 ------------------------------------------------- Reported net loss $ (6,004,318) $ (6,547,553) $ (30,855,352) Add: Goodwill amortization -- -- 1,283,639 ------------------------------------------------ Adjusted net loss $ (6,004,318) $ (6,547,553) $ (29,571,713) ================================================ Reported basic and diluted loss per common share $ (0.53) $ (0.68) $ (3.57) Add: Goodwill amortization -- -- 0.15 ------------------------------------------------ Adjusted basic and diluted loss per share $ (0.53) $ (0.68) $ (3.40) ================================================
At July 31, 2003 and 2002, other intangible assets included the proprietary data mapping technology acquired in the acquisition of RTCI. The gross carrying value of the mapping technology was $4,780,000 at July 31, 2003 and 2002, respectively. Accumulated amortization relating to mapping technology was $2,629,000 and $1,673,000 at July 31, 2003 and 2002, respectively. The data mapping technology is being amortized over five years and amortization expense has been recorded in cost of services. The Company did not have any indefinite lived intangible assets that were not subject to amortization as of July 31, 2003 and 2002. The aggregate amortization expense for other intangible assets was $956,000 for the each of the years ended July 31, 2003 and 2002. At July 31, 2003, estimated amortization expense for other intangible assets for the remaining life of those assets are as follows: Year Estimated Amortization Expense ---- ------------------------------ 2004 $956,000 2005 $956,000 2006 $239,000 F-15 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS (CONT'D) The changes in the carrying amount of goodwill by reporting unit for the years ended July 31, 2002 and 2003, are as follows:
Professional ICC.NET Service Bureau Services Total -------------------------------------------------------------------- Balance at August 1, 2001 $ 26,132 $ 2,167,935 $ -- $ 2,194,067 Reclassification of workforce intangibles -- -- 1,710,617 1,710,617 Impairment loss -- -- (1,710,617) (1,710,617) ------------------------------------------------------------------- Balance at July 31, 2002 $ 26,132 $ 2,167,935 $ -- $ 2,194,067 Impairment loss -- (982,142) -- (982,142) ------------------------------------------------------------------- Balance at July 31, 2003 $ 26,132 $ 1,185,793 $ -- $ 1,211,925
The goodwill of all reporting units is tested annually for impairment as of August 1. During the fourth quarter of fiscal 2003 the goodwill of the Service Bureau was tested for impairment due to a significant decline in revenues and operating income resulting primarily from the bankruptcy of its largest customer. An impairment loss of $982,142 was recognized as a result of this evaluation. The fair value of the Service Bureau reporting unit was estimated using the net present value of expected future cash flows. Due to a continued decline in revenue throughout the course of fiscal 2002, continued operating losses and a significant reduction in forecasted future operating profits, the Professional Services reporting unit was tested for impairment during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was recognized as a result of this evaluation. The fair value of the Professional Services reporting unit was estimated using the net present value of expected future cash flows. Prior to the Company's adoption of SFAS 142, on August 1, 2001, it was required to evaluate its long lived assets and identifiable intangibles for impairment pursuant to FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 121 requires long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on expected undiscounted cash flows and other relevant factors attributable to that asset. During fiscal 2001, due to a significant reduction of the workforce of the Professional Services reporting unit, a steep decline in the value of companies similar to it, continued operating losses and a significant reduction in the forecasted future operating profits, management determined that triggering events had occurred related to certain acquired intangible assets of the Professional Services reporting unit, namely the assembled workforce, the customer list and goodwill. The projected cash flow analysis related to those assets determined that the assets had been impaired. These intangible assets were written down to fair value based on the related discounted expected future cash flows from the intangible assets over their remaining estimated useful lives. During the year ended July 31, 2001, the Company recorded an impairment charge of $16,708,479 related to the intangibles acquired from RTCI. 4. IMPAIRMENT OF SOFTWARE INVENTORY In January 2003, the Company recorded an impairment charge of approximately $248,000 for software inventory held by the Professional Services reporting unit based on historical and projected sales, which indicated that its net carrying value was not recoverable. The Company had previously recorded a write down of $100,000 for software inventory in July 2002. Such software inventory was classified as other current assets in the consolidated balance sheet. The Company's carrying value of inventory at July 31, 2003 is not significant. F-16 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 5. MARKETABLE SECURITIES The following is a summary of available for sale securities:
Gross Unrealized ------------------------- Cost Gains Losses Fair Value --------- --------- --------- ---------- Equity investments - July 31, 2003 $ 66,275 $ 26,874 $ (1,209) $ 91,941 ========= ========= ========= ========= Equity investments - July 31, 2002 $ 458,766 $ 9,601 $(337,676) $ 130,691 ========= ========= ========= =========
Equity investments which consist of investments in publicly traded companies for which the Company does not have the ability to exercise significant influence, are classified as available-for-sale and stated at fair value based on quoted market rates. Adjustments to the fair value of available-for-sale investments are recorded as a component of other comprehensive income, net of any related tax effect. In January 2003, the Company recorded an impairment charge of approximately $318,000 to write down available-for-sale marketable securities due to an other than temporary decline in value. 6. PROPERTY AND EQUIPMENT Property and equipment consists of the following: Estimated July 31, ----------------------------------------- Useful Lives (Years) 2003 2002 ------------- Computers and office equipment 3 $ 3,071,911 $ 3,052,774 Furniture and fixtures 7 307,620 372,074 Purchased software 3 822,006 814,189 Leasehold improvements Various 189,688 158,556 ----------- ----------- 4,391,225 4,397,593 Less accumulated depreciation and amortization (3,834,413) (3,245,729) ------------ ----------- $ 556,812 $ 1,151,864 ============ =========== Depreciation and amortization expense related to property and equipment, including property and equipment acquired under capital leases, was approximately $589,000, $898,000 and $887,000 for the years ended July 31, 2003, 2002 and 2001, respectively. At July 31, 2003, property and equipment acquired under capital leases had a cost basis of $519,930. 7. ACCRUED EXPENSES Accrued expenses consist of the following: July 31, ------------------------------- 2003 2002 ------------- ------------ Employee compensation and severance $ 230,696 $ 405,701 Vacation 342,886 364,170 Professional fees 287,004 135,293 Lease abandonment 165,536 192,749 Other 152,758 309,935 ------------- ------------ $ 1,178,880 1,407,848 ============= ============ F-17 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 8. JOINT SERVICES AGREEMENT AND TECHNOLOGY LICENSE In July 2002, the Company and Triaton GmbH ("Triaton") terminated a joint services agreement between the parties executed in July 2000, and amended in July of 2001. The Company and Triaton entered into a new agreement that provides Triaton a non-exclusive five-year license to use the Company's electronic data interchange system in Europe. The agreement also provides that Triaton may purchase sales support and customer support services based on ICC's standard terms and conditions. Triaton may also purchase software maintenance and support on an annual basis. The sale price for the license was $3,000,000 which was recognized as revenue in the period ended July 31, 2002. Under the terms of the agreement, Triaton paid $1,500,000 in July 2002 and $1,500,000 in October 2002. 9. STOCKHOLDERS' EQUITY 2003 Private Placement of Common Stock and Preferred Stock: During April and May 2003, the company completed a private placement of common stock, convertible preferred stock and warrants to purchase shares of common stock (the "2003 Private Placement") for aggregate gross proceeds of approximately $2,085,000. In the 2003 Private Placement the Company sold 1,682, 683 shares of class A common stock and warrants to purchase 1,528,838 of class A common stock providing gross proceeds of approximately $1,835,000 and 250 shares of series D convertible redeemable preferred stock ("series D preferred) and warrants to purchase 153,845 shares of class A common stock for $250,000. All warrants are immediately exercisable and have an exercise price of $1.47 per share. The warrants are exercisable until the fifth anniversary of the date of issuance. In addition, the warrants are redeemable at the Company's option, if the closing bid price of the Company's class A common exceeds 200% of the exercise price of the warrants for 30 consecutive trading days. The redemption price is $0.10 per share for each share issuable under the warrants. The 250 shares of series D preferred are convertible into 192,307 shares of class A common stock. The allocation of the proceeds from the sale of the series D preferred between the fair value of the series D and the fair value of the detachable warrants resulted in a beneficial conversion feature in the amount of $106,730. The discount was immediately accreted and treated as a deemed dividend to the holder of the series D preferred as all of the series D preferred stock was eligible for conversion upon issuance. In connection with the 2003 Private Placement, the Company incurred fees of $325,750, of which $237,938 was payable in cash and $87,802 was paid by issuing warrants to purchase 110,680 shares of class A common stock. These warrants have substantially the same terms as the warrants issued in the 2003 Private Placement. In connection with the 2003 Private Placement, the Company issued 48,076 shares of class A common stock and warrants to purchase 38,460 shares of class A common stock in settlement of certain outstanding payables. The common stock and warrants were valued at $50,000, the invoice amount of the services provided to the Company. Approximately 21%, or $432,000, of the gross proceeds from the 2003 Private Placement were received from directors and officers and entities with which the Company's directors are affiliated. Subsequent to the completion of the Company's private placement described above, the Company determined that in order to comply with NASD Marketplace Rule 4350(i)(1)(A), the purchase price per share for the shares of class A common stock purchased by directors and officers in the private placement should be increased to market value, and on June 17, 2003 the directors and officers agreed to do so. As a result, two directors and three officers agreed to pay an additional $0.58 per share, or an aggregate of $85,502, for the shares of class A common stock they purchased in the private placement. In August of 2003 the Company paid bonuses of approximately $40,000 to reimburse the officers for their additional $0.58 per share payment. F-18 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) 2001 Private Placement of Common Stock: On October 29, 2001, the Company sold 1,159,716 shares of class A common stock and warrants to purchase 347,915 shares of class A common stock for gross proceeds of $3,189,219. The warrants are immediately exercisable and have an exercise price of $3.58 per share. The warrants are exercisable for a five-year period. The Company may redeem the warrants, at its option, if the closing bid price of the class A common stock exceeds 200% of the exercise price for a period of 30 consecutive trading days. The redemption price is $0.10 per share issuable under the warrants. In connection with the private placement, the Company incurred fees of $152,511, of which $35,000 was paid in cash and $117,511 was paid by issuing warrants to purchase 50,000 shares of class A common stock. The warrants have substantially the same terms and conditions as the warrants issued in the private placement. Approximately 20%, or $635,000, of the gross proceeds were received from directors and officers and entities with which the Company's directors are affiliated. Warrant Exchange Offer: On April 23, 2002, the Company commenced a warrant exchange offer. The offer was made to investors who participated in the Company's private placement on October 29, 2001 and to holders of warrants issued as fees in connection with that private placement. The warrant exchange offer reduced the exercise price of the warrants issued in the private placement from $3.58 per share to $2.50 per share of class A common stock for investors that agreed to exercise those warrants by the expiration date of the warrant exchange offer. In addition, for each share of class A common stock purchased pursuant to a warrant exercise, a new warrant (the "New Warrants") to purchase an equivalent number of shares of class A common stock was issued. The New Warrants have an exercise price of $3.50 per share and are exercisable for five years. The Company may redeem the warrants, at its option, if the closing bid price of the class A common stock exceeds 200% of the exercise price for a period of thirty consecutive days. The redemption price is ten cents per warrant. The warrant exchange offer had an initial expiration date of April 30, 2002, but was extended until May 31, 2002. The Company received $659,288 in gross proceeds and issued a total of 263,715 shares of class A common stock and warrants to purchase an equivalent number of shares of class A common stock as a result of the warrant exchange offer. The Company recorded a deemed dividend in the amount of $461,084 during the third quarter of fiscal 2002 in connection with the warrant exchange offer, representing the aggregate fair value of the repriced warrants exercised in the warrant exchange offer and the fair value of the New Warrants. In connection with the warrant exchange offer, the Company incurred fees of approximately $19,000 which were paid in cash. Class A Common Stock: Holders of class A common stock are entitled to one vote per share on all matters to be voted on by common stockholders. Subject to the preferences of the preferred stock, the holders of class A common stock are entitled to a proportional distribution of any dividends that may be declared by the board of directors, provided that if any distributions are made to holders of class A common stock, identical per-share distributions must be made to the holders of class B common stock, even if the distributions are in class A common stock. In the event of liquidation, dissolution or winding up of ICC, the holders of class A common stock are entitled to share equally with holders of class B common stock in all assets remaining after liabilities and amounts due to holders of preferred stock have been paid in full or set aside. Class A common stock has no preemptive, redemption or conversion rights. The rights of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of series C preferred stock, series D preferred stock or any other series of preferred stock the Company may designate in the future. F-19 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) Class B Common Stock: Class B common stock is convertible into class A common stock on a one-for-one basis both upon the request of the holder of the class B common stock or automatically upon transfer of the class B common stock to a stockholder that did not hold any class B common stock before the transfer. Class B common stock is entitled to six votes per share, but in all other respects each share of class B common stock is identical to a share of class A common stock. As of July 31, 2003 and 2002, there were no outstanding shares of class B common stock. Series A Preferred Stock: Series A preferred stock is convertible, at the option of the holder, into class A common stock. Each share of series A preferred stock is convertible into a number of shares of class A common stock determined by dividing the issuance price per share ($1,000) by 75% of the average market price of the class A common stock for the ten trading days before the conversion date. Each share of series A was convertible into a maximum of 333 shares and a minimum of 200 shares of class A common stock. Series A preferred stock is redeemable, in whole or in part, by the Company at the option of the Company, commencing on the third anniversary of the date of issuance. The redemption price for each share of series A preferred stock is $1,000, plus unpaid dividends. Notice of redemption must be given 30 days prior to the redemption date. Subject to the rights of stockholders holding any series of the Company's preferred stock that is senior to the series A preferred stock, upon a liquidation, dissolution or winding up of the Company, the holders of series A preferred stock are entitled to receive an amount equal to $1,000 per share of series A preferred stock before any distribution is made to holders of common stock. The holders of the outstanding shares of series A preferred stock are entitled to a 4% annual non-cumulative dividend payable, at the option of the Company, in cash or in shares of class A common stock. Dividends are payable on each July 1. Series A preferred stock have no voting rights. On July 1, 2002, the Company paid cash dividends of $6,583 to holders of series A preferred stock.. On July 1, 2001, the Company issued 7,601 shares of class A common stock to holders of series A preferred stock in payment of accrued dividends. On July 1, 2000, the Company paid cash dividends of $181,772 to holders of series A preferred stock. At July 31, 2001, the Company had accrued dividends on its series A preferred stock of $1,157. There were no accrued dividends at July 31, 2002. At July 31, 2003 and 2002, the Company does not have any outstanding shares of series A preferred stock. Series C Preferred Stock: During the year ended July 31, 2000, the Company issued 10,000 shares of series C preferred stock and warrants to purchase 400,000 shares of class A common stock, at an exercise price of $22.21 per share, to Cable & Wireless, PLC ("C&W") for total consideration of $10,000,000. A beneficial conversion feature resulted from the allocation of the proceeds between the fair value of the series C preferred stock and the fair value of the warrants, which resulted in a discount on the preferred stock in the amount of $4,549,535. The discount was immediately accreted as all of the series C preferred stock was eligible for conversion upon issuance. Series C preferred stock is convertible, at the option of the holder, into 447,628 shares of class A common stock. F-20 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) Series C preferred stock is redeemable, in whole or part, by the Company at the option of the Company, at any time after January 1, 2005. The redemption price for each share of series C preferred stock is $1,000 plus unpaid dividends. Notice of redemption must be given 45 days prior to the redemption date. Series C preferred shall be preferred as to assets over all other classes or series of preferred stock of the Company in the event of any liquidation, dissolution or winding up of the Company. The holders of series C preferred are entitled to receive an amount in cash equal to $1,000 per share plus any unpaid or accrued dividends before any distribution is made to holders of common stock. The holders of the outstanding shares of series C preferred stock are entitled to receive a 4% per share annual cumulative dividend payable in cash or shares of common stock at the option of the Company. Each share of series C preferred stock is deemed to have a value of $1,000 and each share of common stock to be paid as a dividend shall be valued at the average of the Market Price (as defined by the certificate of designation of the series C convertible preferred stock) for ten consecutive trading days ending two days prior to the payment date. Dividends are payable on January 1 of each year. Dividends accrue and are cumulative on a daily basis, whether or not earned or declared. Series C preferred stock is entitled to the number of votes per share equal to the number of whole shares of class A common stock into which each share of series C preferred stock is convertible. On January 1, 2003, 2002 and 2001, the Company issued 302,343, 98,839 and 111,142 shares of class A common stock in payment of the dividends on series C preferred stock, respectively. At July 31, 2003, 2002 and 2001, the Company had accrued $231,726, $231,695 and $272,131 for dividends payable, respectively. The total liquidation value of series C preferred stock was $10,000,000 plus accrued dividends of $231,726 at July 31, 2003. Series D Preferred Stock: Series D preferred stock is convertible at the option of the holder into 192,307 shares of class A common stock. Series D preferred stock is redeemable, in whole or in part, by the Company at the option of the Company at any time after April 30, 2005 if the price of class A common stock is greater than or equal to $2.60 per share for thirty consecutive trading days. The redemption price for each share of series D preferred stock is $1,000 plus any accrued and unpaid dividends. Series D preferred shall have preference as to assets over all other classes or series of common and preferred stock of the Company, except for series C preferred, in the event of any liquidation, dissolution, or winding up of the Company. The holders of series D preferred are entitled to receive an amount in cash equal to $1,000 per share plus any accrued and unpaid dividends before any distribution is made to holders of common and preferred stock, except for series C preferred stock. The holders of the outstanding shares of series D preferred stock are entitled to receive dividends at the discretion of the Board of Directors. Series D preferred stock is entitled to the number of votes per share equal to the number of whole shares of class A common stock into which each share of series D preferred stock is convertible on the record date. F-21 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) Warrants: As of July 31, 2003, the following warrants to purchase class A common stock were outstanding:
Number of Shares Exercise Price Expiration Date ---------------- -------------- --------------- Consulting Warrants 18,000 (a) $ 9.94 March 31, 2004 C & W Warrants 400,000 (b) $ 22.21 January 12, 2005 2001 Private Placement Warrants 109,091 (c) $ 3.58 October 28, 2006 2001 Private Placement Commission Warrants 25,000 (d) $ 3.58 October 28, 2006 2002 Warrant Exchange Offer Warrants 263,715 (e) $ 3.50 April 24, 2007 ING Warrants 60,000 (e) $ 3.50 July 11, 2007 2003 Private Placement Warrants 1,307,671 (e) $ 1.47 April 30, 2008 2003 Private Placement Warrants 230,774 (e) $ 1.47 May 1, 2008 2003 Private Placement Commission Warrants 89,810 (f) $ 1.47 April 30, 2008 2003 Private Placement Commission Warrants 20,870 (f) $ 1.47 May 1, 2008 Silicon Valley Bank Warrants 40,000 (g) $ 1.39 May 30, 2010
a) Upon exercise of each warrant, holder is entitled to 1.36891 shares of class A common stock. b) Issued to C&W in a private placement. Upon exercise, holder is entitled to one share of class A common stock. c) Redeemable by the Company at $0.10 per warrant under certain conditions. d) Issued to solicitation agents for their role in the October 2001 private placement. Redeemable by the Company at $0.10 per warrant under certain conditions. e) Redeemable by the Company at $0.10 per warrant under certain conditions. f) Issued to solicitation agents for their role in the April and May 2003 private placement. Redeemable by the Company at $0.10 per warrant under certain conditions. g) Issued in connection with the Company's Accounts Receivable Financing Agreement (Note 11). The fair market value of warrants issued for compensation and services has been recognized as an expense in the period the respective services were performed. On January 22, 2003, 47,760 assumed RTCI warrants expired. The warrants were exercisable for an aggregate of 47,760 shares of the Company's class A common stock. Stock options: The Company's Amended and Restated Stock Option Plan (the "Plan") provides for the grant of options to purchase up to an aggregate of 7,000,000 shares of class A common stock to employees, officers, directors and consultants or advisors. The options granted may be either incentive stock options or nonqualified options. F-22 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) Incentive stock options granted to employees have an exercise price equal to the fair market value of the underlying shares at the date of grant. The Board of Directors determines the exercise price of nonqualified options granted to employees and consultants. The term of all options granted may not exceed 10 years. Options vest as determined by the Board, but generally vesting occurs over a period of two to three years. Generally, vested options must be exercised within 90 days of termination of the optionee's employment or other relationship with the Company. If termination of employment is for cause, the option will expire immediately. In March 2000, the Company granted an option to purchase 100,000 shares of class A common stock in connection with a consulting agreement with a former board member. The fair value of the option, in the amount of $6,318,850, was to be amortized as consulting expense during the term of the consulting agreement. Non-cash charges for this option amounted to $1,185,865 during the year ended July 31, 2000. On September 22, 2000, the former board member and the Company mutually agreed to cancel and terminate the option. Compensation charges in connection with this option ceased being recorded as of this date and the total non-cash charge recognized for this option during the year ended July 31, 2001 amounted to $450,110. In November 2000, the Company assumed the Employee Stock Option Plan of RTCI and issued vested stock options to purchase 349,145 shares of class A common stock for the outstanding options of RTCI. These options were not granted under the Plan. The fair value of such options was included in the purchase price of RTCI. In May 2002, the Company granted options to purchase an aggregate of 845,000 shares of class A common stock to certain executive officers. The options all have an exercise price of $2.70 per share, which was the fair value of the class A common stock at the date of grant. One-third of these options were vested upon issuance. The remaining two-thirds vest on November 10, 2007. If the Company meets certain performance objectives the vesting of the options will be accelerated. On the day the closing price of the Company's class A common stock equals or exceeds $10.00 per share, one-third of such options shall vest. On the first day of the month succeeding any calendar month in which the Company's net revenues exceed $2,000,000, one-third of the options will vest. All of these options will vest immediately upon a change in control of the Company as defined in the option agreements. The weighted-average fair value at the date of grant for options granted during the years ended July 31, 2003, 2002 and 2001 was $1.04, $2.37 and $3.81 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted-average assumptions: Year ended July 31, --------------------------------- 2003 2002 2001 ------- ------- ------ Risk-free interest rate 2.09% 3.77% 4.73% Expected lives 3 3 3 Expected volatility 136% 140% 150% Expected dividend yield 0% 0% 0% F-23 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) The following table summarizes the Company's stock options at July 31, 2003, 2002 and 2001, as well as changes during the years then ended:
Year ended July 31, ------------------------------------------------------------------------------------------- (Shares in thousands) 2003 2002 2001 ----------------------------- ----------------------------- ----------------------------- Weighted-Average Weighted-Average Weighted-Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------- ---------------- ---------- ---------------- ---------- --------------- Options outstanding at beginning of year 5,422.3 $ 9.62 4,517.7 $ 12.93 4,088.6 $ 18.39 Granted 342.0 $ 1.35 1,672.1 $ 3.08 1,145.0 $ 4.62 Acquisitions -- $ -- -- $ -- 349.1 $ 6.53 Forfeited (489.5) $ 11.58 (698.0) $ 16.03 (895.8) $ 26.79 Exercised (12.8) $ .26 (69.5) $ 3.22 (169.2) $ 2.08 --------- -------- -------- Options outstanding at end of year 5,262.0 $ 8.92 5,422.3 $ 9.62 4,517.7 $ 12.93 ========= ======== ======== Options exercisable at end of year 4,406.2 $ 9.69 4,048.4 $ 7.53 2,966.0 $ 11.39 ========= ======== ========
The following table presents information relating to stock options outstanding as of July 31, 2003: (Shares in thousands)
Options Outstanding Options Exercisable ---------------------------------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Remaining Exercise Exercise Range of Exercise Prices Contractual Price Price Shares Life Shares ----------------------------------------------------------------------------------------------------------------- $ 0.26 - $ 1.30 635.5 5.5 $ 0.70 508.1 $ 0.60 $ 1.41 - $ 2.13 122.0 4.8 $ 1.67 94.7 $ 1.58 $ 2.50 - $ 4.22 2,479.6 7.3 $ 2.87 2,020.8 $ 2.84 $ 5.13 - $ 6.29 335.3 7.5 $ 5.16 303.6 $ 5.16 $ 11.50 - $ 17.00 573.6 6.1 $ 12.12 363.0 $ 12.15 $ 19.00 - $ 23.38 834.0 6.7 $ 19.21 834.0 $ 19.21 $ 34.50 - $ 40.00 154.0 6.3 $ 37.24 154.0 $ 37.24 $ 60.00 - $ 80.00 128.0 6.1 $ 68.25 128.0 $ 68.25 -------------------------------------------- ------------------------ 5,262.0 6.8 $ 8.92 4,406.2 $ 9.69 ============== =============
The Company had 968,921 options available for grant under the Plan as of July 31, 2003. Restricted stock: On March 10, 2003, options and stock were awarded to a non-employee member of the board of directors as compensation for consulting services. This individual was awarded 20,000 shares of class A common stock, valued at $18,000, which was recorded as a non-cash charge for stock-based compensation during the year ended July 31, 2003. This individual was also granted options to purchase 100,000 shares of class A common stock. Options to purchase 60,000 shares at an exercise price of $1.00 per share vest six months from the date of issuance, and options to purchase 40,000 shares at an exercise price of $1.25 per share vest one year from the date of issuance. The options have a fair value of $67,000 of which $42,000 has been recorded as a stock-based non-cash charge for services during year ended July 31, 2003. Each non-employee member of the board of directors receives annual compensation of $25,000 for their current term of office, payable quarterly, in class A common stock of he Company. The Company has recorded a non-cash compensation charge of $79,167 in 2003 and has issued 51,703 shares of class A common stock in 2003 which were fully vested upon issuance. F-24 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 9. STOCKHOLDERS' EQUITY (CONT'D) The Company issued 172,907 shares of class A common stock to employees of RTCI in exchange for outstanding shares of restricted stock of RTCI at the consummation of the Company's acquisition of RTCI. Deferred stock-based compensation related to the restricted stock of $730,957 was recorded at the time of the acquisition. The Company recognized non-cash compensation expense related to the restricted stock of $190,019 and $540,938 in the years ended July 31, 2002 and 2001, respectively. All outstanding shares of restricted stock vested on the January 1, 2002. On July 11, 2002, the Company entered into a Settlement Agreement with ING Merger, LLC and ING Capital, LLC, a wholly-owned subsidiary of ING Merger (collectively "ING"), pursuant to which the Company issued to 200,000 shares of class A common stock and warrants to purchase 60,000 shares of class A common stock ING Capital. The warrants are exercisable for five years at an exercise price per share of $3.50. ING had provided certain investment banking services to ICC in connection with its acquisition of RTCI. The Company had accrued $650,000 for such services at the time of the acquisition. The aggregate fair value of the class A common stock and warrants issued pursuant to the settlement was approximately $540,500. The Company recognized the difference of $109,500 as other income during the year ended July 31, 2002. In connection with the acquisition of RTCI, the Company paid $300,000 of investment banking fees on behalf of a former officer of the Company. During 2002, the former officer forfeited 23,689 shares of class A common stock issued in the merger, as repayment for these investment banking fees. The number of shares forfeited were valued at the market price of ICC common stock as defined in the Agreement and Plan of Merger among ICC and RTCI. 10. INCOME TAXES The Company's effective tax rate varied from the statutory federal income tax rate as follows: For the year ended July 31, ---------------------------- 2003 2002 2001 ---------------------------- Expected tax rate (benefit) (35.0)% (35.0)% (34.0)% Increase (decrease) in taxes resulting from: Non-deductible amortization and write-off of intangibles 5.7% 9.1 % 15.7 % Other permanent differences 1.1% 1.5 % 1.9 % State and local income tax (benefit), net of federal effect (4.0)% 25.9% (4.5)% Other (1.1)% (6.7%) -- Increase in valuation allowance 33.3% 5.2 % 15.0 % ----- ----- ----- Effective tax rate -- -- (5.9)% ===== ===== ===== F-25 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 10. INCOME TAXES (CONT'D) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets, liabilities and the valuation allowance at July 31, 2003 and 2002 are as follows: July 31, ----------------------------- 2003 2002 ------------ ----------- Deferred tax assets: Accrued expenses $ 267,915 262,768 Deferred revenues 30,682 65,780 Deferred rent 29,389 57,632 Property and equipment 83,767 199,217 Marketable securities 116,903 131,233 Credit for increasing research activity carryforwards 85,275 -- Federal, state and local net operating loss carryforwards 30,077,973 28,430,956 ------------ ------------ 30,691,904 29,147,586 Deferred tax liabilities: Purchased intangibles (860,400) (1,242,800) Capitalized software development costs (56,944) (130,636) ------------ ------------ (917,344) (1,373,436) Net deferred tax asset before valuation allowance 29,774,560 27,774,150 Valuation allowance (29,774,560) (27,774,150) ------------ ------------ Net deferred tax asset $ -- $ -- ------------ ------------ The Company has provided a valuation allowance of 100% of its net deferred tax asset due to the uncertainty of generating future profits that would allow for the realization of such deferred tax asset. The net increase in the total valuation allowance for the year ended July 31, 2003 was $2,000,410. The Company has a net operating loss carryforward for tax purposes of approximately $75 million as of July 31, 2003. This carryforward expires from 2007 to 2023. The Internal Revenue Code and Income Tax Regulations contain provisions which limit the use of available net operating loss carryforwards in any given year should significant changes (greater than 50%) in ownership interests occur. Due to the initial public offering in 1995, the net operating loss carryover of approximately $1.9 million incurred prior to the initial public offering is subject to an annual limitation of approximately $400,000 until that portion of the net operating loss is utilized or expires. Due to the private placement of series A preferred stock, the net operating loss carryover of approximately $18 million incurred prior to the private placement is subject to an annual limitation of approximately $1 million until that portion of the net operating loss is utilized or expires. Also, due to a 100% ownership change of RTCI, the acquired net operating loss of approximately $6.5 million incurred prior to the ownership change is subject to an annual limitation of approximately $1.4 million until that portion of the net operating loss is utilized or expires. F-26 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 11. ACCOUNTS RECEIVABLE FINANCING AGREEMENT On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement ("Financing Agreement") with Silicon Valley Bank ("Bank") with a term of 1 year. Under the Financing Agreement, the Company may borrow, subject to certain conditions, up to 80% of its outstanding accounts receivable up to a maximum of $2,000,000. Interest accrues at the prime rate plus .35% plus a collateral handling fee equal to .20% on the average daily outstanding financed receivable balance. Interest is payable monthly. The Bank has been granted a security interest in substantially all of the Company's assets. In connection with the Financing Agreement, the Company issued the bank warrants to purchase 40,000 shares of the Company's class A common stock. The warrants are immediately exercisable at an exercise price of $1.39, equal to the fair market value of the Company's class A common stock at the date of closing of the Financing Agreement. The warrants are exercisable for a seven-year period. The fair value of the warrants in the amount of approximately $34,000 is being amortized to interest expense over the term of the Financing Agreement. During the year ended July 31, 2003 the Company recorded interest expense in the amount of approximately $5,700 for the amortization of the fair value of the warrants. At July 31, 2003, there were no amounts outstanding under the financing arrangement. On October 22, 2003, the Company and Silicon Valley Bank amended the Financing Agreement to extend the term of the agreement to August 31, 2004. 12. COMMITMENTS AND CONTINGENCIES Profit sharing plan: The Company has a Profit Sharing Plan under which an amount equal to 3.5% of the pretax profit of the Company for each fiscal year is set aside for the benefit of such employees as are determined by the Board of Directors. No funding has been provided under this plan through July 31, 2003 as the Company has incurred losses since the inception of the plan. Obligations under operating leases: The Company has non-cancelable operating lease commitments for office space expiring on various dates through July 2005. Rent expense under these leases was approximately $1,047,000, $1,319,000 and $1,559,000 for the years ended July 31, 2003, 2002 and 2001, respectively. Certain leases contain escalation clauses for operating expenses. At July 31, 2003, minimum future rental payments due under non-cancelable operating leases are as follows: 2004 1,192,916 2005 437,131 ---------- $1,630,047 ========== At July 31, 2003, the Company has ceased utilizing certain office space leased under a non cancelable operating lease. The future lease payments for this space in the amount of $166,000, have been recorded as a liability at July 31, 2003. F-27 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 12. COMMITMENTS AND CONTINGENCIES (CONT'D) Obligations under capital leases: The Company has various non-cancelable capital leases for computer equipment and software. At July 31, 2003, minimum future lease payments under non-cancelable capital leases were as follows: 2004 $ 159,536 2005 47,229 ----------- 206,765 Amount representing interest 12,456 ----------- Present value of future minimum lease payments 194,309 Less current portion (148,189) ----------- Capital lease obligation - less current portion $ 46,120 =========== Representations and Warranties: Guarantees and Indemnifications - As part of its standard license agreements, the Company agrees to indemnify its customers against liability if the Company's products infringe a third party's intellectual property rights. Historically, the Company has not incurred any significant costs related to performance under these indemnities. As of July 31, 2003, the Company was not subject to any litigation alleging that the Company's products infringe the intellectual property rights of any third parties. Letters of credit: The Company has provided cash collateral for letters of credit in the aggregate amount of $128,607 and $157,103, at July 31, 2003 and 2002, respectively, which serve as security deposits for certain lease agreements. These amounts have been recorded as restricted cash in the Company's consolidated balance sheet. Separation Agreement: In March 2001, ICC entered into a Separation Agreement with its former President and Chief Executive Officer which required the Company to pay $437,500, payable in equal monthly installments of $29,167 commencing on May 1, 2001. The final payment under this agreement was made in August of 2002. 13. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash and accounts receivable. The Company places its excess cash in money-market instruments with institutions of high credit-quality. All accounts receivable are unsecured. The Company believes that any credit risk associated with receivables is minimal due to the number and credit worthiness of its customers. Receivables are stated at estimated net realizable value, which approximates fair value. For the year ended July 31, 2003, no single customer accounted for more than 10% of revenue. The Company had one customer that accounted for 22% and 11% of revenue for the years ended July 31, 2002 and 2001, respectively. No single customer accounted for more than 10% of accounts receivable at July 31, 2003. The Company had one customer that accounted for approximately 52% of accounts receivable at July 31, 2002. During October 2002, the full amount of this receivable was collected. F-28 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 13. CONCENTRATION OF CREDIT RISK (CONT'D) Revenue by geographic region, based on customer location is as follows: Year ended North July 31, America Europe Other Total ----------- ----------- ---------- ---------- ----------- 2003 $12,054,455 $ 22,947 $ 5,912 $12,083,314 2002 11,171,976 3,024,118 25,702 14,221,796 2001 8,665,395 1,072,860 4,263 9,742,518 14. BUSINESS SEGMENT INFORMATION Prior to February 1, 2004, the Company reported the results of their operations in three segments: ICC.NET, Service Bureau and Professional Services. In response to continuing weak demand for professional services, the Company combined these activities with ICC.NET to reduce operating costs. As a result, effective February 1, 2004, the Company no longer reported the results of professional services activities in a separate segment and included these results with the ICC.NET segment. The segment data for each of the three years in the period ended July 31, 2003, has been restated to conform to this change in reportable segments. The Company has two operating segments as follows: o ICC.NET - the Company's global Internet-based value added network, or VAN, uses the Internet and proprietary technology to deliver customers' documents and data files to members of their trading communities, many of which may have incompatible systems, by translating the documents and data files into any format required by the receiver, and the development and operation of comprehensive business-to-business e-commerce solutions. The segment also conducts a series of product-independent, one-day EDI seminars for e-ecommerce users. o Service Bureau - the Service Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with large companies and provides various EDI and UPC (universal product code) services. The Service Bureau also licenses EDI software. F-29 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 14. BUSINESS SEGMENT INFORMATION (CONT'D) The table below summarizes information about operations and long-lived assets as of and for the years ended July 31, 2003 and 2002:
ICC.NET Service Bureau Total ------------ -------------- ----------- Year Ended - July 31, 2003 Revenues from external customers $ 10,595,368 $ 1,487,946 $ 12,083,314 ============ ============ ============ Operating loss (1) $ (4,508,817) $ (1,132,102) $ (5,640,919) Other income, net (363,399) -- (363,399) ------------ ------------ ------------ $ (4,872,216) $ (1,132,102) $ (6,004,318) ============ ============ ============ Supplemental segment information: Amortization and depreciation $ 1,588,964 $ 86,775 $ 1,675,739 Impairment of software inventory 248,077 -- 248,077 Impairment of capitalized software -- 148,479 148,479 Impairment of marketable securities 317,924 -- 317,924 Impairment of acquired intangibles -- 982,142 982,142 Non-cash charges for stock-based compensation and services 139,415 -- 139,415 As of July 31, 2003 Property and Equipment, net $ 514,011 $ 42,801 $ 556,812 Capitalized software, net -- 127,842 127,842 Acquired identified intangibles, net 2,151,000 -- 2,151,000 Goodwill 26,132 1,185,793 1,211,925 ------------ ------------ ------------ Long lived assets, net $ 2,691,143 $ 1,356,436 $ 4,047,379 ============ ============ ============ ICC.NET Service Bureau Total ------------ -------------- ----------- Year Ended - July 31, 2002 Revenues from external customers $ 12,588,613 $ 1,633,183 $ 14,221,796 ============ ============ ============ Operating loss $ (6,845,046) $ 4,949 $ (6,840,097) Other income, net 292,544 -- 292,544 ------------ ------------ ------------ $ (6,552,502) $ 4,949 $ (6,547,553) ============ ============ ============ Supplemental segment information: Amortization and depreciation $ 2,018,052 $ 114,415 $ 2,132,467 Impairment of acquired intangibles 1,710,617 -- 1,710,617 Non-cash charges for stock-based compensation and services 250,008 -- 250,008 As of July 31, 2002 Property and equipment, net $ 1,061,454 $ 90,410 $ 1,151,864 Capitalized software, net -- 326,588 326,588 Acquired identified intangibles, net 3,107,000 -- 3,107,000 Goodwill, net 26,132 2,167,935 2,194,067 ------------ ------------ ------------ Long lived assets, net $ 4,194,586 $ 2,584,933 $ 6,779,519 ============ ============ ============
(1) Commencing in the second fiscal quarter of 2003, certain costs for executive management, human resources, selling and marketing, accounting and finance have been allocated to the Company's operating segments based on the level of services performed for each segment. For cost reduction purposes, these functions were centralized and are now performed by ICC.NET personnel. For the year ended July 31, 2003, ICC.NET allocated $135,000 of these costs to the Service Bureau segment. F-30 INTERNET COMMERCE CORPORATION Notes to consolidated financial statements 15. SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS The Company had the following non-cash investing and financing activities:
Year ended July 31, 2003 2002 2001 ------------ ------------- ----------- Equipment acquired under capital leases -- $ 121,367 $ 44,945 Issuance of common stock for dividends on preferred stock 400,031 400,000 422,784 Private placement commissions 87,802 117,511 -- Common stock and warrants issued to investment advisors -- 504,560 -- Amounts related to business combinations: Fair value of assets acquired, net of cash acquired -- -- 29,085,388 Less: Liabilities assumed -- -- 1,902,751 Fair value of equity instruments issued -- -- 20,797,639 Cash to be distributed to option and warrant holders upon exercise -- -- 343,456 Note receivable and accrued interest -- -- 5,000,000 Transaction costs paid in prior period -- -- 369,487 Transaction costs accrued -- -- 650,000 ----------- ----------- ----------- -- -- 29,063,333 ----------- ----------- ----------- Payment for purchase of acquisitions, net of cash acquired -- -- 22,055
16. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly financial information (in thousands, except for per share data) includes, in our opinion, all normal and recurring adjustments necessary to fairly state our consolidated results of operations and related information for the periods presented
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- Fiscal 2003 Revenues, net $ 3,050 $ 2,837 $ 3,094 $ 3,102 Total costs and expenses 4,013 4,400 4,162 5,149 ------- ------- ------- ------- Operating loss (963) (1,563) (1,068) (2,047) Interest and investment income, net (18) (324) (6) (15) Income tax benefit -- -- -- -- ------- ------- ------- ------- Net loss $ (981) $(1,887) $(1,074) $(2,062) ======= ======= ======= ======= Basic and diluted loss per common share $ (0.09) $ (0.17) $ (0.11) $ (0.16) ======= ======= ======= ======= Fiscal 2002 Revenues, net $ 3,046 $ 2,690 $ 2,725 $ 5,761 Total costs and expenses (5,195) (4,678) (4,528) (6,661) ------- ------- ------- ------- Operating loss (2,149) (1,988) (1,803) (900) Interest and investment income, net 44 (33) 65 216 Income tax benefit -- -- -- -- ------- ------- ------- ------- Net loss $(2,105) $(2,021) $(1,738) $ (684) ======= ======= ======= ======= Basic and diluted loss per common share $ (0.22) $ (0.19) $ (0.21) $ (0.06) ======= ======= ======= =======
F-31 Schedule II. Valuation and Qualifying Accounts
Balance at Additions Balance at Beginning Charted to Additions End of of Period Expense Acquired Deductions period ----------- ----------- ----------- ----------- ----------- Year ended July 31, 2003 Allowance for doubtful accounts $ 241,684 $ 43,501 $ $ (64,904) $ 220,281 Allowance on deferred tax asset $27,774,150 $ 2,000,410 $ -- $ -- $29,774,560 Year ended July 31, 2002 Allowance for doubtful accounts $ 224,022 $ 223,107 $ -- $ (205,445) $ 241,684 Allowance on deferred tax asset $27,433,411 $ 340,739 $ -- $ -- $27,774,150 Year ended July 31, 2001 Allowance for doubtful accounts $ 74,388 $ 261,640 $ 23,949 $ (135,955) $ 224,022 Allowance on deferred tax asset $22,258,347 $ 5,175,064 $ -- $ -- $27,433,411
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