U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended July 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ____ to ____
Commission File No. ___________
INTERNET COMMERCE CORPORATION
(Name of Small Business Issuer in its charter)
Delaware 13-3645702
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
805 Third Avenue 9th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (212) 271-7640
Securities registered under Section 12(b) of the Act:
Name of each exchange
Title of Each class on which registered
None None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
(Title of Class)
Class A Warrants
(Title of Class)
Class B Warrants
(Title of Class)
Units consisting of Class A Common Stock,
Class A Warrants and
Class B Warrants
(Title of Class)
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Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $105,243.
As of October 21, 1999 the issuer had outstanding 1,855,441 shares of
Class A Common Stock and 115,590 shares of Class B Common Stock that are
convertible into Class A Common Stock. The aggregate market value of the Common
Stock held by nonaffiliates as of October 21, 1999 was approximately $16.8
million based on a closing price for the Class A Common Stock of $12.25 on the
Nasdaq Small Cap Market on such date.
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PART I
Item 1. Description of Business
a) Business Development
We were founded in November 1991 under the name Infosafe Systems, Inc. and from
1991 to 1997 we conducted limited operations and developed certain products that
we were unable to exploit commercially and consequently discontinued. In 1997,
we shifted our business emphasis to focus exclusively on the development and
marketing of our CommerceSense service and changed out name to Internet Commerce
Corporation in September 1998 to reflect this shift. We launched the current
version of our CommerceSense service commercially in April 1999. As a result, we
have only a limited operating history and there is little historical information
on which to evaluate our business and prospects.
We developed our CommerceSense service as an alternative to the electronic data
interchange, or EDI, services that are currently provided by traditional value
added networks, also known as VANs, that offer their services primarily using
dedicated telecommunications links. Our CommerceSense service translates and
transmits electronic documents, such as purchase orders, requests for proposals
and receipts, as well as images and other data over the Internet.
We are currently focusing on our CommerceSense service. As a result, our revenue
for the foreseeable future is almost entirely dependent on the success of this
service, including, but not limited to, the number of customers who subscribe to
the service and the volume (in kilocharacters) of the data, documents or other
information they send or retrieve utilizing our service. We expect our cost of
revenue and operating expenses to increase significantly, especially in the
areas of marketing, customer installation and customer service. We will need to
generate significant revenue to achieve and maintain profitability. If we do not
increase our revenue significantly, we will continue to be unprofitable.
Internet Commerce Corporation (referred to as we or ICC in this Annual Report)
completed the merger of our majority owned subsidiary ("ICCSUB" or the
"subsidiary") into ICC in September 1998.
ICC was incorporated under the laws of the State of Delaware on November 18,
1991. Our executive offices are located at 805 Third Avenue 9th floor, New York,
New York 10022 and our telephone number is (212) 271-7640. (See "Description of
Properties.")
b) Industry Background
We believe that although the Internet has become an important new sales channel,
its real value will be in achieving business efficiencies and cost savings by
expanding global business-to-business interconnectedness.
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We believe that in an increasingly global economy, improvements in speed and
efficiency in the supply chain between businesses are important and improvements
in the capacity of a business to buy and sell goods and services or raw
materials within its business community becomes an important factor in its
ability to compete. Thus, for example, in a just-in-time economy, timeliness,
and not price, may be the most important component in creating competitive
advantage.
The speed and efficiency of the supply chain are hindered by incompatibilities
in technologies and methodologies used to communicate business information among
trading communities, which slow down the flow of information and create
bottlenecks. These incompatibilities stem from the diversity of trading
partners, which may range from members of the Fortune 100 to sole proprietors
providing niche products. Trading partners may therefore have different
communications capabilities and requirements. Some trading partners may rely on
paper or fax to communicate, others exchange data in proprietary file formats
through direct dial-up connections or over the Internet, while the largest
trading partners use electronic methods such as EDI over VANs.
The CommerceSense Solution
The current version of ICC's electronic commerce service "CommerceSense" was
launched commercially in the third fiscal quarter 1999 and is currently in use
by its customers for the secure exchange of business to business electronic
forms and data files. We believe that our CommerceSense service provides a
solution to the communication difficulties caused by the differences in data
formats, networks and communications methods used by the members of trading
communities, and thus bridges the incompatibility gap and enables seamless
electronic business communication. Our CommerceSense service can translate
incompatible files into a format any user is capable of receiving and uses the
Internet to transmit the data file by EDI, fax or other format. We believe that
users of our CommerceSense service can thus improve their productivity and
reduce their costs by enabling electronic business-to-business transactions
between parties with different systems.
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customer, and request transmission of the inbox contents. In either case, the
mailbox supervisor forwards the inbox transmissions to the computer interface
service module, which sends the transmissions to the customer's own computer
system.
We believe that our CommerceSense service improves the basic infrastructure of
business-to-business electronic communications by providing intelligent
messaging and routing using the Internet, which, we believe, improves the
security, reliability, ease of use and acceptability of using the Internet for
business-to-business electronic commerce. CommerceSense performs these functions
without requiring that the user purchase any software and at prices that are, we
believe, less than half of the prices currently charged by traditional VANs.
We designed our CommerceSense service to avoid what we believe are
inefficiencies in traditional VAN services, software products and phone and
manual fax processes, which we believe are more expensive, slower and more
difficult to use than our CommerceSense service. CommerceSense incorporates
proprietary technology and is immediately accessible using a standard Internet
connection and a web browser.
Our CommerceSense service uses the Internet to deliver a higher level of service
and more features than traditional VANs:
o Documents are delivered up to 100 times faster, depending upon
the speed of the customer's Internet connections;
o Our customers may more effectively track, monitor and process
business documents and other data files using our real-time
document management browser screen displays;
o Our CommerceSense service allows us to consistently provide
confirmed delivery of documents and other data files;
o Documents can be delivered either in real-time or retrieved
when convenient for the customer. Real-time delivery reduces
the potential for document corruption, bottlenecks and other
problems associated with batch delivery modes, which are
traditionally store-and-forward and in some cases can take
several hours to be delivered;
o Our CommerceSense service can handle transmissions of data
other than standard business documents, such as images,
engineering drawings, architectural blueprints, audio and some
types of video; and
o Our customers enjoy flexibility in creating different document
types and formats for various business applications. For
example, our customers can add their business logo to their
documents and can use their own format for each document type.
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In addition, we believe our CommerceSense service offers advantages over e-mail
and other Internet-based electronic commerce systems, such as a full range of
VAN services, translation of a wide variety of data into customer-specified
formats, management of business documents or data files of virtually any size
and of a wide variety, including purchase orders, invoices, statements,
inventory tracking and shipping documents, images, engineering drawings,
architectural blueprints, audio and some types of video. CommerceSense also
provides a complete audit trail of content delivery and customer selection from
a variety of security methods.
We believe that CommerceSense is one of the only Internet-based data
transmission services that is approved to interconnect with the eight largest
traditional VANs, which we believe currently provide EDI services for 90% of
companies 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 between a customer that uses a traditional VAN and its
trading partners that do not. This provides our customers with the possibility
of maximum penetration into their trading partner community.
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 CommerceSense service to comply
with this requirement and thus can reduce their costs and improve their ability
to locate, order, track and deliver products. Our CommerceSense 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. Due to the special requirements and rapid growth of these new
web-based retail companies, we have a dedicated web retailer sales and support
team that offers the retail companies the option to outsource to us all of their
electronic document and data file delivery requirements.
EDI to fax service. Traditional EDI users convert electronic documents into a
faxable format and fax the documents manually to their trading partners that can
not receive documents transmitted electronically in EDI. Our CommerceSense fax
service allows our customers to send a document electronically, which we will
then electronically convert and fax to any of our customer's trading partners
that cannot receive electronically transmitted documents and specify that they
want to receive the document by fax. We believe that our CommerceSense fax
service will result in lower fax costs for our customers as well as reduced
human involvement in the document delivery process and fewer errors. Recently,
several other VANs began offering similar EDI-fax services; however, we believe
that these services cost 3 to 5 times more per page and are currently only
offered domestically. Our customers currently send documents using our
CommerceSense fax service to approximately 900 trading partners.
Large-scale electronic document management and delivery. Our CommerceSense
service can transmit large-scale non-EDI electronic documents and other large
files, which may include catalogs, engineering drawings, graphics and some types
of video. CommerceSense allows customers to manage and distribute these large
files in real-time and provides archiving,
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security, authentication and audit services. CommerceSense 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 CommerceSense VAN
service.
Business Strategy
We believe that our CommerceSense service provides a platform with many
applications that will allow our customers to fulfill a substantial portion of
their electronic document and data delivery requirements with significantly less
administrative effort and cost. We believe that CommerceSense will allow our
customers to send us the majority of their important documents and data files
which we will then be able to transmit to each of the intended recipients in any
form requested by the recipient. Our customers will thus be able to integrate a
substantial portion of their document and data file delivery methods into a
single, seamless process.
A large company that uses EDI to communicate with its vendors is referred to as
a hub; its trading partners, vendors or customers, are referred to as spokes. We
intend to continue to market CommerceSense as a one-stop electronic document and
data delivery service to the 2,500 largest hub companies in the United States.
Due to the cost to the spoke companies of implementing EDI and using VANs and
other electronic document delivery methods, large hub companies are currently
connected electronically to only a small percentage of their potential spoke
companies.
Our current customers conduct their business internationally, and we intend to
service these customers and pursue new international customers by expanding our
marketing and operation to Europe and other places outside the United States.
We believe that a significant number of these hub companies intend to expand the
use of electronic commerce to more of their spoke companies. Small spoke
companies using our CommerceSense service require only an Internet connection or
a web browser to receive and transmit documents electronically and, we believe,
will also be able to receive electronic documents using our CommerceSense fax
service. As a result, large hub companies may now be able to request or
encourage electronic commerce with their small hub companies. In turn, many of
these spoke companies may become the hub companies for their suppliers, which
should further broaden the reach of our CommerceSense service.
We intend to encourage the use of our CommerceSense service through exceptional
customer service. We currently offer technical support to our customers
twenty-four hours a day, seven days a week. Due to the multiple redundancies of
all of our systems and the stability of the Securities Industry Automation
Corporation, or SIAC, which is the location of our data center, our
CommerceSense service has been fully operational more than 99% of the time. SIAC
runs all computing operations for the New York Stock Exchange and the American
Stock Exchange.
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We intend to seek acquisitions of services, products or companies, joint
ventures or other arrangements which complement or expand our business. However,
we cannot assure you that we will be able to identify appropriate acquisition
candidates in the future or that we will be able to successfully negotiate and
finance the acquisition if an acquisition candidate is identified. If we make
other types of acquisitions, it will be necessary to assimilate the acquired
services, technologies or customers into our operations. If we consummate one or
more significant acquisitions through the issuance of shares of class A common
stock, our stockholders could suffer significant dilution of their ownership
interests in ICC. Finally, expanding our business through acquisitions may
expose us to new and different competitors, which will likely have greater
financial and other resources than we do.
We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that period-to-period
comparisons of our operating results may not be meaningful and that our
operating results for any particular period will not necessarily be a good
indicator of our future performance.
Competition
Our principal competitors include: Harbinger Corporation, GE Information
Services, Inc., International Business Machines Corporation Global Services,
Sterling Commerce, Inc., AT&T Corp. and MCI Communications Corporation. Each of
these competitors has an established VAN that has provided EDI for at least
several years and has long-established relationships with the users of EDI,
including many of our prospective customers.
The business-to-business electronic commerce industry is evolving rapidly and is
intensely competitive. If we are not able to compete effectively against our
current and future competitors, we may lose customers, may need to lower our
prices, may experience reductions in gross margins, increases in marketing costs
or losses in market share, or may experience a combination of these problems
and, as a result, our business will suffer.
Our market is characterized by rapidly changing technology, customer demands and
intense competition. If we cannot keep pace with these changes, our
CommerceSense service could become uncompetitive and our business will suffer.
The Internet's recent growth and the intense competition in our industry require
us to continue to develop strategic business and Internet solutions that enhance
and improve the customer service features, functions and responsiveness of our
CommerceSense VAN and other proposed services and that keep pace with continuing
changes in information technology and customer requirements. If we are not
successful in developing and marketing enhancements to our CommerceSense VAN
service or other proposed services that respond to technological change or
customer demands, our business will suffer.
Many of our current and potential competitors have significant existing customer
relationships and vastly larger financial, marketing, customer support,
technical and other resources than we do. As a result, they may be able to
respond more quickly to changing technology and changes in customer requirements
or be able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and make more attractive offers to
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potential customers and employees, or be able to devote greater resources to the
development, promotion and sale of their services than we can. As a result, we
may not be successful in competing against competitors.
If we are successful in utilizing our CommerceSense platform to provide new
services, we may enter into different markets and may face the same or
additional competitors, most of which will have substantially greater financial
and other resources than we do.
Patents and Trademarks
Patents
On August 26, 1997, ICC was granted patent No. 5,661,799 entitled, Apparatus and
Storage Medium for Decrypting Information. The essential components of this
patent include 1) the decryption of encrypted information without requiring that
decryption keys be transmitted from one place to another, 2) the decryption of
encrypted information which employs different keys for different segments of
information and 3) the disabling of a system for the decryption of encrypted
information if a user is no longer authorized to retrieve information.
On January 7, 1997, ICC was granted patent No. 5,592,549 entitled, Method and
Apparatus for Retrieving Selected Information from a Secure Information Source.
There are three essential components to this "Branding Patent:" 1) decryption of
an electronic item or product i.e. a document or software, 2) the attachment of
an identifying serial number, 3) the logging of the item number and serial
number. By attaching a "brand" at the time the document is decrypted from a
secure data source, an "audit trail" of the decrypted information can be
maintained.
In February 1995, ICC was granted patent No. 5,394,469 entitled, Method and
Apparatus for Retrieving Secure Information From Mass Storage Media, for its
system to retrieve and monitor the use of protected information from various
digital media.
In December 1995, ICC was granted patent No. 5,473,687 entitled, Method for
Retrieving Secure Information from A Database, covering its technology for
providing a secure method for the commercial distribution and use of digital
information on a rental basis using a technique to discourage long-term use
without endangering the computer or the operating system.
We rely upon this encryption and authentication technology to provide secure
transmission of confidential information. If our security measures do not
prevent security breaches, we could suffer operating losses, damage to our
reputation, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
that render current encryption technology outdated may result in a breach of our
encryption and authentication technology and could enable an outside party to
steal proprietary information or interrupt our operations.
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Uncertain Patent Protection.
Although ICC has obtained patent rights described above, we believe that the
protection of our rights in our CommerceSense service will depend primarily on
our proprietary software and messaging techniques which constitute "trade
secrets." ICC has made no determination as to the patentability of these trade
secrets. ICC will continue to evaluate, on a case-by-case basis, whether
applying for additional patents in the future is in our best interests. There
can be no assurance that our technology will remain a secret or that others will
not develop similar technology and use such technology to compete with us.
Additionally, there can be no assurance that any issued patents owned by ICC or
our trade secrets will afford us adequate protection or not be challenged,
invalidated, infringed or circumvented, or that patent applications relating to
our products or technologies that it may license in the future or file itself,
including any patent as to which a notice of allowance has issued, will result
in patents being issued, or that any rights granted thereunder will provide
competitive advantages to ICC. Although ICC believes that its technology does
not infringe upon the proprietary hardware or software of others, it is possible
that others may have or be granted patents claiming products or processes that
are necessary for or useful to the development of our CommerceSense service and
that legal actions could be brought against us claiming infringement. In the
event that we are unsuccessful against such a claim, we may be required to
obtain licenses to such patents or to other patents or proprietary technology in
order to develop, manufacture or market its products. There can be no assurance
that we will be able to obtain such licenses on commercially reasonable terms,
if at all. If we are required to and do not obtain such licenses, we will
encounter delays in the development and manufacturing of our products and
technologies while we attempt to design around such patents or other rights and
there can be no assurance that such attempts would be successful. Failure to
obtain such licenses or to design around such patents or other rights would have
a material adverse effect on our business.
Trademarks
ICC's trademarks INFOSAFE, PROTECTED BY INFOSAFE and DESIGN PALETTE have been
registered with the United States Patent and Trademark Office. The applications
to register ICC.NET, AUDINET, COMMERCESENSE, B2B4B2C and B to B for B to C have
now been allowed as trademarks and await registration. We intend to apply for
additional name and logo marks in the United States and in foreign
jurisdictions. No assurance can be given that registrations will issue on the
non-allowed applications or that interested third parties will not petition the
United States Patent and Trademark Office to cancel our registration.
The validity, enforceability and scope of protection of some types of
proprietary rights in Internet-related businesses are uncertain and still
evolving. If unauthorized third parties try to copy our service or our business
model or use our confidential information to develop competing services, we may
lose customers and our business could suffer. We may not be able to effectively
police unauthorized use of our technology because policing is difficult and
expensive. In particular, the global nature of the Internet makes it difficult
to control the
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ultimate destination or security of software or other data transmitted. The laws
of other countries may not adequately protect our intellectual property.
Marketing and Sales
We intend to employ a variety of marketing initiatives, including significantly
increased print advertising, to enhance awareness of our CommerceSense and other
services in the electronic commerce community and to increase our sales
domestically and internationally. We anticipate it will be necessary to retain
channel partners or independent contractors to train customers in the use of
CommerceSense to achieve our business plan.
Direct Marketing through Sales Force. Direct sales to large corporate users of
existing VAN services have been successful for ICC to date and continue to form
the core of our sales strategy. Our sales force currently consists of seven
people and is growing. Our sales force organization consists of field sales
representatives who provide direct assistance with sales calls at customer sites
and must meet target quotas. These representatives are supported by technical
personnel based in the field. All field sales personnel report to the Executive
Vice President of Sales through one of two regional managers responsible for the
eastern and western parts of the United States.
Indirect Marketing through Hub Companies. We believe that smaller spoke
companies comprise a significant potential market that may be reached without
any direct marketing on our part, because the low cost of our CommerceSense
service will allow these smaller spoke companies to consider using our service
if requested to do so by their hub companies.
Seminars and Tradeshows. We plan to conduct seminar marketing, consisting of a
traveling road show providing targeted group demonstration and selling
activities to pre-qualified audiences invited to events in their own localities
by direct mail supported by telemarketing confirmation. We will continue to
attend multiple industry tradeshows in 2000 and 2001. We plan to staff national
shows, currently planned for eight per year, with sales, support and executive
personnel from our headquarters.
Web-based and Print Advertising. We intend to use both web-based and traditional
print advertising. We plan to roll out a redesigned web site in January 2000
embodying a variety of promotional features, including the ability for a trading
partner to subscribe to our CommerceSense service and begin the installation
process for its own account online, directly from our web site. We also intend
to focus on print advertising in industry publications.
Strategic Relationships. We are currently discussing relationships with general
consulting firms and others in which the firms will recommend our products and
services as part of their project or product recommendations. In addition, we
are currently offering to create custom-designed interfaces to the purchasing
software packages, which commonly have an EDI component, of the twenty largest
companies that produce purchasing software. We believe that an interface with
our Internet-based electronic commerce system will appeal to the software
companies' desire to highlight the cutting-edge character of their software. The
software companies will not incur any costs by adding our interface, since we
are developing
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the interfaces to increase the number of users of our CommerceSense service
rather than to produce revenues by selling the interfaces.
Technical Support
We provide technical support twenty-four hours a day, seven days a week, for new
users of our CommerceSense service by educating the users about the application
and correctly configuring the users' computer systems. We also provide ongoing
assistance for previously-installed users. Due to the multiple redundancies of
all of our systems and the stability of SIAC, our CommerceSense service has been
fully operational more than 99% of the time.
Customers
We currently provide our CommerceSense service to more than 125 customers,
including the following:
o Three large web-based online shopping services;
o A large book retailer;
o Several large publishers;
o Three major office supply companies;
o A software manufacturer;
o A freight company;
o A large retail drug store chain; and
o Several automotive parts manufacturers.
We believe that no single customer will account for a material portion of our
revenues by the end of 1999.
Research and Development
Product development and enhancement costs decreased to $517,000 in 1999 from
approximately $576,000 in 1998. The decrease of $59,000 is due to utilizing
certain technical development employees on internal systems projects.
Employees
At July 31, 1999, ICC had 44 full-time employees, of which 13 performed
administrative, management and executive functions, 13 performed sales and
marketing functions and 18 were responsible for our technology and its
development.
Item 2. Description of Properties
Our executive offices are located at 805 Third Avenue, New York, New York 10022
under a lease that expires on December 31, 2004. The lease covers approximately
5,500 square feet, provides for annual rent of approximately $200,000 and is
subject to customary increases.
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We leased an additional 2,500 square feet at this location under a lease that
expires in February 2000 for a total rent of $50,000.
We leased a second facility in August 1999. This facility, which is located in
East Setauket, New York, contains approximately 4,100 square feet and will
initially accommodate 25 employees. This lease is for 5 years at an annual rent
of approximately $78,000 and is subject to customary increases. We plan to
locate our development and network administration groups and our technical
support call center at this facility.
Our data center is located at SIAC under an agreement that expires in December
2002. The agreement has an option to renew and to expand our usage of the
facility at the end of the current term. We plan to renew this agreement and to
exercise our option to expand.
We believe that these facilities should be adequate for our present and
reasonably foreseeable requirements.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
ICC's class A common stock is currently traded on The Nasdaq SmallCap Market
under the symbol ICCSA. ICC's Units, class A warrants and class B warrants are
traded in the over-the-counter market on the OTC Bulletin Board under the
symbols ICCSU, ICCSW and ICCSZ respectively. Our class A common stock, Units,
class A warrants and class B warrants were delisted from The Nasdaq SmallCap
Market on February 22, 1999 because we did not satisfy the listing criteria.
Since then, our class A common stock has been relisted on The Nasdaq SmallCap
Market. The following table sets forth the high and low closing prices of ICC's
securities for the periods indicated. These quotations represent prices between
dealers in securities, do not include retail mark-ups, mark-downs or commissions
and do not necessarily represent actual transactions.
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Fiscal Years Ended July 31:
High 1998 Low High 1999 Low
---- ---- --- ---- ---- ---
Class A
Common Stock
1st Quarter $13.750 $ 5.000 $ 2.125 $ .625
2nd Quarter 10.000 4.845 12.000 1.625
3rd Quarter 10.000 1.875 18.000 4.000
4th Quarter 4.690 .938 17.875 7.375
Units
1st Quarter $25.000 $ 8.125 $ 2.750 $ .125
2nd Quarter 18.125 5.625 12.500 2.000
3rd Quarter 11.250 2.190 10.500 7.000
4th Quarter 4.375 .625 20.000 8.000
Class A Warrants
1st Quarter $ 8.750 $ .625 $ .344 $ .063
2nd Quarter 4.375 .940 .063 .063
3rd Quarter 2.345 .315 .063 .063
4th Quarter .940 .080 2.312 .063
Class B Warrants
1st Quarter $ 5.470 $ .625 $ .063 $ .016
2nd Quarter 3.750 .625 .063 .063
3rd Quarter 1.720 .155 .063 .063
4th Quarter 1.250 .080 1.000 .031
(b) Holders
As of July 31, 1999, there were approximately 175 record holders of our class A
common stock, 5 record holders of our class B common stock, approximately 38
record holders of our class A warrants and approximately 39 record holders of
our class B warrants.
(c) Dividends
The Company has not paid any cash dividends on its common stock and does not
intend to declare or pay cash dividends on the common stock in the foreseeable
future. The holders of the outstanding shares of series A preferred stock are
entitled to a 4% annual non-cumulative dividend payable in cash or in shares of
class A common stock, at the option of ICC. These dividends are payable on each
July 1, commencing on July 1, 1999. ICC elected to issue 14,641 shares of class
A common stock and pay $312 in cash in payment of the dividend due on July 1,
1999.
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Recent sales of unregistered securities
We raised $7 million of cash proceeds and converted into equity $2,595,000 of
debt through the sale and exchange of series A preferred stock in our private
placement that was completed in April 1999. We issued a total of 9,595 shares of
series A preferred stock in connection with this private placement. In July 1999
we issued to Summerwind Restructuring, Inc., or Summerwind, 45 shares of series
A preferred stock for financial consulting and advisory services rendered from
January 1, 1999 through April 30, 1999 and 20,000 shares of class A common stock
on June 30, 1999 in connection with the termination of consulting arrangements.
Summerwind also received 500,000 warrants (also known as the Summerwind
warrants) as consideration for various consulting services under a consulting
agreement.
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 $1,000 by the
average market price of the class A common stock for the ten trading days before
the conversion date. However,
o if this average market price is less than $3 per share, the
series A preferred stock provides that the average market price
will be considered to be $3 per share, which results in a maximum
of 333 shares which may be issued upon conversion of one share of
series A preferred stock;
o if this average market price is greater than $5 per share, the
series A preferred stock provides that the average market price
will be considered to be $5 per share, which results in a minimum
of 200 shares which may be issued upon conversion of one share of
series A preferred stock; and
o until December 31, 1999, each share of outstanding series A
preferred stock is convertible into 200 shares of class A common
stock.
As a result of this formula, if all of the series A preferred stock were
converted before January 1, 2000, a maximum of 2,064,334 shares of class A
common stock could be issued in this conversion. If all of the series A
preferred stock were converted after December 31, 1999, a maximum of 3,213,334
shares of class A common stock would be issued in this conversion. The minimum
and maximum conversion rates apply even if the class A common stock is not
traded on The Nasdaq SmallCap Market after January 1, 2000. No fewer than 25
shares may be converted at one time unless the holder then holds fewer than 25
shares and converts all of the holder's shares at that time.
Series A preferred stock is redeemable, in whole or in part, by ICC, 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 before the redemption date.
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Subject to the rights of stockholders holding any series of ICC preferred stock
that is senior to the series A preferred stock, upon a liquidation, dissolution
or winding up of ICC, 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% non-cumulative annual dividend payable in cash or in shares of class A
common stock, at the option of ICC. Thus dividends are payable on each July 1
commencing on July 1, 1999. ICC elected to issue 14,641 shares of class A common
stock in payment of the dividend due on July 1, 1999.
Series A preferred stock has no voting rights except as expressly required by
law.
Each of the Summerwind warrants entitles the holder upon exercise to purchase
one share of class A common stock for $2.50 and expires in June 2003. The number
and exercise price of the Summerwind warrants are subject to adjustment in the
event of any sale or distribution of debt or other securities of ICC or of cash,
property or other assets to holders of class A common stock, any stock dividend
payable in shares of class A common stock paid to holders of class A common
stock, any subdivision or combination of the outstanding class A common stock,
or any sale of any shares of class A common stock, or of any rights, options,
warrants, or securities convertible into or exercisable for class A common
stock, for consideration valued at less than the then exercise price of the
Summerwind warrants.
In September 1998, ICC purchased the remaining 16.7% minority interest of its
majority-owned subsidiary from the minority stockholders in exchange for 334,495
shares of class A common stock and merged the two companies.
In December 1998 we issued 175 shares of class S preferred stock and 21,248
shares of class A common stock to Schnader Harrison Segal & Lewis LLP in payment
of legal services rendered on our behalf. On July 1, 1999 we issued 13,462
shares of class A common stock to Schnader Harrison in exchange for all 175
shares of series S preferred stock.
From June 1998 to January 1999 we issued 778,500 warrants to investors in
connection with our 1998 bridge financing. Each of these warrants entitles the
holder upon exercise to purchase one share of class A common stock for $2.50.
These warrants expire between December 2001 and July 2002. We issued 59,850
warrants and may issue an additional 6,750 to placements agents in connection
with our 1998 bridge financing. Each of these warrants entitles the holder upon
exercise to purchase one share of class A common stock for $2.50. These warrants
expire between July 2001 and January 2002. We issued 173,250 warrants to
broker/dealers in connection with our April 1999 private placement of Series A
preferred stock. Each of these warrants entitles the holder upon exercise to
purchase one share of class A common stock for $5.00 and expires in April 2002.
The warrants issued in our 1998 bridge financing to investors and placement
agents are redeemable by ICC for $2.50 per warrant within 10 days of mailing an
acceleration notice at any time after one year from issuance.
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The number and exercise price of the warrants issued to financial advisors in
connection with our 1998 bridge financing and our April 1999 private placement
are subject to adjustment in the event of any stock dividend payable in shares
of class A common stock paid to holders of class A common stock or any
subdivision or combination of the outstanding class A common stock.
Through Exchange Agreements each dated as of June 30, 1999 between ICC and
various holders of options to purchase units, each unit consisting of one share
of class A common stock, one class A warrant and one class B warrant, that were
issued in January 1995 and March 1997 to D.H. Blair, and its designees, in
connection with our initial public offering and 1997 private placement of units,
we exchanged 105,000 shares of class A common stock for all of the outstanding
options.
Richard Blume received 18,000 warrants for consulting services performed for
ICC. These warrants are exercisable at $9.94 per share and expire on March 3,
2004.
Richard J. Berman received 38,750 shares of class A common stock in lieu of cash
payment for his services as chairman and chief executive officer of ICC from
September 15, 1998 to March 15, 1999.
Southeast Research Partners received 75,000 warrants pursuant to a consulting
agreement with ICC for services rendered commencing in October 1998. The
warrants were exchanged for 63,000 shares of class A common stock in July 1999.
On July 1, 1999 we issued 14,641 shares of class A common stock as a dividend on
the series A preferred stock to the holders of series A preferred stock of
record as of July 1, 1999 according to the provisions of the certificate of
designation for the series A preferred stock.
Arthur Medici was issued 70,000 shares of class B common stock on December 17,
1996, upon his hiring as the chief executive officer of our predecessor,
Infosafe Systems, Inc. Upon the merger of our former subsidiary, Internet
Commerce Corporation, into Infosafe Systems, Inc. and the subsequent reverse
split, these shares changed into 14,000 shares of our class B common stock.
Michael Brooks purchased 80,000 shares of class B common stock in a private
placement in June 1998. At the end of December 1998, Brooks converted 70,000 of
these shares into 70,000 shares of class A common stock.
Class B common stock is convertible into class A common stock on a one-for-one
basis both upon request of the holder of the class B common stock or
automatically upon transfer of the class B common stock to a stockholder that
does not hold any class B common stock before the transfer. Class B common stock
is entitled to six votes per share rather than one vote per share, but in all
other respects each share of class B common stock is identical to one share of
class A common stock.
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All of the securities described in this section were issued by ICC in
transactions not involving a public offering, to accredited investors that gave
ICC representations that the securities were purchased with investment intent
and not with an intent to distribute the securities. The securities were issued
under the exemption from registration set forth in Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), or, in the case of
the shares of class A common stock issued as dividends on the series A preferred
stock, under the exemption from registration set forth in Section 3(a)(9) of the
Securities Act.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Annual Report on Form 10-KSB contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Specifically, all statements other than statements of historical facts included
in this Report regarding our financial position, business strategy and plans and
objectives of management for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of management, as well
as assumptions made by and information currently available to management. When
used in this Report, the words "anticipate," "believe," "estimate," "expect,"
"may," "will," "continue" and "intend," and words or phrases of similar import,
as they relate to our financial position, business strategy and plans, or
objectives of management, are intended to identify forward-looking statements.
These "cautionary statements" reflect our current view with respect to future
events and are subject to risks, uncertainties and assumptions related to
various factors including, without limitation, those described below the heading
"Overview", those described on pages 20 to 22 of this Annual Report and in our
registration statements and periodic reports filed with the Securities and
Exchange Commission under the Securities Act and the Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure you
that our expectations will prove to be correct. Based upon changing conditions,
should any one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may vary materially
from those described in this Report as anticipated, believed, estimated,
expected or intended.
Overview
We were founded in November 1991 under the name Infosafe Systems, Inc. and from
1991 to 1997 we conducted limited operations and developed certain products that
we were unable to exploit commercially and consequently discontinued. In 1997,
we shifted our business emphasis to focus exclusively on the development and
marketing of our CommerceSense service and changed our name to Internet Commerce
Corporation in September 1998 to reflect this shift. We launched the current
version of our CommerceSense service commercially in April 1999. As a result, we
have only a limited operating history and there is little historical information
on which to evaluate our business and prospects.
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We developed our CommerceSense service as an alternative to the EDI services
that are currently provided by traditional VANs that offer their services
primarily using dedicated telecommunications links. Our CommerceSense service
translates and transmits electronic documents, such as purchase orders, requests
for proposals and receipts, as well as images and other data over the Internet.
We are currently focusing on our CommerceSense service. As a result, our revenue
for the foreseeable future is almost entirely dependent on the success of this
service, including, but not limited to, the number of customers who subscribe to
the service and the volume (in kilocharacters) of the data, documents or other
information they send or retrieve utilizing our service. We expect our cost of
revenue and operating expenses to increase significantly, especially in the
areas of marketing, customer installation and customer service. We will need to
generate significant revenue to achieve and maintain profitability. If we do not
increase our revenue significantly, we will continue to be unprofitable.
We raised $7 million of cash proceeds and converted into equity $2,595,000 of
debt through the sale and exchange of 9,595 shares of series A preferred stock
in our private placement that was completed in April 1999.
We expect to base our expenditures on our plans and estimates of future revenue.
We may be unable to adjust spending in a timely manner if we experience an
unexpected shortfall in our revenue. As a result, we may not achieve
profitability.
Fiscal Year Ended July 31, 1999 compared with Fiscal Year Ended July 31, 1998
Our revenues were $105,000 and $19,000 in the fiscal years ended July 31, 1999
("1999") and July 31, 1998 ("1998"), respectively. All of the 1999 revenues and
$17,000 of the 1998 revenues were attributable to our CommerceSense service.
Cost of services increased to $452,000 in 1999 from $11,000 in 1998. The
increase of $441,000 is primarily due to direct cost components, including
charges for data lines and personnel employed for the roll-out of our
CommerceSense service to new customers and the depreciation of equipment used to
render the service.
Product development and enhancement costs decreased to $517,000 in 1999 from
$576,000 in 1998. The decrease of $59,000 is due to utilizing certain technical
development employees on internal systems projects.
Selling and marketing expenses increased to $420,000 in 1999 from $8,000 in
1998, an increase of $412,000. We were able to spend more of our resources on
our selling and marketing efforts after completion of our private placement of
series A preferred stock in April 1999. These expenses primarily consisted of
salaries and related costs, advertising and participation in trade shows.
General and administrative expenses increased to $3,549,000 in 1999 from
$2,300,000 in 1998. The increase of $1,249,000 is largely due to infrastructure
expansion to support
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anticipated growth of our CommerceSense service. Expenses related to salaries,
payroll taxes, benefits and recruitment costs increased $972,000 which reflects
a more than 100% increase in our staffing levels from 1998 to 1999. Also, in
1999 we amortized goodwill, in the amount of $131,000, that resulted from the
purchase of the remaining interest of our majority owned subsidiary in September
1998. The increase in other expenses was due to an increased level of activity
in 1999 compared to 1998.
Non-cash charges in connection with options, compensation and services were
$3,267,000 in 1999. There were no such charges in 1998. We issued stock and
warrants throughout the year for services received since we had insufficient
funds to acquire these services. These non-cash charges were calculated using
the Black-Scholes Option Pricing Model. The non-cash charges consist of (a)
$862,000 for consulting expense, which is comprised of the issuance of (i) 45
shares of series A preferred stock valued at $45,000 and 500,000 warrants valued
at $591,000 to Summerwind, (ii) 18,000 warrants to a consultant valued at
$138,000 and (iii) 63,000 warrants issued to Southeast Research Partners, Inc.
("Southeast") valued at $88,000; (b) 20,000 shares of class A common stock
issued to Summerwind in connection with the termination of consulting
arrangements valued at $260,000; (c) $148,000 for stock issued to officers for
compensation; (d) $1,374,000 for options to certain officers and management of
ICC which vested upon our class A common stock reaching a certain market price.
Variable plan accounting requires us to take a non-cash charge to earnings equal
to the difference between the exercise price of the options and the fair market
value of our common stock on the date the price requirement for vesting is met,
multiplied by the number of options that vest on that date; and (e) $623,000 for
the vesting of certain options due to a change of control feature attached to
such options.
Write-down of assets was $33,000 in 1999 and $178,000 in 1998. In 1999 we wrote
down obsolete computer equipment and a trade booth that was no longer used in
our business. In 1998, the unamortized portion of a prepaid license fee and
notes receivable from Visus Technology was written off as we abandoned
operations and support for the Advanced Imaging Systems.
Interest and investment income remained about the same in 1999 and 1998. Income
from these items was $88,000 in 1999 and $87,000 in 1998.
Interest expense was $1,578,000 in 1999 and $31,000 in 1998. The increase in
interest expense is largely attributable to the amortization of debt discount
related to 778,500 warrants issued in our 1998 bridge financing, which caused a
non-cash charge of $1,237,000 to interest expense. Also, the amortization of
debt issue costs for the issuance of 59,850 warrants to NASD registered
broker/dealers who participated in the private placement of bridge note units
required a non-cash charge to interest expense in the amount of $188,000. These
warrants were valued using the Black-Scholes Option Pricing Model. In addition,
we incurred interest of $111,000 on the bridge notes in 1999. The remaining
interest expense was due to capital leases and was $44,000 in 1999 and $31,000
in 1998.
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The net loss in 1999 was $9,621,000 compared to $2,997,000 for 1998. The net
loss in 1999, after excluding non-cash charges in connection with options,
compensation and services, debt discount and debt issues costs, was $4,929,000.
Liquidity and Capital Resources
At July 31, 1999 we had working capital of $3,119,000.
We have financed our operations through private placements during fiscal 1994,
our initial public offering during fiscal 1995 (the "IPO"), a private placement
in March 1997, a private placement of bridge note units during fiscal 1998 and
1999 and a private placement of series A preferred stock in April 1999. We
anticipate losses through fiscal 2000, as we attempt to expand commercial
markets for CommerceSense.
As a result of operating losses, cash used in operating activities amounted to
$4,201,000 in 1999 and $2,023,000 in 1998. Cash used for purchase of equipment
amounted to $191,000 in 1999 and $436,000 in 1998.
Our principal sources of liquidity at July 31, 1999 included cash and cash
equivalents of $114,000 and marketable securities of $3,971,000. We will seek to
obtain additional financing from outside investors. Additional funding may not
be available when needed or on terms acceptable to us, which could have a
material adverse effect on our business, financial condition and results of
operations. If adequate funds are not available, we may be required to reduce
our staffing levels and revenue will be materially and adversely affected. Any
additional equity financing would be dilutive to stockholders, and debt
financing, if available, may contain covenants that might restrict our ability
to implement our current objectives.
We have a net operating loss carryforward of $22 million to offset any future
taxable income for federal tax purposes. The utilization of the loss
carryforward to reduce any such future income taxes will depend on our ability
to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2019. The
Internal Revenue Code of 1986, as amended, contains provisions which generally
limit the use of available net operating loss carryforwards in any given year
should significant changes (greater than 50%) in ownership interests occur. Due
to the IPO, the net operating loss carryover of $1,900,000 incurred prior to the
IPO will be subject to an annual limitation of $400,000 until the pre-IPO
portion of the net operating loss is utilized or expires. Also, due to the
private placement of series A preferred stock in April 1999, the net operating
loss carryover of $20 million incurred prior to the private placement will be
subject to an annual limitation of $1,000,000 until that portion of the net
operating loss is utilized or expires.
Year 2000 Compliance
We may have substantial exposure to the year 2000 problem, both with our own
systems and with systems we do not control. The year 2000 problem could harm our
business and financial results. Many currently installed computer systems and
software products have been coded to accept or recognize only two digit entries
to define the applicable year. These
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systems may erroneously recognize the year 2000 as the year 1900. Thus could
result in major failures or malfunctions.
This risk is particularly significant for our business. We rely on computer
programs and systems in connection with our internal and external communication
networks and systems, including transmissions of information over the Internet,
order processing and fulfillment, accounting and financial systems, customer
access to our web site and other business functions. Based on our design process
and assessment to date, we believe the current versions of our service and our
various systems are year 2000 compliant. However, we cannot assure you that our
programs designed to minimize the impact of the transition to the year 2000 on
the terminal operations software at our facilities and other date sensitive
equipment will be completely successful. In addition, the costs of implementing
these programs may exceed our current estimates. If these programs are not
successful or if their costs exceed our estimates, the date change from 1999 to
2000 could harm our business. The full extent of any adverse impact on our
business is impossible to determine.
In addition, our customers may not become year 2000 compliant in a timely
fashion or at all. The failure of a customer to become year 2000 compliant will
adversely affect the ability of that customer's trading partners to receive or
utilize the document or data we transmit. As a result, customers that are not
year 2000 compliant may cease using our CommerceSense service, decreasing our
revenues and harming our results of operations.
Certain Trends and Uncertainties
Each of the following risk factors should be carefully considered in addition to
the other information contained in this annual report on Form 10-KSB. Any of the
following risks could materially and adversely affect our business, operating
results, financial condition and the market price of our class A common stock.
We may not achieve profitability. The profit potential of our business model is
unproven. Our revenue is dependent on the number of customers who subscribe to
our CommerceSense VAN service and the volume of the data, documents or other
information they send or retrieve utilizing this service. The success of our
CommerceSense VAN service and our other proposed services depends to a large
extent on the future of business-to-business electronic commerce using the
Internet, which is uncertain. In addition, we expect our cost of revenue and
operating expenses to increase significantly, especially in the areas of
marketing, customer installation and customer service. As a result, we expect to
incur additional losses in the future. If we experience a shortfall in our
estimated revenue, we may be unable to adjust spending in a timely manner and
may not achieve profitability.
If we are unable to obtain necessary future capital, our business will suffer.
As of July 31, 1999, we had unrestricted cash and marketable securities in the
amount of approximately $4.1 million. We anticipate that we will need to raise
additional funds soon. If we are unable to obtain necessary additional
financing, our business will suffer. We cannot assure you that any additional
financing will be available on reasonable terms or at all. In addition, we may
need to raise additional funds sooner if we attempt to expand more rapidly or if
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competitive pressures or technological changes are greater than anticipated.
Even if we are able to obtain additional financing, we will subsequently need to
raise additional funds if we do not become profitable or if achieving
profitability takes longer than we anticipate.
If we cannot hire and retain highly qualified employees, our business and
financial results will suffer. We are substantially dependent on the continued
services and performance of our executive officers and other key employees. In
addition, we believe we will need to expand significantly our information
technology, marketing and customer service staffs. Competition for employees in
our industry is intense. If we are unable to attract, assimilate and retain
highly qualified employees, our management may not be able to effectively manage
our business, exploit opportunities and respond to competitive challenges and
our business and financial results will suffer. Many of our competitors may be
able to offer more lucrative compensation packages which include stock options
and other stock-based compensation and higher-profile employment opportunities
than we can.
If we are not able to hire and retain independent contractors, our business will
be harmed. We are substantially dependent on the services of independent
contractors to train customers in the use of CommerceSense. We have entered into
three relationships with independent contractors and need to retain several
other providers of these services to achieve our business plan. If we fail to
hire and retain qualified independent contractors, then our business will be
harmed.
If we cannot successfully expand our business outside of the United States, our
revenues and operating results will be adversely affected. Our current and
future customers are conducting their businesses internationally. As a result,
an important component of our business strategy is to expand our international
marketing and sales efforts. We have limited experience in expanding our
business outside the United States and if we do not successfully expand our
business in this way, we may lose current and future customers. In addition, our
potential new service offerings may involve delivery of data and use of the
Internet in other countries which may currently have or enact laws or
regulations that restrict our ability to deliver data or use the Internet or
that impose significant taxes for doing so. Loss of customers and restrictions
on delivery of data and use of the Internet will adversely affect our revenues
and operating results.
We may face capacity constraints which impede our revenue growth and business
profitability. The satisfactory performance, reliability and availability of our
network infrastructure, customer support and document delivery systems and our
web site are critical to our reputation and our ability to attract customers and
maintain adequate customer service levels. Any significant or prolonged capacity
constraints could prevent customers from sending or gaining access to their
documents or other data or accessing our customer support services for extended
periods of time. This would decrease our ability to acquire and retain customers
and prevent us from achieving the necessary growth in revenue to achieve
profitability. If the amount of traffic increases substantially and we
experience capacity constraints, we will need to expand further and upgrade our
technology and network infrastructure. We may be unable to predict the rate or
timing of increases in the use of our services to enable us to upgrade our
operating systems in a timely manner.
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If Internet usage does not continue to grow or its infrastructure fails, our
business will suffer. If the Internet does not gain increased acceptance for
business-to-business electronic commerce, our business will not grow or become
profitable. Concerns about the security of online transactions and the privacy
of users may inhibit the growth of the Internet as a means of delivering
business documents and data. We may need to incur significant expenses and use
significant resources to protect against the threat of security breaches or to
alleviate problems caused by security breaches. We cannot be certain that the
infrastructure or complementary services necessary to maintain the Internet as a
useful and easy means of transferring documents and data will continue to
develop. The Internet infrastructure may not support the demands that growth may
place on it and the performance and reliability of the Internet may decline.
Government regulation and legal uncertainties relating to the Internet could
harm our business. Changes in the regulatory environment in the United States
and other countries could decrease our revenues and increase our costs. The
Internet is largely unregulated and the laws governing the Internet remain
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy and taxation apply to the Internet. In addition,
because of increasing popularity and use of the Internet, any number of laws and
regulations may be adopted in the United States and other countries relating to
the Internet or other online services covering issues such as:
o user privacy;
o security;
o pricing and taxation;
o content; and
o distribution.
Item 7. Financial Statements
The response to this item is submitted in a separate section of this Annual
Report.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
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PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
Directors and Executive Officers
The directors and executive officers of the Company, along with their respective
ages and positions with the Company, are as follows:
Name Age Position
Richard J. Berman 57 Chairman of the Board
Dr. Geoffrey Carroll 45 President and Chief Executive Officer, Director
Richard Blume 51 Executive Vice President and Chief Operating Officer
G. Michael Cassidy 47 Executive Vice President Sales, Director
Michele Golden 40 Executive Vice President Business Development,
Director
David Hubbard 43 Chief Technology Officer
Walter M. Psztur 40 Chief Financial Officer, Secretary
Charles C. Johnston 64 Director
Arthur R. Medici 50 Director
James Ortenzio 53 Director
Peter Ruel 37 Director
Richard J. Berman, Chairman - Mr. Berman joined ICC in September 1998 and served
as our chief executive officer until June 1999. For more than 15 years prior to
September 1998, Mr. Berman, through American Acquisition Company, acted as
principal in venture capital and real estate, as an advisor in mergers and
acquisitions, and as a source of funding for small growth companies. He was also
the chairman of Prestolite Battery Company, the largest battery producer in
Canada, which merged with Exide Corporation in 1993.
Dr. Geoffrey S. Carroll, President and Chief Executive Officer - Dr. Carroll
joined ICC in June 1999. Prior to joining ICC, Dr. Carroll served as president
and chief executive officer of LCC International, Inc., one of the world's
largest suppliers of integrated infrastructure resources to the wireless
telecommunications industry. From 1996 to 1997, Dr. Carroll served as chief
executive officer of Origin B.V., the information technology services subsidiary
of Philips N.V., Europe's largest electronics manufacturer. Prior to 1996, Dr.
Carroll spent six years with Electronic Data Systems (EDS) in the capacities of
group executive for Europe, member of the EDS Europe board of directors and
president of Northern Europe. Dr. Carroll has spent his entire career in the
information technology field.
Richard Blume, Executive Vice President and Chief Operating Officer - Mr. Blume
joined ICC in June 1999. Prior to joining ICC, Mr. Blume served as chief
operating officer - U.S. and president of the wireless division of Long Distance
International Inc., a facilities- based international telecommunications common
carrier. From 1994 to 1996, Mr. Blume
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was President of Digitable Communications Inc., a satellite transponder,
brokerage service and business development firm. Mr. Blume was a founder and
chief executive officer of Action Pay Per View, a national pay per view movie
network, and President of United Satellite Communications, the first broadcast
satellite company in the U.S.
G. Michael Cassidy, Executive Vice President Sales - The developer of our
business model and co-founder of Internet Commerce Corporation, our former
subsidiary which was incorporated in April 1997. In September 1998, Internet
Commerce Corporation was merged into Infosafe Systems, Inc. and Infosafe
Systems, Inc. changed its name to Internet Commerce Corporation. Mr. Cassidy is
currently responsible for ICC's marketing and sales strategies and industry
positioning. From August 1993 to October 1996, Mr. Cassidy was President and CEO
of Greentree Software, a NASDAQ-listed, software development company
specializing in supply chain management software solutions for Fortune 1000
scale companies. He began his sales career at IBM and later managed strategic
alliances for Coopers & Lybrand.
Michele Golden, Executive Vice President/Business Development - A co-founder of
Internet Commerce Corporation, our former subsidiary which was incorporated in
April 1997. In September 1998, Internet Commerce Corporation was merged into
Infosafe Systems, Inc. and Infosafe Systems, Inc. changed its name to Internet
Commerce Corporation. She has over 10 years of senior management experience in
electronic commerce initiatives. Ms. Golden previously was president and founder
of New Paradigm Golden-link, an EDI service provider. From 1992 to 1994 she was
vice president of business development of CIS Corporation, an EDI technology
company. She is responsible for business development and strategic large account
relationships.
David Hubbard, Chief Technology Officer - Mr. Hubbard has been with ICC since
April 1997. He has more than 20 years of large systems design experience. Prior
to joining ICC, Mr. Hubbard was CTO of Track Data Corp., a real-time market data
vendor. During his 14 years at Track Data he directed engineering for their
real-time market ticker feeds and data analysis systems, handling most of the
world's stock, options, and commodity exchanges, as well as most major national
and international news services.
Walter M. Psztur, Chief Financial Officer and Secretary - Mr. Psztur has been
with ICC since September 1997. Mr. Psztur served as our Corporate Controller
until September 1998 when he was named Vice President of Finance and
Administration and assumed the duties of Chief Financial Officer. Mr. Psztur was
named our Chief Financial Officer in July, 1999. Prior to joining ICC, from 1993
to September 1997, Mr. Psztur was the Assistant Corporate Controller of Standard
Motor Products, automotive manufacturer and distributor with annual revenues of
approximately $700 million. His responsibilities included corporate financial
consolidation and reporting, financial operations and financial systems,
acquisition analysis and corporate policies and procedures for accounting and
financial controls.
Charles C. Johnston has been a Director of ICC since October 1996. Mr. Johnston
is presently an active private investor. From 1990 to 1992, Mr. Johnston was
chairman of Teleglobe Inc., a computer services company. Since January 1990, Mr.
Johnston has been a
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member of the Board of Directors of Teleglobe Inc. From 1969 to 1989, he was
chairman and chief executive officer of ICI Systems Inc., a computer services
company.
Arthur R. Medici has been the Senior Vice President of Marketing of Cable &
Wireless USA, Inc. since February 1999. He was president of ICC from November
1996 to January 1999 and has been a director of ICC since November 1996. From
November 1996 to September 1998 he also served as the chief executive officer of
ICC. From August 1994 to December 1996, Mr. Medici was president of the North
American division of Derwent Information, Ltd., a producer of international
patent abstracts and information formatted for print, CD-ROM and digital online
delivery. From November 1990 to August 1994, Mr. Medici was a senior vice
president of Thomson & Thomson. Both companies are subsidiaries of The Thomson
Corporation's Intellectual Property Resources Group.
James A. Ortenzio has been a Director of ICC since January 1999. Mr. Ortenzio
also serves as chairman of Jao Holdings which has investments in the fashion,
food and real estate industries. Since 1996, he has also served as chairman of
the Hudson River Park Conservancy under Governor George Pataki. Mr. Ortenzio was
appointed to the Board of the Economic Development Corporation of the City of
New York by Mayor Rudolph Giuliani in 1994. Mr. Ortenzio has also served as
Chairman of Transition for the New York State Attorney General Dennis Vacco,
Chairman of Economic Development Transition for Governor George Pataki and is
currently Senior Advisor to the U.S. Department of Defense. He is also a member
of the Board of Trustees of Cornell University.
Peter E. Ruel has been a Director of ICC since January 1999. Since April 1998,
Mr. Ruel has been an officer, director and shareholder of Summerwind
Restructuring, Inc., a New York concern engaged in corporate finance activities.
From December 1994 to February 1998, Mr. Ruel served as a senior vice president
and chairman of the Capital Markets Committee, syndicate manager and chairman of
the Pre-Underwriting Acceptance Committee of Jeffries & Company, Inc., an
investment banking company. For more than nine years prior thereto, Mr. Ruel
served in similar roles at Fahnestock & Company, Inc., a New York investment
bank, Tucker Anthony, Inc., a Boston-based investment bank, and First of
Michigan Capital Corporation, a Detroit-based investment bank.
During 1999, a resignation was submitted by former board member James Christie.
All directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers serve at the
discretion of the Board of Directors, subject to rights, if any, under contracts
of employment.
25
<PAGE>
Other Significant Employees:
The following persons, although not executive officers, make significant
business contributions to ICC:
Steve Brett Vice President of Information Services
Arnold Capstick Vice President, Product Marketing
Anthony D'Angelo Senior Vice President, Electronic Commerce Network Services
Steve Brett, Vice President of Information Services - Mr. Brett has been with
ICC since June 1997. Mr. Brett served as our director of integration services
until July 1999, when he was named Vice President of Information Services. Mr.
Brett has extensive experience in the design and development of banking systems,
including trade finance and capital markets.
Arnold B. Capstick, Vice President, Product Marketing - In June 1999, Mr.
Capstick, formerly GE Information Services Director of Product Marketing, joined
ICC as a vice president of product marketing. During his 29-year career with GE
Information Services, Mr. Capstick spent 11 years managing the company's
EDI*EXPRESS service, helping it grow into the largest electronic data
interchange value added network, with $125 million in service revenues. He
joined the EDI Services unit of GE Information Services in 1989 as manager of
EDI services, ultimately becoming global product manager, EDI marketing. Under
his leadership, EDI*EXPRESS grew to include 40,000 trading partners in more than
750 cities worldwide. He initiated service in Europe and the Asia Pacific region
and launched new TCP/IP and EDI-to-fax services. He began his GE career in the
Honeywell Computer Department in 1967 and moved to GE Information Services in
1975. Mr. Capstick is a member of the Electronic Messaging Association, DISA
X.12 Standards and Product Development Managers Association.
Anthony D'Angelo, Senior Vice President, Electronic Commerce Network Services -
Mr. D'Angelo has been with ICC since 1997. Mr. D'Angelo served as our director
of electronic commerce services until December 1998, when he was named our vice
president of electronic commerce services. In July 1999, Mr. D'Angelo was named
our Senior Vice President, Electronic Commerce Network Services. Prior to
joining ICC, Mr. D'Angelo, was with Standard Motor Products from October 1985 to
March 1997. Most recently he was corporate IS manager of Standard Motor Products
where he oversaw IT issues for its Canadian subsidiary, Mid-western division,
sales force, and developed and managed corporate electronic commerce & EDI
systems.
Directors' Compensation
Directors of the Company do not receive any fixed compensation for serving on
the Board. Board members are reimbursed for all reasonable expenses incurred by
them in connection with serving as directors of the Company.
26
<PAGE>
Board Committees
The audit committee consists of Mr. Johnson and Mr. Ruel. The audit committee
makes recommendations to the Board of Directors regarding the selection of
independent accountants, reviews the results and scope of audit and other
services provided by our independent accountants and reviews and evaluates our
audit and control functions. The compensation committee consists of Mr. Ortenzio
and Mr. Ruel. The compensation committee has the power and authority to grant
options under and to administer our stock option plans and to review and approve
the compensation for our executive officers.
Compliance with Section 16(a) of the Exchange Act
The Company is in the process of bringing its reporting persons into compliance.
Item 10. Executive Compensation
The following table sets forth the compensation paid or accrued by ICC for
services rendered during the fiscal years ended July 31, 1997, July 31, 1998 and
July 31, 1999 to our former chief executive officer, our current chief executive
officer and the four most highly compensated other executive officers whose
compensation in the year ended July 31, 1999 was more than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Fiscal Annual Compensation
Years Other
Name and Principal Position Ended Compensation
July 31, Salary Bonus
<S> <C> <C> <C> <C>
Richard J. Berman(1)......... 1999 $67,500 $-- $38,500(2)
Chairman and former 1998 -- -- --
chief executive officer 1997 -- -- --
Geoffrey S. Carroll.......... 1999 16,667 --
President and chief 1998 -- -- --
executive officer 1997 -- -- --
David Hubbard................ 1999 140,000 --
Chief technology officer 1998 100,000 --
1997 40,833 --
G. Michael Cassidy........... 1999 106,250 --
Executive vice president and 1998 100,000 --
general manager 1997 29,167 --
Michele Golden............... 1999 105,000 --
Executive vice president for 1998 100,000 --
business development 1997 29,167 --
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Walter M. Psztur............. 1999 105,000 10,000
Chief financial officer, 1998 87,886 --
principal accounting officer 1997 -- --
and secretary
</TABLE>
- ----------------------
(1) Mr. Berman resigned as chief executive officer in June 1999 upon Dr.
Carroll's appointment on June 30, 1999.
(2) Pursuant to Mr. Berman's employment agreement, in lieu of receiving
cash, during the period from September 15, 1998 through March 15, 1999,
Mr. Berman received 38,750 shares of class A common stock. See
Employment Agreements on page 29.
Option/SAR Grants
The following table sets out the options that were granted during the fiscal
year ended July 31, 1999.
<TABLE>
<CAPTION>
Number of Percent of total
securities options/SAR's
underlying granted to
options/SAR's employees in Exercise or base
granted (#) fiscal year price ($ / Sh) Expiration date
<S> <C> <C> <C> <C>
Richard J. Berman 250,000 25.6% $2.50 January 31, 2006
Dr. Geoffrey S. Carroll 150,000 15.4% $40.00 - $80.00 June 29, 2009
David Hubbard 16,606 1.7% $2.50 January 31, 2006
Walter M. Psztur 63,652 6.5% $2.50 January 31, 2006
</TABLE>
During the fiscal year, additional options were granted which are subject to
stockholder approval. These options were granted to our Chairman, our Chief
Executive Officer and our Chief Operating Officer in the following amounts and
subject to the following terms.
Mr. Richard Berman was granted options to purchase 100,000 shares of class A
common stock at an exercise price of $12.00 per share. One-third of these
options are exercisable immediately and the balance are exercisable commencing
on January 1, 2000, provided that one-third of the options are exercisable only
if the average closing price of the class A common stock for any five
consecutive trading days exceeds $15.00 and the remaining one-third of the
options are exercisable only if the average closing price for the class A common
stock for any five consecutive trading days exceeds $20.00.
Dr. Geoffrey S. Carroll was granted options to purchase 300,000 shares of class
A common stock at an exercise price of $12.00 per share. One-third of these
options are exercisable immediately and the balance are exercisable commencing
on January 1, 2000, provided that one-third of the options are exercisable only
if the average closing price of the class A common stock for any five
consecutive trading days exceeds $15.00 and the remaining one-
28
<PAGE>
third of the options are exercisable only if the average closing price for the
class A common stock for any five consecutive trading days exceeds $20.00.
Richard Blume was granted options to purchase 200,000 shares of class A common
stock at an exercise price of $12.00 per share. One-third of these options are
exercisable immediately and the balance are exercisable commencing on January 1,
2000, provided that one-third of the options are exercisable only if the average
closing price of the class A common stock for any five consecutive trading days
exceeds $15.00 and the remaining one-third of the options are exercisable only
if the average closing price for the class A common stock for any five
consecutive trading days exceeds $20.00. Mr. Blume was also granted immediately
exercisable options to purchase (i) 30,000 shares of class A common stock
exercisable at $40.00 per share, (ii) 30,000 shares of class A common stock
exercisable at $60.00 per share and (iii) 30,000 shares of class A common stock
exercisable at $80.00 per share. All of Mr.
Blume's options expire on June 29, 2009.
Option Exercises
There were no Options/SAR Grants exercised during the fiscal year ended July 31,
1999.
Fiscal Year End Option Values
The following table sets forth the number of securities underlying unexercised
options and the value of unexercised in the money options at the end of the
fiscal year ended July 31, 1999 for our former chief executive officer and the
four most highly compensated other executive officers whose compensation in the
year ended July 31, 1999 was more than $100,000. Our current chief executive
officer held no options at the end of the fiscal year ended July 31, 1999.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In the
Unexercised Options at Fiscal Money Options at Fiscal Year
Year End Exercisable/Unexercisable End Exercisable/Unexercisable
<S> <C> <C> <C> <C>
Richard J. Berman 183,334/66,666 2,062,508/749,993
David Hubbard 127,334/2,667 1,685,993/29,993
G. Michael Cassidy 251,021/0 3,385,153/0
Michele Golden 376,397/0 5,075,879/0
Walter M. Psztur 100,000/0 1,188,370/0
</TABLE>
Employment Agreements
Richard J. Berman joined ICC as chairman and chief executive officer under a
two-year employment agreement beginning on September 15, 1998. Under the
employment agreement, Mr. Berman receives a base salary at an annual rate of
$180,000. However, due to ICC's working capital shortage, Mr. Berman agreed to
accept, and the Board of Directors unanimously authorized, payment of his salary
from September 15, 1998 through December 31, 1998 in shares of class A common
stock valued at $2.00 per share and from January 1, 1999 through March 15, 1999
in shares of class A common stock valued at $3.00 per share,
29
<PAGE>
both of which values exceeded the fair market value of the class A common stock
of $1.10 at the date the employment agreement was signed. As a result of these
provisions, Mr. Berman received a total of 38,750 shares of class A common
stock. In addition, under the employment agreement Mr. Berman was granted a
total of 250,000 options to purchase class A common stock at $2.50 per share
stock under our employee stock option plan, one-third of which vested upon
employment and the balance vests in 20% increments when the class A common stock
attains or exceeds each of following per-share bid prices for twenty consecutive
trading days: $7.50, $10.00, $12.50, $15.00 and $17.50.
Geoffrey S. Carroll joined ICC as President and Chief Executive Officer under a
three year employment arrangement. Under the employment arrangement, Dr. Carroll
receives a base salary at an annual rate of $200,000 per year, increasing to at
least $350,000 per year on the earlier of November 1, 1999 or completion of a
funding transaction. Dr. Carroll will also be eligible to receive an annual
performance bonus. ICC has granted Dr. Carroll options to purchase class A
common stock described under the caption "Option/SAR Grants". The terms and
conditions of Dr. Carroll's employment and compensation arrangement are subject
to final negotiation and the entering into of formal documents with ICC.
Richard Blume joined ICC as Chief Operating Officer under a three year
employment arrangement. Under the employment arrangement, Mr. Blume receives a
base salary at an annual rate of $175,000 per year, increasing to $250,000 per
year on completion of a funding transaction. Mr. Blume will also be eligible to
receive an annual performance bonus. ICC has granted Mr. Blume options to
purchase class A common stock described under the caption "Option/SAR Grants".
The terms and conditions of Mr. Blume's employment and compensation arrangement
are subject to final negotiation and the entering into of formal documents with
ICC.
We have also entered into employment agreements with each of G. Michael Cassidy,
Michele Golden, David Hubbard, Walter M. Psztur, Anthony D'Angelo and Steve
Brett. The employment agreements with Mr. Cassidy, Ms. Golden and Mr. Hubbard
are each for a term of three years that ends on April 16, 2000. The employment
agreements with Mr. Psztur, Mr. D'Angelo and Mr. Brett are each for a term of
two years that ends on July 31, 2000. Under the employment agreements for Mr.
Cassidy, Ms. Golden, Mr. Psztur and Mr. D'Angelo each receives a base salary at
the annual rate of $100,000, under Mr. Hubbard's employment agreement, Mr.
Hubbard receives a base salary at the annual rate of $140,000 and under Mr.
Brett's employment agreement, Mr. Brett receives a base salary at the annual
rate of $90,000.
Stock Option Plans
Pursuant to the 1994 Stock Option Plan (the "1994 Plan"), as amended by the
Company's stockholders in 1998, the company may grant options to purchase an
aggregate of 1,960,000 shares of the Company's Class A Common Stock. The 1994
Plan provides for the grant to key employees of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, and for the
grant of non-qualified stock options to eligible executive officers, directors
and key employees of the Company. The 1994 Plan, which expires in 2004, is
administered by the Board of Directors or a committee designated by the Board of
Directors. The purposes of the 1994 Plan are to ensure the retention of existing
executive personnel, key employees and consultants of the Company, to attract
and retain new executive personnel, key employees and consultants and to provide
additional incentive by permitting such individuals to participate in the
ownership of the Company, and the criteria to be utilized by the Board of
Directors or the Compensation Committee in granting options pursuant to the 1994
Plan will be consistent with these purposes.
Options granted under the 1994 Plan may be exercisable for a period of up to 10
years from the date of grant at an exercise price which is not less than the
fair market value of the Class A Common Stock on the date of the grant, except
that the term of an incentive stock option granted under the 1994 Plan to a
stockholder owning more than 10% of the outstanding Class A Common Stock may not
exceed five years and its exercise price may not be less than 110% of the fair
market value of the Class A Common Stock on the date of the grant. To the extent
that the aggregate fair market value, as of the date of grant, of the shares of
which incentive stock options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the portion of such option
which is in excess of the $100,000 limitation will be treated as a non-qualified
stock option. Upon the exercise of an
30
<PAGE>
option, payment may be made by cash, check or any other means that the Board or
the committee determines. No option may be granted under the 1994 Plan after
September 2004. The options are non-transferable during the life of the option
holder.
On June 30, 1999, the Board of Directors voted to amend the plan, which
amendment is subject to stockholder approval. Under the Plan, as amended, the
number of shares available for grant was increased to 4,000,000 shares.
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 exercise
price of nonqualified options granted to employees and consultants is determined
by the Board of Directors. Options vest as determined by the Board, but vesting
generally occurs over a period of three to four years. In general, if employment
is terminated, vested options must be exercised within 90 days of termination or
the options are automatically cancelled. However, if termination of employment
is for cause, the option expires immediately.
Profit Sharing Plan
In January 1992, the Company adopted a Profit Sharing Plan, pursuant to which an
amount equal to 3.5% of the pretax profit of the Company for each fiscal year
was to be set aside for the benefit of such employees as are determined by the
Board of Directors. No funding was provided through July 31, 1999 as the Company
incurred a net loss for the period.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the number of shares of Common Stock owned
beneficially as of October 21, 1999 by each person that beneficially owns more
than 5% of our outstanding class A common stock or class B common stock, each
director and each executive officer as well as all directors and executive
officers as a group. Other than as disclosed in the following table and
accompanying footnotes, the directors and each, the named executive officers,
and the directors and executive officers as a group did not own any other equity
securities of the Company. Unless otherwise noted, each individual has sole
voting and investment power. Fractional shares are rounded to the nearest whole
number.
31
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
---------------------------------------------------------------
Number of Number of
Shares % Shares %
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Executive Officers,
Directors and
5% Beneficial Owners (1):
Richard J. Berman (2) 247,161 12.0%
Arthur R. Medici (3) 256,155 12.1% 14,000 12.1%
G. Michael Cassidy (4) 376,791 17.9%
Charles C. Johnston (5) 69,180 3.6%
Michele Golden (6) 565,052 25.3%
Peter Ruel (7) 120,250 6.1%
David Hubbard (8) 127,334 6.4%
Walter M. Psztur (9) 100,000 5.1%
Richard Blume (10) 28,077 1.5%
James Ortenzio (11) 70,311 3.7%
Dominic Bassani (12) 451,570 19.7%
Sound Holding (13) 201,638 9.8%
ICN Capital (14) 129,860 6.5%
Benny Shabtai (15) 100,777 5.2%
Long Island Title Agency (16) 100,777 5.2%
Michael Brooks 10,000 8.7%
Thomas Lipscomb 84,878 73.4%
Voting Trust 84,878 73.4%
All executive officers
and directors as a group
(11 persons) (17) 1,960,311 56.8% 14,000 12.1%
Voting Trust 84,878 73.4%
Executive Officers, Directors
and Voting Trust 1,960,311 56.8% 98,878 85.5%
- -----------------
</TABLE>
(1) Except as otherwise noted, each individual or entity has sole voting and
investment power over the securities listed and the address of each
beneficial owner is in care of the Company at its principal office at
805 Third Avenue, New York, New York 10022. The amounts and percentages
of class A common stock in the table above do not include shares of
class A common stock issuable upon conversion of the shares of class B
common stock listed in the table. The conversion rate used to determine
the number of shares of class A common stock issuable upon conversion of
shares of series A preferred stock has been set at 200 shares of class A
common stock per share of series A preferred since until December 31,
1999 each share of outstanding series A preferred stock is convertible
into 200 shares of class A common stock. See "Recent sales of
unregistered securities" on pages 13 to 16 of this Annual Report.
(2) Mr. Berman holds 38,827 shares of class A common stock; exercisable
options to purchase 183,334 shares of class A common stock; warrants to
purchase 15,000 shares of class A common stock; and 50 shares of series
A preferred stock which are convertible into 10,000 shares of class A
common stock.
32
<PAGE>
(3) Mr. Medici beneficially owns 6,155 shares of class A common stock;
exercisable options to purchase 200,000 shares of class A common stock;
warrants to purchase 30,000 shares of class A common stock; and 100
shares of series A preferred stock which are convertible into 20,000
shares of class A common stock.
(4) Mr. Cassidy holds 125,770 shares of class A common stock and
exercisable options to purchase 251,021 shares of class A common stock.
(5) Mr. Johnston holds 9,180 shares of class A common stock and exercisable
options to purchase 60,000 shares of class A common stock.
(6) Ms. Golden holds 188,655 shares of class A common stock and exercisable
options to purchase 376,397 shares of class A common stock.
(7) Mr. Ruel holds warrants to purchase 120,250 shares of class A common
stock.
(8) Mr. Hubbard holds exercisable options to purchase 127,334 shares of
class A common stock.
(9) Mr. Psztur holds exercisable options to purchase 100,000 shares of
class A common stock.
(10) Mr. Blume holds 77 shares of class A common stock; warrants to purchase
18,000 shares of class A common stock; and 50 shares of series A
preferred stock which are convertible into 10,000 shares of class A
common stock.
(11) Mr. Ortenzio holds 311 shares of class A common stock; warrants to
purchase 30,000 shares of class A common stock; and 200 shares of
series A preferred stock which are convertible into 40,000 shares of
class A common stock.
(12) Mr. Bassani holds 20,070 shares of class A common stock; warrants to
purchase 413,500 shares of class A common stock; and 90 shares of
series A preferred stock which are convertible into 18,000 shares of
class A common stock.
(13) Sound Holdings holds warrants to purchase 201,638 shares of class A
common stock.
(14) ICN Capital holds 860 shares of class A common stock and 645 shares of
series A preferred stock which are convertible into 129,000 shares of
class A common stock.
(15) Mr. Shabtai holds 777 shares of class A common stock and 500 shares of
series A preferred stock which are convertible into 100,000 shares of
class A common stock.
(16) Long Island Title holds 777 shares of class A common stock and 500
shares of series A preferred stock which are convertible into 100,000
shares of class A common stock.
(17) The executive officers and directors as a group hold a total of 368,975
shares of class A common stock; 1,298,086 shares of exercisable options
to purchase class A common stock; 213,250 warrants to purchase class A
common stock; and 400 shares of series A preferred stock which is
convertible into 80,000 shares of class A common stock.
Voting Trust. Thomas H. Lipscomb, former chairman of the board of directors and
president of ICC, has deposited substantially all of the shares of class B
common stock beneficially owned by him and other members of his family into a
voting trust until February 18, 2000. As of October 21, 1999, the shares in the
voting trust represented 20.0% of the total voting power of ICC. However, the
shares in the voting trust would currently represent only 5.2% of the total
voting power of ICC if all of ICC's outstanding convertible securities were
converted into shares of class A common stock and none of the currently
outstanding shares
33
<PAGE>
of class B common stock was converted into class A common stock. The shares of
common stock held in the voting trust will be voted at the direction of a
majority of the non-management directors of ICC and Richard J. Berman, the
chairman of ICC.
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits, List and Reports on Form 8-K
13 (a) Exhibits
The following documents are filed as exhibits to this Form 10-KSB,
including those exhibits incorporated in this Form 10-KSB by reference to a
prior filing of ICC under the Securities Act or the Exchange Act as indicated in
parenthesis:
Exhibit
Number Description
- ------ ---------------------------------------------------
3(i).1 Amended and Restated Certificate of Incorporation (1)
3(i).2 Certificate of Merger merging Infosafe Systems, Inc. and Internet
Commerce Corporation (1)
3(i).3 Certificate of Amendment to the Amended and Restated Articles of
Incorporation (2)
3(i).4 Certificate of Designations -- Series A Convertible Redeemable
Preferred Stock (1)
3(i).5 Certificate of Designations -- Series S Preferred Stock (1) 3(ii).1
By-laws (8) 4.1 Specimen Certificate for Class A Common Stock (3) 4.2
Form of Revised Subscription Agreement, dated March 31, 1999, relating
to the shares of Series A Convertible Redeemable Preferred Stock sold
in the 1999 private placement (1)
4.3 Form of Underwriter's Option (3)
4.4 Form of Warrant Agreement (3)
4.5 Escrow agreement, as amended (3)
4.6 Form of warrant expiring February 18, 2002 (3)
4.7 Warrant Agreement, dated February 10, 1997, by and among ICC, American
Stock Transfer and Trust Company as warrant agent and D.H. Blair
Investment Banking Corp. (4)
4.8 Amendment Agreement, dated February 10, 1997, to Warrant Agreement
dated January 25, 1995 by and among ICC, American Stock Transfer and
Trust Company as warrant agent and D.H. Blair Investment Banking Corp.
(4)
4.9 Form of Unit Purchase Option for D.H. Blair Investment Banking Corp.
dated February 18, 1997 (4)
4.10 Agreement, dated February 18, 1997, between ICC and D. H. Blair
Investment Banking Corp. to extend an agreement dated January 25, 1995
regarding mergers, acquisitions and similar transactions (4)
34
<PAGE>
4.11 Form of Class A Bridge Warrant issued in the 1998 bridge financing (1)
9.1 Voting Trust Agreement between the trustees of the voting trust and
various stockholders of ICC (3)
9.2 Amendments to the Voting Trust Agreement (1)
10.1 1992 Stock Option Plan (3)
10.2 1994 Stock Option Plan (3)
10.3 Formation and Stock Purchase Agreement, dated as of April 16, 1997
among ICC, Michele Golden and Michael Cassidy (5)
10.4 Lease Agreement between 805 Third Ave. Co. as landlord and ICC as
tenant relating to the rental of ICC's current principal executive
office (6)
10.5 Consulting Agreement, dated as of June 12, 1998, between Summerwind
Restructuring, Inc. and ICC (1)
10.6 Lease Agreement, dated as of May 21, 1999, between JB Squared LLC and
ICC relating to the rental of approximately 4,000 square feet at the
Lakeview Executive Center, 45 Research Way, East Setauket, New York,
11733 (7)
10.7 Employment Agreement for Richard J. Berman dated as of September 15,
1998 (1)
10.8 Employment Agreement for G. Michael Cassidy dated as of April 16, 1997
(1)
10.9 Employment Agreement for Michele Golden dated as of April 16, 1997 (1)
10.10 Employment Agreement for Donald R. Gordon dated as of December 18, 1998
(1)
10.11 Employment Agreement for David Hubbard dated as of April 16, 1997 (1)
10.12 Employment Agreement for Walter M. Psztur dated as of August 21, 1998
(1)
10.13 Settlement Agreement between ICC, Arthur R. Medici and Dr. Robert H.
Nagel (9)
10.14 Revised Settlement Agreement between ICC, Arthur R. Medici and Dr.
Robert H. Nagel (9)
10.15 Amendment to the Revised Settlement Agreement between ICC, Arthur R.
Medici and Dr. Robert H. Nagel (9)
27.1 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File no. 333-80043)
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1998
(3) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File no. 33-83940)
(4) Incorporated by reference to the Company's Report on Form 10-QSB dated
January 31, 1997
(5) Incorporated by reference to the Company's Report on Form 10-QSB dated
April 30, 1997
35
<PAGE>
(6) Incorporated by reference to the Company's Report on Form 10-QSB dated
October 31, 1997
(7) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form S-3 (File no. 333-80043)
(8) Incorporated by reference to our current report on Form 8-K filed with
the SEC on July 1, 1999
(9) Incorporated by reference to the Company's Registration Statement on
Form S- 3 (File no. 333-89591)
13 (b) Document List
Independent Auditors' Report
Financial Statements:
Balance Sheet
July 31, 1999
Statement of Operations - Year Ended
July 31, 1999
Consolidated Statement of Operations - Year Ended
July 31, 1998
Statement of Changes in Shareholder Equity and Other Comprehensive
Income - Years Ended July, 31, 1999 and 1998
Statements of Cash Flows - Year Ended
July 31, 1999
Consolidated Statements of Cash Flows - Year Ended
July 31, 1998
13 (b) Reports on Form 8K
On September 25, 1998, the Company filed a Current Report on Form 8-K.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: October 28, 1999
INTERNET COMMERCE CORPORATION
by: /s/ Dr. Geoffrey S. Carroll
--------------------------------
Dr. Geoffrey S. Carroll
President and Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Dr. Geoffrey S. Carrol President, Chief Executive October 28, 1999
- ---------------------------- Officer and Director
Dr. Geoffrey S. Carroll (Principal Executive Officer)
/s/ Walter M. Psztur Chief Financial Officer October 28, 1999
- ---------------------------- (Principal Financial
Walter M. Psztur and Accounting Officer)
/s/ Richard J. Berman
- ----------------------------
Richard J. Berman Director October 28, 1999
/s/ G. Michael Cassidy
- ----------------------------
G. Michael Cassidy Director October 28, 1999
/s/ Michele Golden
- ----------------------------
Michele Golden Director October 28, 1999
- ----------------------------
Charles C. Johnston Director October __, 1999
/s/ Arthur R. Medici
- ----------------------------
Arthur R. Medici Director October 28, 1999
/s/ James Ortenzio
- ----------------------------
James Ortenzio Director October 28, 1999
/s/ Peter Ruel
- ----------------------------
Peter Ruel Director October 28, 1999
<PAGE>
Exhibit Index
Exhibit
Reference
Number Number
3(i).1 Amended and Restated Certificate of Incorporation (1) *
3(i).2 Certificate of Merger merging Infosafe Systems, Inc.
and Internet Commerce Corporation (1) *
3(i).3 Certificate of Amendment to the Amended and Restated
Articles of Incorporation (2) *
3(i).4 Certificate of Designations -- Series A Convertible
Redeemable Preferred Stock (1) *
3(i).5 Certificate of Designations -- Series S Preferred Stock (1) *
3(ii).1 By-laws (8) *
4.1 Specimen Certificate for Class A Common Stock (3) *
4.2 Form of Revised Subscription Agreement, dated
March 31, 1999, relating to the shares of Series A
Convertible Redeemable Preferred Stock sold in the 1999
private placement (1) *
4.3 Form of Underwriter's Option (3) *
4.4 Form of Warrant Agreement (3) *
4.5 Escrow agreement, as amended (3) *
4.6 Form of warrant expiring February 18, 2002 (3) *
4.7 Warrant Agreement, dated February 10, 1997, by and
among ICC, American Stock Transfer and Trust Company
as warrant agent and D.H. Blair Investment Banking
Corp. (4) *
4.8 Amendment Agreement, dated February 10, 1997, to
Warrant Agreement dated January 25, 1995 by and among
ICC, American Stock Transfer and Trust Company as
warrant agent and D.H. Blair Investment Banking Corp. (4) *
4.9 Form of Unit Purchase Option for D.H. Blair Investment
Banking Corp. dated February 18, 1997 (4) *
4.10 Agreement, dated February 18, 1997, between ICC and
D. H. Blair Investment Banking Corp. to extend an
agreement dated January 25, 1995 regarding mergers,
acquisitions and similar transactions (4) *
4.11 Form of Class A Bridge Warrant issued in the 1998 bridge
financing (1) *
9.1 Voting Trust Agreement between the trustees of the voting
trust and various stockholders of ICC (3) *
9.2 Amendments to the Voting Trust Agreement (1) *
10.1 1992 Stock Option Plan (3) *
10.2 1994 Stock Option Plan (3) *
10.3 Formation and Stock Purchase Agreement, dated as of
April 16, 1997 among ICC, Michele Golden and Michael
Cassidy (5) *
10.4 Lease Agreement between 805 Third Ave. Co. as
i
<PAGE>
landlord and ICC as tenant relating to the rental of ICC's
current principal executive office (6) *
10.5 Consulting Agreement, dated as of June 12, 1998, between
Summerwind Restructuring, Inc. and ICC (1) *
10.6 Lease Agreement, dated as of May 21, 1999, between JB
Squared LLC and ICC relating to the rental of
approximately 4,000 square feet at the Lakeview
Executive Center, 45 Research Way, East Setauket,
New York, 11733 (7) *
10.7 Employment Agreement for Richard J. Berman dated as
of September 15, 1998 (1) *
10.8 Employment Agreement for G. Michael Cassidy dated as
of April 16, 1997 (1) *
10.9 Employment Agreement for Michele Golden dated as of
April 16, 1997 (1) *
10.10 Employment Agreement for Donald R. Gordon dated as
of December 18, 1998 (1) *
10.11 Employment Agreement for David Hubbard dated as of
April 16, 1997 (1) *
10.12 Employment Agreement for Walter M. Psztur dated as
of August 21, 1998 (1) *
10.13 Settlement Agreement between ICC, Arthur R. Medici
and Dr. Robert H. Nagel (9) *
10.14 Revised Settlement Agreement between ICC, Arthur R.
Medici and Dr. Robert H. Nagel (9) *
10.15 Amendment to the Revised Settlement Agreement between
ICC, Arthur R. Medici and Dr. Robert H. Nagel (9) *
27.1 Financial Data Schedule 27.1
(1) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File no. 333-80043)
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended July 31, 1998
(3) Incorporated by reference to the Company's Registration Statement on
Form SB-2 (File no. 33-83940)
(4) Incorporated by reference to the Company's Report on Form 10-QSB dated
January 31, 1997
(5) Incorporated by reference to the Company's Report on Form 10-QSB dated
April 30, 1997
(6) Incorporated by reference to the Company's Report on Form 10-QSB dated
October 31, 1997
(7) Incorporated by reference to Amendment No. 3 to the Company's
Registration Statement on Form S-3 (File no. 333-80043)
(8) Incorporated by reference to our current report on Form 8-K filed with
the SEC on July 1, 1999
(9) Incorporated by reference to the Company's Registration Statement on
Form S- 3 (File no. 333-89591)
ii
<PAGE>
INTERNET COMMERCE CORPORATION
Index
Page
Financial Statements
Independent auditors' report F-2
Balance sheet as of July 31, 1999 F-3
Statements of operations for the years ended July 31, 1999 and
July 31, 1998 F-4
Statements of changes in stockholders' equity and other comprehensive
income for the years ended July 31, 1999 and July 31, 1998 F-5
Statements of cash flows for the years ended July 31, 1999 and
July 31, 1998 F-6
Notes to financial statements F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Internet Commerce Corporation
New York, New York
We have audited the accompanying balance sheet of Internet Commerce Corporation
(formerly Infosafe Systems, Inc. and subsidiary), as of July 31, 1999, and the
related statements of operations, changes in stockholders' equity and
comprehensive income and cash flows for each of the years in the two-year period
ended July 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements enumerated above present fairly, in all
material respects, the financial position of Internet Commerce Corporation as of
July 31, 1999, and the results of its operations and its cash flows for each of
the years in the two-year period ended July 31, 1999, in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
September 30, 1999
F-2
<PAGE>
INTERNET COMMERCE CORPORATION
Balance Sheet
As of July 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $ 114,258
Marketable securities 3,970,655
Accounts receivable 49,424
Prepaid expenses and other assets 111,434
------------
Total current assets 4,245,771
Restricted cash 435,664
Property and equipment, net 793,131
Software development costs, net 711,889
Goodwill, net 339,721
Other assets 14,237
------------
Total assets $ 6,540,413
LIABILITIES
Current liabilities:
Accounts payable $ 367,379
Accrued expenses 554,537
Capital lease obligation 188,271
Other liabilities 16,819
------------
Total current liabilities 1,127,006
Capital lease obligation - less current portion 358,498
------------
Total liabilities 1,485,504
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock:
Preferred stock - 5,000,000 shares authorized, including 10,000 series A
preferred stock and 175 series S preferred stock
Series A preferred stock - par value $.01 per share, $1,000 liquidation value
per share, 9,590 shares issued and outstanding 96
Common stock:
Class A - par value $ .01 per share, 40,000,000 shares authorized,
One vote per share; 1,810,941 shares issued and outstanding 18,109
Class B - par value $ .01 per share, 2,000,000 shares authorized,
Six votes per share; 115,590 shares issued and outstanding 1,156
Additional paid-in capital 28,989,889
Accumulated deficit (23,920,341)
Accumulated other comprehensive loss (34,000)
------------
Total stockholders' equity 5,054,909
------------
Total liabilities and stockholders' equity $ 6,540,413
============
</TABLE>
See notes to financial statements
F-3
<PAGE>
INTERNET COMMERCE CORPORATION
Statements of Operations
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------
1999 1998
(consolidated)
-------------- --------------
<S> <C> <C>
Revenue:
Services $ 105,243 $ 17,481
Other 2,000
------------ ------------
105,243 19,481
------------ ------------
Expenses:
Cost of services 452,306 11,315
Product development and enhancement 516,608 575,802
Selling and marketing 419,714 7,526
General and administrative 3,548,596 2,299,856
Non-cash charges in connection with options,
compensation and services 3,266,520
Write-down of assets 32,915 177,735
------------ ------------
8,236,659 3,072,234
------------ ------------
Operating loss (8,131,416) (3,052,753)
------------ ------------
Interest and investment income 88,143 86,613
Interest expense (including debt discount of
$1,237,357 and debt issue costs of $188,182
for the year ended July 31, 1999) (1,577,667) (31,041)
------------ ------------
NET LOSS $ (9,620,940) $ (2,997,181)
Dividends attributable to preferred stock (190,645)
Dividends attributable to preferred stock resulting from
discount for beneficial conversion feature (1,222,072)
------------ ------------
Loss attributable to common stockholders $(11,033,657) $ (2,997,181)
============ ============
Basic and diluted loss
per common share $ (7.62) $ (2.79)
(10.10)
============ ============
Weighted average number of common
shares outstanding - basic
and diluted loss per share 1,447,091 1,075,718
============ ============
</TABLE>
See notes to financial statements
F-4
<PAGE>
Internet Commerce Corporation
Statements of Changes in Stockholders' Equity and Other Comprehensive Income
<TABLE>
<CAPTION>
Series A Series S Class A Class B Unrealized
Preferred Stock Preferred Stock Common Stock Common Stock Gain (loss) on
------------------------------------------------------------------------- Marketable
Shares Amount Shares Amount Shares Amount Shares Amount Securities
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1997 $ $ 944,083 $ 9,441 274,513 $2,745 $8,928
----------------------------------------------------------------------------------------
Issuance of common stock 80,000 800
Exchange of common stock 3,868 39 (3,868) (39)
Issuance of common stock for
services
Escrow shares canceled (156,248) (1,562)
Value of warrants issued
Net loss
Unrealized loss on marketable (8,928)
securities
----------------------------------------------------------------------------------------
Balance - July 31, 1998 947,951 9,480 194,397 1,944
Issuance of common stock for
purchase
of minority interest 334,495 3,345
Issuance of common stock for
compensation, termination of
consulting
agreement and settlement of 175 2 79,934 799
legal fees
Issuance of common stock in
exchange
for warrants and unit purchase 316,651 3,166
options
Issuance of preferred stock for 45 1
services
Proceeds from private placement
(net
of costs of $585,000) 7,000 70
Issuance of warrants for services
Issuance of warrants in
connection with
debt
Exchange of common stock 78,807 788 (78,807) (788)
Repayment of subscription note
receivable
Conversion of bridge loans into
preferred
stock 2,595 26
Conversion of preferred stock (50) (1) 10,000 100
Proceeds from exercise of warrants 15,000 150
Redemption of redeemable stock
Redemption of preferred stock (175) (2) 13,462 135
Dividend on preferred stock 14,641 146
Charge on price-based stock
options
and for change of control
Net loss
Unrealized loss on marketable
securities
Total comprehensive income
Net Loss Unrealized
========================================================================================
Balance - July 31, 1999 9,590 $ 96 $ 1,810,941 $ 18,109 115,590 $1,156 $
========================================================================================
<CAPTION>
<S> <C> <C> <C> <C>
Additional Total
Paid-In Note Accumulated Stockholders'
Capital Receivable Deficit OCI * Equity
---------------------------------------------------------
Balance - July 31, 1997 $14,235,172 $ (11,302,220) $ $2,954,066
---------------------------------------------------------
Issuance of common stock 111,700 $
(112,500)
Exchange of common stock
Issuance of common stock for 111,971 111,971
services
Escrow shares canceled 1,562
Value of warrants issued 71,803 71,803
Net loss (2,997,181) (2,997,181)
Unrealized loss on marketable (8,928)
securities
---------------------------------------------------------
Balance - July 31, 1998 14,532,208 (112,500) (14,299,401) 131,731
Issuance of common stock for
purchase
of minority interest 467,039 470,384
Issuance of common stock for
compensation, termination of
consulting
agreement and settlement of 682,518 683,319
legal fees
Issuance of common stock in
exchange
for warrants and unit purchase (3,166)
options
Issuance of preferred stock for 44,999 45,000
services
Proceeds from private placement
(net
of costs of $585,000) 6,414,930 6,415,000
Issuance of warrants for services 816,672 816,672
Issuance of warrants in
connection with
debt 2,043,304 2,043,304
Exchange of common stock
Repayment of subscription note 112,500 112,500
receivable
Conversion of bridge loans into
preferred
stock 1,952,744 1,952,770
Conversion of preferred stock (99)
Proceeds from exercise of warrants 37,350 37,500
Redemption of redeemable stock 5,478 5,478
Redemption of preferred stock (133)
Dividend on preferred stock (458) (312)
Charge on price-based stock
options
and for change of control 1,996,503 1,996,503
Net loss (9,620,940) (9,620,940)
Unrealized loss on marketable (34,000) (34,000)
securities
Total comprehensive income (9,654,940)
Net Loss Unrealized (9,654,940)
=========================================================
Balance - July 31, 1999 $28,989,889 $ (23,920,341) $ $(34,000) $ 5,054,909
=========================================================
* Other Comprehensive Income
</TABLE>
See notes to financial statements
F-5
<PAGE>
Internet Commerce Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended July 31,
---------------------------
1999 1998
(consolidated)
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(9,620,940) $(2,997,181)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 423,872 135,621
Writedown on disposal of assets 32,915 177,735
Loss on sale of marketable securities 7,611
Issuance of common stock and warrants for services,
compensation and consulting agreement termination 1,270,017 111,971
Non cash charge for compensatory stock options issued
and for change of control 1,996,503
Amortization of debt discount 1,237,357 8,413
Changes in:
Accounts receivable, prepaid expenses and other assets 122,400 65,688
Accounts payable, notes payable and accrued expenses 329,111 534,584
Due to stockholders (60,000)
----------- -----------
Net cash used in operating activities (4,201,154) (2,023,169)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs (714,373)
Purchases of property and equipment (191,417) (435,896)
Purchases of marketable securities (5,012,142) (778,745)
Purchase of certificate of deposits (435,664)
Proceeds from sales of marketable securities 999,876 3,268,762
----------- -----------
Net cash provided by (used in) investing activities (4,639,347) 1,339,748
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net 6,415,000
Proceeds from bridge loan 2,300,000 295,000
Proceeds from issuance of warrants 38,925
Proceeds from exercise of warrants 37,500
Proceeds from subscription receivable 112,500
Proceeds from financing lease 312,639
Payment for redemption of redeemable common stock (277)
Payment of dividends (312)
Payments on capital lease obligations (126,864) (41,611)
Payment of purchase agreement (70,000)
Payment of loan payable (27,180)
----------- -----------
Net cash provided by financing activities 8,776,472 468,848
----------- -----------
Net decrease in cash and cash equivalents (64,029) (214,573)
Cash and cash equivalents, beginning of period 178,287 392,860
----------- -----------
Cash and cash equivalents, end of period $ 114,258 $ 178,287
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 111,283 $ 21,681
</TABLE>
See notes to financial statements
F-6
<PAGE>
INTERNET COMMERCE CORPORATION
Notes to financial statements
July 31, 1999
NOTE A - THE COMPANY
Internet Commerce Corporation (the "Company" or "ICC") was incorporated under
the name Infosafe Systems, Inc. on November 18, 1991 in the State of Delaware.
The Company changed its name to Internet Commerce Corporation on September 25,
1998. In the fourth quarter of fiscal year 1999, ICC became an operating company
and was no longer considered a development stage company.
ICC is engaged in the design, development, and marketing of systems for
securing, controlling, delivering and auditing electronic documents and files
primarily over the Internet. ICC is seeking to position itself as an independent
third party to authenticate, certify, validate, authorize and deliver secure
transactions for electronic information.
ICC began the development of the CommerceSense service in 1997, introduced
CommerceSense for beta testing in November 1997 and launched the current version
of CommerceSense commercially in April 1999. The CommerceSense 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.
On September 25, 1998, ICC merged its majority owned subsidiary ("ICCSUB") into
the Company. ICC issued 16.72474 shares of class A common stock in exchange for
each share of ICCSUB not already owned by ICC to purchase the remaining 16.7% of
ICCSUB then outstanding.
In April of 1999, ICC raised $7,000,000 in a private placement of series A
convertible redeemable preferred stock ("Series A Preferred Stock"). In
addition, the holders of $2,595,000 of bridge notes converted them to Series A
Preferred Stock.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[1] Revenue recognition:
The Company's revenues are derived from services, which include
subscription fees, implementation fees and consulting fees.
Subscription fees are charged for use of the Company's service, which
include both fixed and usage based fees and are recognized over the
service period and as transactions are processed. Implementation fees
are generally billed in the period the new customer is activated.
Consulting fees are recognized as services are performed.
[2] Depreciation and amortization:
Computers and office equipment, office software, and furniture and
fixtures are stated at cost and are depreciated on the straight-line
method over 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.
F-7
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[3] Software development costs:
The Company capitalizes the costs of developing and testing new or
significantly enhanced software products in accordance with the
provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Software to be Sold, Leased or Otherwise
Marketed" ("SFAS 86"). Pursuant to SFAS 86, capitalization of costs
begins when technological feasibility of the product is established and
ceases when the product is ready for general release to customers.
Technological feasibility is established either upon the completion of
a detailed program design or the completion of a working model. No
software development costs have been capitalized during the fiscal year
ended July 31, 1999. Software development costs are amortized over a
maximum of three years or the expected life of the product, whichever
is less.
[4] 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, which was adopted by the company in 1998,
basic and diluted net loss per common share is computed by dividing the
net loss by the weighted average number of shares of common stock
outstanding during each period. Except as described below, the per
share effects of potential common shares such as warrants, options and
convertible preferred stock have not been included, as their effect
would be antidilutive.
The Securities and Exchange Commission has taken the position that when
preferred stock is convertible to common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from
the common stock market price at the time of conversion, the discounted
amount is an assured incremental yield, the "beneficial conversion
feature", to the preferred shareholders and should be accounted for as
an embedded dividend to preferred shareholders. As such, this dividend
was recognized in the loss per share calculation.
[5] Income taxes:
The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 measures deferred income taxes 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 financial statements. The resulting asset was fully
reserved since management is unable to conclude that it is more likely
than not that the benefit will be realized.
[6] Statement of cash flows:
For purposes of the statement of cash flows, the Company considers all
highly liquid cash investments purchased with an original maturity of
three months or less to be cash equivalents.
[7] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
F-8
<PAGE>
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[8] Impairment of long-lived assets:
The Company accounts for the impairment of long-lived assets in
accordance with provisions of SFAS 121, "Accounting for Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
establishes accounting standards for the impairment of long-lived
assets, certain identifiable assets and goodwill related to those
assets. During the year ended July 31, 1999, the Company wrote down
fixed assets in the amount of $32,915 and during the year ended July
31, 1998, the Company wrote down its prepaid licensing fee, notes
receivable and equipment previously held for lease in the aggregate of
$177,735.
[9] Stock-based compensation:
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." The Financial Accounting Standards Board issued
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123
established a fair-value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure requirements
of SFAS 123 and has presented the proforma effects on net loss and loss
per share of common stock as if SFAS 123 had been adopted, as well as
certain other information.
[10] Marketable securities:
The Company invests excess cash in debt securities. The Company has
invested in corporate commercial paper with scheduled maturities within
one year. The fair values for marketable securities are based on quoted
market prices.
The 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.
[11] Goodwill:
Goodwill consists of the excess of cost over the fair value of net
assets acquired from the purchase of the minority interest of the
Company's majority owned subsidiary. Impairment is assessed based on
projected future cash flows expected to be generated from the
CommerceSense service. Goodwill is being amortized over thirty six
months from the acquisition date using the straight-line method.
Accumulated amortization at July 31, 1999 amounted to $130,662.
NOTE C - MARKETABLE SECURITIES
The following is a summary of available for sale securities:
<TABLE>
<CAPTION>
Gross Unrealized Estimated
------------------------------
Cost Gains Losses Fair Value
---------------- ------------- ------------ ----------------
<S> <C> <C> <C>
U.S. corporations debt
securities $ 4,004,655 $ $ 34,000 $ 3,970,655
================ ============= ============ ================
</TABLE>
The contractual maturities of the above securities is less than one
year.
F-9
<PAGE>
NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consist of the following:
<S> <C>
Computers and office equipment (including capital lease of $247,186) $ 954,394
Furniture and fixtures 91,691
Office software (including capital lease of $145,055) 229,079
Leasehold improvements 31,044
----------
1,306,208
Less accumulated depreciation 513,077
----------
$ 793,131
==========
</TABLE>
NOTE E - ACCRUED EXPENSES
Accrued expenses consist of the following:
Legal settlement $ 176,000
Legal and professional fees 97,856
Rent 94,396
Vacation 82,436
Wages 25,694
Other 78,155
----------
$ 554,537
=========
NOTE F - STOCKHOLDERS' EQUITY
[1] Reverse stock split:
Effective September 25, 1998, the Company completed a one-for-five
reverse stock split. The accompanying financial statements have been
retroactively adjusted with respect to common stock to reflect the
reverse stock split.
[2] 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 A
preferred stock or any other series of preferred stock the Company may
designate in the future.
F-10
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[3] 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 does 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 one share of class A common stock.
[4] 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 the following formula:
$1,000 divided by the average market price of the class A
common stock for the ten trading days before the conversion
date, up to a maximum of 333 shares and a minimum of 200
shares of class A common stock, except that until December 31,
1999 each 8,505 shares of series A preferred stock is
convertible into a maximum of 200 shares of class A common
stock. No fewer than 25 shares may be converted at one time
unless the holder then holds fewer than 25 shares and converts
all such shares at that time.
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 in cash or in
shares of class A common stock, at the option of the Company. Dividends
are payable on each July 1. On July 1, 1999, the Company issued 14,641
shares of class A common stock and $312 for payment of the dividend.
Series A preferred stock has no voting rights except as expressly
required by law.
F-11
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[5] Warrants:
As of July 31, 1999, the Company had the following common stock
warrants outstanding:
<TABLE>
<CAPTION>
Number of Exercise Expiration Date
--------- -------- ---------------
Shares Price
------ -----
<S> <C> <C> <C>
Class A warrants 316,215 (a) (c) $ 23.20 February 18, 2002
Class B warrants 311,488 (b) (c) $ 31.22 February 18, 2002
Bridge warrants 763,500 (d) $ 2.50 December 2001 to July 2002
Bridge commission warrants 59,850 (e) $ 2.50 July 2001 to January 2002
Private placement commission
warrants 173,250 (f) $ 5.00 April 29, 2002
Consulting warrants 500,000 (g) $ 2.50 June 12, 2003
Consulting warrants 18,000 (b) $ 9.94 March 31, 2004
</TABLE>
(a) Upon exercise of each warrant, holder is entitled to one share of class A
common stock and one class B warrant.
(b) Upon exercise of each warrant, holder is entitled to one share of class A
common stock
(c) Redeemable at $.25 per warrant under certain conditions.
(d) Investors of the Company's 1998 bridge financing purchased 10% notes with
warrants attached. For $1.00 of notes, a purchaser was entitled to 0.3
warrant and ICC issued a total of 778,500 warrants in this transaction.
Each of these warrants entitle the holder upon exercise to purchase one
share of class A common stock. Under certain circumstances the Company may
accelerate the expiration date.
(e) Issued to placement agents in connection with our 1998 bridge financing.
Terms are substantially the same as (d).
(f) Issued to NASD registered broker/dealers in connection with our April 1999
private placement of series A preferred stock. Upon exercise, holder is
entitled to one share of class A common stock in exchange for each warrant.
(g) Issued to Summerwind Restructuring, Inc. as consideration for various
consulting services under a consulting agreement. Upon exercise, holder is
entitled to one share of class A common stock in exchange for each warrant.
F-12
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
[6] Stock options:
The Company's 1994 Stock Option Plan, (the "Plan"), as amended,
provides for the grant of options to purchase up to an aggregate of
1,960,000 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.
On September 25, 1998, the Company assumed the ICCSUB stock option plan
and issued 1,071,534 stock options in exchange for the outstanding
ICCSUB stock options.
On June 30, 1999, the Board of Directors voted to increase the number
of shares available for grant under the Plan to 4,000,000 shares
subject to shareholder approval. 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 exercise price of
nonqualified options granted to employees and consultants is determined
by the Board of Directors. The term of all options granted may not
exceed 10 years. Options vest determined by the Board, but generally
vesting occurs over a period of three to four years. Generally, if
employment is terminated, vested options must be exercised within 90
days of termination or they are automatically cancelled. If termination
of employment is for cause, the option will expire immediately.
On June 30, 1999, the Company granted to three officers, subject to
shareholder approval, 690,000 price-vested options under the Plan.
One-third of 600,000 of such options are immediately exercisable at
$12.00 per share and the balance becomes exercisable commencing on
January 1, 2000, provided that one third of such options shall only be
exercisable if the average closing price for the Common Stock for any
five consecutive trading days exceeds $15.00 and the remaining
one-third of such options shall only be exercisable if the average
closing price for the common stock for any five consecutive trading
days exceeds $20.00. Of the remaining 90,000 of such options, one-third
shall be exercisable at $40.00 per share, one-third of such options
shall be exercisable at $60.00 per share and one-third of such options
shall be exercisable at $80.00 per share. The above options are
considered price-vested options and will require variable plan
accounting which requires the Company to take a non-cash charge to
earnings for the difference between the exercise price and the fair
market value of the stock multiplied by the number of vesting options
on the date each price requirement is met.
The Company granted 390,000 price-vested options under the Plan. The
weighted exercise price was $2.82 for such options. The number of
options immediately exercisable were 130,000. The remaining 260,000 is
exercisable, in 20% increments, when the class A common stock attains
or exceeds each of the following per share bid prices for twenty
consecutive trading days: $7.50, $10.00, $12.50, $15.00 and $17.50. As
of July 31, 1999, none of these options have been forfeited and 286,014
options have become exercisable. The Company took a non-cash charge to
earnings in the amount of $1,374,069 during the year for these
price-vested options. In addition, the Company took a non-cash charge
of $622,434 due to certain options vesting from a change of control
feature.
The Company's 1992 Stock Option Plan was terminated upon adoption of
the 1994 Plan. Options to purchase 4,000 Class A Common Shares
previously granted under the 1992 Plan were forfeited during the fiscal
year ended July 31, 1999.
F-13
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY (CONTINUED)
On June 30, 1999, the Company granted 150,000 options, not pursuant to
the 1994 and 1992 Plans, to an officer of the Company. Each one-third
of these options is exercisable at $40.00, $60.00 and $80.00. The
options expire on June 29, 2009 and have the same terms as options
granted under the 1994 Plan.
The Company applies APB Opinion 25 and related interpretations in
accounting for its options. Accordingly, no compensation cost has been
recognized for its employee stock option grants other than non-cash
charges for the vesting of price-vested options. Had the compensation
cost for the Company's stock options grants been determined based on
the fair value at the grant dates for awards consistent with the method
of SFAS 123, the Company's net loss and loss per share would have
changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year ended July 31,
--------------------------------------------
1999 1998
-------------------- -------------------
<S> <C> <C> <C> <C>
Net Loss As reported $ ( 9,620,940) $ (2,997,181)
Pro forma $ ( 8,933,719) $ (3,245,320)
Net Loss Per Share As reported $ ( 7.62) $ (2.79)
Pro forma $ ( 7.15) $ (3.02)
</TABLE>
The weighted-average fair value at date of grant for options granted
during the years ended July 31, 1999 and 1998 was $1.51 and $6.15 per
option, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
Year ended July 31,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Risk-free interest rate 4.53% 5.90%
Expected lives 3 3
Expected volatility 113% 92%
Expected dividend yield 0% 0%
</TABLE>
A summary of the status of the Company's 1994 and 1992 Stock Option Plans
as of July 31, 1999 and 1998, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------------------------------------------------
(Shares in thousands) 1999 1998
----------------------------- -------------------------------
Weighted-Average Weighted-Average
Exercise Exercise
Shares Price Shares Price
---------- ------------------ ------------ ------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
Of year 156.6 $19.65 183.8 $21.83
Granted 1,897.0 $ 1.41 44.0 $10.03
Forfeited (105.9) $12.03 (71.2) $19.33
---------- ------------
Options outstanding at end of year 1,947.7 $ 1.42 156.6 $19.65
========== ============
Options exercisable at end of year 1,749.0 $ 1.20 83.3 $19.82
========== ============
</TABLE>
F-14
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY: (CONTINUED)
The following table presents information relating to stock options
outstanding as of July 31, 1999:
<TABLE>
<CAPTION>
(Shares in thousands)
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Exercise Prices Remaining Exercise Exercise
Shares Contractual Life Price Shares Price
--------------------------- ----------- --------------------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.26 - $ 1.41 1,223.9 7.7 $ 0.41 1,202.6 $ 0.40
$ 2.13 - $ 3.88 696.1 6.1 $ 2.69 535.4 $ 2.71
$ 13.63 - $ 20.00 27.7 9.4 $14.24 11.0 $ 15.17
----------- -----------
1,947.7 7.1 $ 1.42 1,749.0 $ 1.20
=========== ===========
</TABLE>
The Company had 1,654 options reserved for future issuance under the
Plan as of July 31, 1999.
NOTE G - INCOME TAXES
The Company has a net operating loss carryforward for tax purposes of
approximately $22 million as of July 31, 1999. This carryforward expires from
2007 to 2019.
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, the net operating loss carryover of
approximately $1.9 million incurred prior to the initial public offering will be
subject to an annual limitation of approximately $400,000 until that portion of
the net operating loss is utilized or expires. Also, due to the private
placement of series A preferred stock, the net operating loss carryover of
approximately $20 million incurred prior to the private placement will be
subject to an annual limitation of approximately $1 million until that portion
of the net operating loss is utilized or expires.
The principal components of deferred tax assets, liabilities and the valuation
allowance at July 31, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accrued expenses $ 71,000
Tax depreciation over book 31,000
Compensation expense - stock options 799,000
Federal, state and local net operating loss carryforwards 8,862,000
-----------------
9,763,000
Less deferred tax liability:
Capitalized software development costs (285,000)
----------------
Net asset 9,478,000
Valuation allowance (9,478,000)
----------------
Net deferred tax asset $ 0
==================
</TABLE>
F-15
<PAGE>
NOTE G - INCOME TAXES (CONTINUED)
The Company's effective tax rate varied from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
For the year ended July 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Expected tax rate (benefit) (34.0)% (34.0) %
Increase in taxes resulting from:
Non deductible items 3.7 % 1.0 %
Increase in valuation allowance 30.3 % 33.0 %
-------------- --------------
Effective tax rate - 0 -% - 0 -%
============== ==============
</TABLE>
NOTE H - OBLIGATIONS UNDER CAPITAL LEASES
The Company has various capital leases for computers and office
equipment and office software. At July 31, 1999 minimum future lease
payments for capitalized leases are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
2000 $ 258,041
2001 236,015
2002 140,184
2003 26,009
------------
660,249
Amount representing imputed interest 113,480
------------
Present value of future minimum lease payments 546,769
Less current portion 188,271
------------
Capital lease obligation - less current portion $ 358,498
============
</TABLE>
NOTE I - COMMITMENTS AND CONTINGENCIES
[1] Employment and agreements:
The Company has employment agreements with one officer and six other
employees expiring from April to September 2000. The agreements require
aggregate annual payments of $895,000 per year. The Company is
negotiating employment agreements with two other officers. The
Company's Board of Directors has approved aggregate annual payments,
through June 2002, to these officers in the amount of $375,000,
increasing to $600,000 on the earlier of the Company securing
additional financing or November 1, 1999.
[2] Profit sharing plan:
During January 1992, the Company adopted a Profit Sharing Plan, whereby
an amount equal to 3.5% of the pretax profit of the Company for each
fiscal year shall be set aside for the benefit of employees. No funding
was provided through July 31, 1999.
F-16
<PAGE>
NOTE I - COMMITMENTS AND CONTINGENCIES (CONTINUED)
[3] Obligations under operating leases:
The Company leases office facilities in New York City and Long Island
under operating leases expiring through 2005. The aggregate rentals
under these leases were approximately $207,000 and $205,000 for the
years ended July 31, 1999 and July 31, 1998, respectively. Certain
leases contain escalation clauses for operating expenses.
At July 31, 1999 minimum future rental payments due under all operating
leases are as follows:
2000 $ 331,279
2001 284,583
2002 287,433
2003 290,383
2004 277,952
Thereafter 101,575
-------
$ 1,573,205
[4] Letters of credit:
The Company has provided cash collateral for letters of credit in the
aggregate amount of $435,664 as required in certain lease agreements.
These amounts have been recorded as restricted cash in the Company's
balance sheet.
[5] Contingency:
On October 15, 1996, Mr. Thomas Lipscomb, the former President and
Chief Executive Officer of the Company, informed the Board of Directors
that he was tendering his resignation as President and Chief Executive
Officer, effective upon the Board of Directors appointing his
successor. Such successor, Mr. Arthur R. Medici, was appointed as
President and Chief Executive Officer by the Board on December 17,
1996. Subsequently, on July 17, 1997, the Company received
correspondence from counsel to Thomas Lipscomb, notifying the Company
that Mr. Lipscomb had terminated his services under his Employment and
Consulting Agreement ("Agreement"), dated as of January 1, 1992, as
thereafter amended. By such letter, Mr. Lipscomb also demanded to be
paid certain amounts allegedly due under the Agreement. The Company
does not believe Mr. Lipscomb's claims under the agreement are
meritorious and so informed counsel for Mr. Lipscomb. No estimate can
be made as no formal claim has been filed.
[6] Legal settlement:
In February 1999, the Company settled a dispute with its former Vice
President and Director of Technology. The Company paid $60,000 in cash
and is required to issue 22,000 shares of class A common stock valued
at $176,000.
F-17
<PAGE>
NOTE J - SUPPLEMENTAL NON-CASH DISCLOSURES TO STATEMENT OF CASH FLOWS
The Company had the following non-cash financing activities:
<TABLE>
<CAPTION>
For the year ended July 31,
-----------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Debt discount in connection with bridge loan $ 1,816,197 $ 71,803
Issuance of warrants in connection with bridge financing 188,182
Property acquired under capital lease 392,241
Issuance of common stock for purchase of minority interest of
subsidiary 470,384
Issuance of common and preferred stock for settlement 275,000
Conversion of indebtedness into preferred stock 1,952,770
Notes receivable in exchange for class A common stock 112,500
</TABLE>
NOTE K - YEAR 2000 COMPLIANCE (UNAUDITED)
We have commenced implementation of new financial software for internal
operating purposes that is Year 2000 ("Y2K") compliant. Based on our design
process and assessment to date, we believe the current versions of our service
and our various systems are Y2K compliant. However, we cannot assure you that
our programs designed to minimize the impact of the transition to the year 2000
on our electronic date-sensitive equipment, including the terminal operations
software at our facilities, will be completely successful (or that the costs of
implementing them will not exceed our current estimates). If these programs are
not successful (or if their costs exceed our estimates), the date change from
1999 to 2000 could have a material and adverse effect on our business, operating
results and financial condition. The full extent of any adverse impact on our
business is impossible to determine.
It is possible that our customers may not become Y2K compliant in a timely
fashion. While the failure of a customer to become Y2K compliant will not affect
our ability to receive or transmit that customer's documents or data, the
ability of that customer's trading partners to receive or utilize the document
or data transmitted may be adversely affected. As a result, customers that are
not Y2K compliant may cease using our CommerceSense service and that may have a
material and adverse effect on our business, operating results and financial
condition.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 114,258
<SECURITIES> 3,970,655
<RECEIVABLES> 49,424
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,245,771
<PP&E> 1,306,208
<DEPRECIATION> 513,077
<TOTAL-ASSETS> 6,540,413
<CURRENT-LIABILITIES> 1,127,006
<BONDS> 0
0
96
<COMMON> 18,109
<OTHER-SE> 5,036,704
<TOTAL-LIABILITY-AND-EQUITY> 6,540,413
<SALES> 105,243
<TOTAL-REVENUES> 105,243
<CGS> 452,306
<TOTAL-COSTS> 452,306
<OTHER-EXPENSES> 7,696,210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,577,667
<INCOME-PRETAX> (9,620,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,620,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,620,940)
<EPS-BASIC> (7.62)
<EPS-DILUTED> (7.62)
</TABLE>
