UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended July 31, 2000
OR
|_| Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
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805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Class A Common Stock, $.01 par value
Redeemable Class A Warrants
Redeemable Class B Warrants
Units consisting of Class A Common Stock,
Redeemable Class A Warrants and
Redeemable Class B Warrants
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-B contained herein, and will not be
contained, to the best of the issuer'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. |_|
As of October 9, 2000 the issuer had outstanding 6,626,839 shares of Class
A Common Stock and 2,574 shares of Class B Common Stock that are convertible
into Class A Common Stock. The aggregate market value of the Class A Common
Stock held by nonaffiliates as of October 9, 2000 was approximately $35,720,063
based on a closing price for the Class A Common Stock of $6.125 on the Nasdaq
National Market on such date.
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PART I
Item 1. Description of Business
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 ICC.NET service, formerly known as our CommerceSense(R)
service, and changed our name to Internet Commerce Corporation in September 1998
to reflect this shift. In the fourth quarter of fiscal year 1999, we became an
operating company and were no longer considered a development stage company. We
launched the current version of our ICC.NET 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. In
addition, we are subject to various risk factors which are described starting on
page 14 of this annual report.
We developed our ICC.NET 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 ICC.NET 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 ICC.NET service and 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 and revenue derived from
our acquisition of IDC described below. We expect our expenses to increase,
especially in the areas of sales and marketing. 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.
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.")
Recent Developments
On August 2, 2000, ICC entered into an Agreement and Plan of Merger with
Intercoastal Data Corporation, a Georgia corporation, referred to as IDC, and
the IDC shareholders, pursuant to which IDC merged with and into ICC, referred
to as the IDC Merger, on August 3, 2000 and is being operated as a division of
ICC.
IDC is engaged in the development, sale, marketing or other exploitation of
business-to-business electronic data interchange standards-based applications
for standard-based EDI exchange over value-added networks, private networks
intranets, extranets or the Internet. For the twelve months ended January 31,
2000, IDC had total revenues of approximately $1.5 million and net income of
approximately $0.1 million. IDC also owns a portfolio of cash and marketable
securities that had a value of approximately $1.3 million at the effective time
of the IDC Merger. IDC was founded in 1972 and is headquartered in Carrollton,
Georgia. Historical financial statements of IDC as of and for the years ended
January 31, 2000 and January 31, 1999 and pro forma financial statements for ICC
and IDC are contained in our current report on form 8-K filed with the SEC on
August 11, 2000, which is incorporated by reference in this annual report.
Historical financial statements of IDC as of and for the three and six month
periods ended July 31, 2000 and July 31, 1999 are contained in our current
report on form 8-K filed with the SEC on September 11, 2000, which is
incorporated by reference in this annual report.
On June 14, 2000, ICC entered into a Merger Agreement among ICC, ICC Acquisition
Corporation, Inc., a North Carolina corporation and wholly-owned subsidiary of
ICC, referred to as Buyer, Research Triangle Commerce, Inc., a North Carolina
corporation, referred to as RTCI, and certain shareholders of RTCI identified
therein. The Merger Agreement provides for the merger of Buyer with and into
RTCI, with RTCI continuing as the surviving corporation
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and as a wholly-owned subsidiary of ICC, referred to as the RTCI Merger. RTCI is
an e-frastructure solutions company serving the B2B e-commerce market. RTCI
helps its clients conduct business electronically through a continuum of
services including eConsulting, data transformation mapping (EDI, EAI, XML) and
internetworking. RTCI has developed a business model that offers remote service
delivery, fixed and value-based pricing and reusable solutions. The completion
of the RTCI Merger is subject to stockholder approval and other customary
closing conditions. We have called a special meeting of out stockholders to
approve the RTCI Merger for November 6, 2000. If the RTCI Merger is completed,
the RTCI shareholder will receive up to $4 million of cash and, depending on the
price of our class A common stock for the ten days ending three days prior to
the effective time of the RTCI Merger, a maximum of 3,315,890 shares of our
class A common stock and a minimum of 1,800,000 shares of our class A common
stock. Historical financial statements of RTCI as of and for the years ended
December 31, 1998 and 1999 and as of and for the six months ended June 30, 1999
and 2000 are contained in our current report on form 8-K filed with the SEC on
September 7, 2000, which is incorporated by reference in this annual report. Pro
forma financial statements for ICC and RTCI are contained in our current report
on form 8-K filed with the SEC on August 11, 2000, which is incorporated by
reference in this annual report.
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.
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 1000 to sole proprietors
providing niche products. Trading partners may therefore have different
communications capabilities and requirements. Some trading partners may rely on
paper or fax to communicate, others 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 ICC.NET Solution
ICC.NET is currently in use by our customers for the secure exchange of
business-to-business electronic forms and data files. We believe that our
ICC.NET service provides a solution to the communication difficulties caused by
the differences in data formats, networks and communications methods used by the
members of trading communities, and thus bridges the incompatibility gap and
enables seamless electronic business communication. Our ICC.NET service can
translate incompatible files into a format any user is capable of receiving and
uses the Internet to transmit the data file by EDI, fax or other format. We
believe that users of our ICC.NET service can thus improve their productivity
and reduce their costs by enabling electronic business-to-business transactions
between parties with different systems.
We believe that our ICC.NET 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. ICC.NET performs these functions
without requiring that the user purchase any software and at prices that are, we
believe, significantly below the prices currently charged by traditional VANs.
We designed our ICC.NET service to avoid what we believe are inefficiencies in
traditional VAN services, software products and phone and manual fax processes,
which we believe are more expensive, slower and more difficult to use than our
ICC.NET service. ICC.NET incorporates proprietary technology and is immediately
accessible using a standard Internet connection and a web browser.
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Our ICC.NET 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 ICC.NET service allows us to consistently provide confirmed
delivery of documents and other data files;
o Documents can be delivered either in real-time or retrieved when
convenient for the customer. Real-time delivery reduces the
potential for document corruption, bottlenecks and other problems
associated with batch delivery modes, which are traditionally
store-and-forward and in some cases can take several hours to be
delivered;
o Our ICC.NET service can handle 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.
In addition, we believe our ICC.NET service offers advantages over e-mail and
other Internet-based electronic commerce systems, such as a full range of VAN
services, translation of a wide variety of data into customer-specified formats,
management of business documents or data files of virtually any size and of a
wide variety, including purchase orders, invoices, statements, inventory
tracking and shipping documents, images, engineering drawings, architectural
blueprints, audio and some types of video. ICC.NET also provides a complete
audit trail of content delivery and customer selection from a variety of
security methods.
We believe that ICC.NET is one of the only Internet-based data transmission
services that is approved to interconnect with twenty traditional VANs that
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.
We developed and added new features to our ICC.NET service in 2000 including
enhancements to reports and facsimile services, advanced on-network document
sorting and searching capabilities and an improved Help subsystem. We also added
powerful new Extended Markup Language, referred to as XML, based capabilities to
our Internet electronic commerce solutions. This unique new feature utilizes XML
to automatically pre-populate response documents.
EDI for web-based retailers. We provide an electronic document and data file
delivery link between web-based retailers and their vendors. We believe that
many larger vendors require that product orders and other documents be
transmitted using EDI. Web retailers can use our ICC.NET service to comply with
this requirement and thus can reduce their costs and improve their ability to
locate, order, track and deliver products. Our ICC.NET service can process
purchase orders, invoices, order status reports and other files transmitted
between web-based shopping portals of electronic retailers and their vendors,
distributors and manufacturers and can also manage critical logistics delivery
files. 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.
Large-scale electronic document management and delivery. Our ICC.NET service can
transmit large-scale non-EDI electronic documents and other large files, which
may include catalogs, engineering drawings, graphics and some
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types of video. ICC.NET allows customers to manage and distribute these large
files in real-time and provides archiving, security, authentication and audit
services. ICC.NET will support both a publish/subscribe configuration, in which
a customer can publish any number of files for subscribers authorized by the
customer to view and/or download, and a point-to-point-delivery configuration
that operates like our ICC.NET VAN service.
EDI to fax service. Traditional EDI users convert electronic documents into a
faxable format and fax the documents manually to their trading partners that
cannot receive documents transmitted electronically in EDI. Our ICC.NET 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.
Business Strategy
We believe that our ICC.NET 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 ICC.NET 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 ICC.NET 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 are
servicing these customers and pursuing new international customers in Europe and
other places outside the United States. See "International" on page 6 of this
annual report.
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 ICC.NET service require only an Internet connection and a
web browser to receive and transmit documents electronically and, we believe,
will also be able to receive electronic documents using our ICC.NET fax service.
As a result, large hub companies may now be able to request or encourage
electronic commerce with their small spoke companies. In turn, many of these
spoke companies may become the hub companies for their suppliers, which should
further broaden the reach of our ICC.NET service.
We intend to encourage the use of our ICC.NET service through exceptional
customer service. We currently offer technical support to our customers
twenty-four hours a day, seven days a week. Due to the multiple redundancies of
all of our systems and the stability of the Securities Industry Automation
Corporation, or SIAC, which is the location of our data center, our ICC.NET
service has been fully operational more than 99% of the time. SIAC runs all
computing operations for the New York Stock Exchange and the American Stock
Exchange.
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.
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We expect to experience seasonality in our business that reflects the
seasonality of the businesses of our customers. We believe that 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.
International
ICC has announced a five-year agreement with ThyssenKrupp Information Services
Group, or ThyssenKrupp, which provides ThyssenKrupp with Principal Partner
status in the form of European hosting rights for ICC services. The agreement
includes an $8,000,000 minimum revenue guarantee to ICC over the first 24 months
of the agreement.
ThyssenKrupp will package and integrate ICC services into ThyssenKrupp's product
and service offerings and will establish its own co-branding of the services. In
addition, ICC and ThyssenKrupp intend to establish an ICC.NET data platform for
operation by ThyssenKrupp in Europe which will be connected with ICC's network.
ThyssenKrupp will initially focus its sales and marketing efforts on the major
continental European markets and will provide international language support,
initially German with French and other primary European languages to follow.
In addition, ICC is expanding internationally through its strategic global
alliance with Cable & Wireless. See "Marketing and Sales-Direct Marketing
through Sales Force" in this annual report.
Competition
Our principal competitors include: Peregrine Systems, Inc., GE Global
eXchange Services, a subsidiary of GE Information Services, Inc.,
International Business Machines Corporation Global Services, Sterling
Commerce, Inc., a subsidiary of SBC Communications Inc., AT&T Corp. and
WorldCom, Inc. 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 ICC.NET
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 ICC.NET 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 ICC.NET 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 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 ICC.NET 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.
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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, such as a document or software, 2) the attachment
of an identifying serial number and 3) the logging of the item number and serial
number. By attaching a "brand" at the time the document is decrypted from a
secure data source, an "audit trail" of the decrypted information can be
maintained.
In December 1995, ICC was granted patent No. 5,473,687 entitled, Method for
Retrieving Secure Information from a Database, covering its technology for
providing a secure method for the commercial distribution and use of digital
information on a rental basis using a technique to discourage long-term use
without endangering the computer or the operating system.
In February 1995, ICC was granted patent No. 5,394,469 entitled, Method and
Apparatus for Retrieving Secure Information From Mass Storage Media, for its
system to retrieve and monitor the use of protected information from various
digital media.
We rely upon this encryption and authentication technology to provide secure
transmission of confidential information. If our security measures do not
prevent security breaches, we could suffer operating losses, damage to our
reputation, litigation and possible liability. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
that render current encryption technology outdated may result in a breach of our
encryption and authentication technology and could enable an outside party to
steal proprietary information or interrupt our operations.
Uncertain Patent Protection
Although ICC has obtained patent rights described above, we believe that the
protection of our rights in our ICC.NET service will depend primarily on our
proprietary software and messaging techniques 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.
In addition, 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 we may file or license in the future,
including any patent as to which a notice of allowance was issued, will result
in patents being issued, or that any rights granted thereunder will provide
competitive advantages to ICC. Although we believe that our technology does not
infringe upon the proprietary hardware or software of others, it is possible
that others may have or be granted patents claiming products or processes that
are necessary for or useful to the development of our ICC.NET service and that
legal actions could be brought against us claiming infringement. 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 our products and services. 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.
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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 ICC.NET, INFOSAFE, PROTECTED BY INFOSAFE, COMMERCESENSE,
COPYSAFE and DESIGN PALETTE have been registered with the United States Patent
and Trademark Office. The applications to register AUDINET, 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 be issued 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 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 employ a variety of marketing initiatives, including significantly increased
print advertising and trade show representation to enhance awareness of our
ICC.NET and other services in the electronic commerce community and to increase
our sales domestically and internationally.
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. ICC has begun a program to leverage and augment
the sales force of ICC by developing reseller and agent programs with major
organizations. The most significant of these are our Cable & Wireless and
ThyssenKrupp relationships. Cable & Wireless began selling our services in May
2000 throughout the United States and will extend the programs to Europe and the
United Kingdom. Cable & Wireless employs more than 1,000 sales representatives
in the United States and a like number overseas. See "International" on page 6
of this annual report for information about ICC's relationship with
ThyssenKrupp. ICC's telesales and sales force currently consists of twelve
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 and telesales representatives who use industry and
internal databases to create leads for our ICC.NET service and qualify leads
generated from tradeshows and advertising. These representatives are supported
by technical personnel based in the field. All field sales personnel report to
the Executive Vice President of Sales and all telesales representatives report
to the Vice President of Marketing.
Indirect Marketing through Hub Companies. We believe that smaller spoke
companies comprise a significant potential market that may be reached without
any direct marketing on our part, because the low cost of our ICC.NET service
should allow these smaller spoke companies to consider using our service if
requested to do so by their hub companies.
Seminars and Tradeshows. We conduct 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
and advertising supported by telemarketing confirmation. From June to August of
2000, ICC sponsored a national seminar program with Research Triangle Commerce,
Inc. in 14 cities throughout the United States to gain broader exposure to
potential customers. ICC has significantly expanded its participation in
industry tradeshows and has hired personnel to focus solely on this area. We
plan to staff national shows with sales, support and executive personnel from
our headquarters.
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Web-based and Print Advertising. We intend to use both web-based and traditional
print advertising. Our new redesigned web site embodies a variety of promotional
features. In addition, ICC has selectively begun a print advertising campaign to
generate sales leads and increase brand recognition.
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 the interfaces to increase the number of users of our ICC.NET
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 all
users. For new users of our ICC.NET service, we provide education about the
application and correctly configure the users' computer systems. We also provide
ongoing assistance for previously-installed users. Due to the multiple
redundancies of all of our systems and the stability of SIAC, our ICC.NET
service has been fully operational nearly 100% of the time.
Customers
We currently provide our ICC.NET service to more than 350 customers in
various industries including pharmaceutical, publishing, office supplies,
e-tailing, manufacturing and retail. Customers in these industries include
American Power Conversion Corporation, TravelCenters of America, Inc.,
OfficeMax, Inc., The CIT Group, Inc., Hastings Entertainment, Inc., Barnes &
Noble, Inc., edu.com, Inc., Revlon, Inc., Xerox Corporation, The McGraw-Hill
Companies, Inc., Random House Inc., Linens n' Things, Inc. and Sector
Communications, Inc., a SIAC company. We believe that no single customer
accounted for a material portion of our revenues during the year ended July
31, 2000.
Research and Development
Research and development costs related to the maintenance and improvement of our
ICC.NET service increased to $702,000 in 2000 from $517,000 in 1999 primarily
due to increased salaries and related costs and consulting fees.
Employees
At July 31, 2000, ICC had 76 full-time employees, of whom 40 performed
administrative, management and executive functions, 24 performed sales and
marketing functions and 12 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
12,300 square feet and provides for annual rent of approximately $500,000.
We leased a second facility in August 1999, which is located in East Setauket,
New York, under a lease that expires on June 30, 2004. The lease covers
approximately 8,900 square feet and provides for an annual rent of approximately
$180,000 that increases 3.5% per annum. We currently locate our development and
network administration groups and our technical support call center at this
facility.
In August 2000, we entered into a lease for a third facility, which is located
in Carrollton, Georgia, under a lease that expires on July 31, 2005. The lease
covers approximately 8,000 square feet and provides for annual rent of
approximately $80,000. The facility is used by our IDC division.
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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
ICC held an Annual Meeting of Stockholders, referred to as the Annual Meeting,
on June 19, 2000 in New York City. ICC delivered to its stockholders a proxy
statement, dated May 22, 2000, detailing the Board of Directors' proposals. The
stockholders approved, in each case by the required number of affirmative votes,
three proposals. The proposals were:
(1) to ratify ICC's selection of Deloitte & Touche LLP as independent
auditors of ICC for the fiscal year ending July 31, 2000 (passed
with 5,714,386 votes for, 190,093 votes against, 10,685 abstaining
and 218,515 broker non-votes);
(2) to approve ICC's Amended and Restated Stock Option Plan, as
described in the proxy statement for the Annual Meeting (passed with
3,174,464 votes for, 582,177 votes against, 8,380 abstaining and
2,368,658 broker non-votes); and
(3) to elect two directors for a term expiring at the next annual
meeting of stockholders, to elect three directors for a term
expiring at the second annual meeting of stockholders following the
Annual Meeting and to elect three directors for a term expiring at
the third annual meeting of stockholders following the Annual
Meeting (passed with at least 5,662,259 votes in favor of each
director).
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Market Information
Since September 20, 2000, ICC's class A common stock has been traded on the
Nasdaq National Market under the symbol ICCA. ICC's class A common stock was
previously 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. Our class A common stock was
subsequently relisted on The Nasdaq SmallCap Market on March 17, 1999. 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.
Fiscal Years Ended July 31:
1999 2000
---- ----
High Low High Low
---- --- ---- ---
Class A Common Stock
1st Quarter $ 2.125 $.625 $16.250 $ 9.938
2nd Quarter 12.000 1.625 48.500 14.125
3rd Quarter 18.000 4.000 96.000 12.125
4th Quarter 17.875 7.375 24.000 8.250
Units
1st Quarter 2.750 .125 14.000 10.500
2nd Quarter 12.500 2.000 10.500 10.500
3rd Quarter 10.500 7.000 10.500 10.500
4th Quarter 20.000 8.000 23.000 10.500
Class A Warrants
1st Quarter .344 .063 2.500 .250
2nd Quarter .063 .063 39.000 2.000
3rd Quarter .063 .063 152.000 10.500
4th Quarter 2.312 .063 19.000 5.000
Class B Warrants
1st Quarter .063 .016 .688 .063
2nd Quarter .063 .063 12.500 .375
3rd Quarter .063 .063 80.000 5.000
4th Quarter 1.000 .031 8.500 2.000
(b) Holders
As of July 31, 2000, there were approximately 155 record holders of our class A
common stock, 3 record holders of our class B common stock, approximately 51
record holders of our class A warrants and approximately 53 record holders of
our class B warrants.
(c) Dividends
ICC 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
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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 and a total of $181,772 in cash in payment of the dividend due on July 1,
2000 The holders of the outstanding shares of series C preferred stock are
entitled to a 4% annual dividend payable in cash or in shares of class A common
stock, at the option of ICC. These dividends are payable on each January 1,
commencing on January 1, 2001.
Recent sales of unregistered securities
In connection with the IDC Merger, we issued a total of 190,861 shares of ICC
class A common stock to the six former shareholders of IDC. On September 15,
2000, ICC filed with the Securities and Exchange Commission a registration
statement on form S-3 registering the resale of these shares. If the average
market value of the shares for the ten days ending four days prior to the
effective date of the registration statement is less than the average value of
the shares for the ten days ending four days prior to the effective time of the
IDC Merger ($17.34 per share), ICC will issue up to an additional 47,715 shares
to the IDC Sellers to restore this decline in value.
In connection with the arrangements with Cable & Wireless, ICC sold to Cable &
Wireless for $10 million 10,000 shares of series C preferred stock and 400,000
warrants to purchase class A common stock of ICC. See "Marketing and
Sales-Direct Marketing through Sales Force" in this annual report.
In November 1999, we sold a total of 434,184 shares of our class A common stock
to nine accredited investors for $9.5 million.
All of the securities described in this section were issued by ICC in
transactions not involving a public offering, to investors that made
representations that the securities were purchased with investment intent and
not with an intent to distribute the securities. The issuance of the securities
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended.
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 starting on page 14 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 ICC.NET service and changed our name to Internet Commerce
Corporation in September 1998 to reflect this
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shift. We ceased to be a development stage company and became an operating
entity in the fourth quarter of our fiscal year ended July 31, 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 ICC.NET 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 ICC.NET 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 ICC.NET 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 and revenue derived from
our acquisition of IDC. We expect our expenses to increase, especially in the
areas of sales and marketing. 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 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, 2000 Compared with Fiscal Year Ended July 31, 1999
Our revenues were $1,303,000 and $105,000 during the fiscal years ended July 31,
2000 ("2000") and July 31, 1999 ("1999"), respectively. Revenues were generated
from the sale of services related to our ICC.NET service and consisted primarily
of transaction fees, mailbox fees and consulting services.
Cost of services increased to $2,515,000 in 2000 from $452,000 in 1999. The
increase is primarily due to direct cost components. In 2000, expenses primarily
relating to customer and technical support provided by our product development
and enhancement employees increased $896,000 and were allocated to cost of
services. Service costs related to an agreement with Sector, Inc. ("Sector")
increased $120,000 in 2000. Sector is a wholly-owned subsidiary of SIAC
(Securities Industry Automation Corporation) which is a joint subsidiary of the
New York and American Stock Exchanges. Sector provides us with a computer room
facility in the SIAC Data Center. This facility is used by us to house our
servers and communications infrastructure. Salaries and related employee
benefits increased $615,000 in 2000. In addition, amortization of capitalized
software increased $238,000, data lines and support increased $72,000 and costs
of consultants increased $65,000 in 2000. The remaining increase of $57,000 was
primarily attributable to allocated overhead costs. Personnel related to cost of
services increased to 21 at the end of 2000 from 6 at the end of 1999.
Product development and enhancement costs related to the maintenance and
improvement of our ICC.NET service increased to $702,000 in 2000 from $517,000
in 1999 primarily due to increased salaries and related costs and consulting
fees. Personnel related to product development and enhancements increased to 12
at the end of 2000 from 7 at the end of 1999.
Selling and marketing expenses increased to $3,273,000 in 2000 from $420,000 in
1999. The increase reflects spending related to our expanded selling and
marketing efforts. Salaries and related employee benefits increased $1,462,000
in 2000. Expenses relating to selling and marketing efforts of our development
and enhancement employees increased $550,000 and were allocated to selling and
marketing expenses. Expenses related to travel, advertising and for consultants
increased $267,000, $195,000 and $197,000 respectively. The remaining increase
of $182,000 was primarily attributable to allocated overhead costs. Personnel
related to selling and marketing increased to 24 at the end of 2000 from 15 at
the end of 1999.
General and administrative costs increased to $4,814,000 in 2000 from $3,549,000
in 1999. The increase is attributable to an increase in recruitment fees,
salaries and related employee benefits of $729,000 and an increase in
professional fees of $468,000. The remaining increase of $68,000 was primarily
attributable to allocated overhead
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costs. Personnel related to general and administrative functions increased to 18
at the end of 2000 from 16 at the end of 1999. The remainder of the increase was
primarily due to the expansion of our operations.
Non-cash charges in connection with compensation and services increased to
$5,160,000 in 2000 from $3,267,000 in 1999. These non-cash charges were
calculated using the Black-Scholes Option Pricing Model. The non-cash charges
for 2000 consisted of the following charges related to the employee stock
options granted to certain officers of ICC, which vested upon our class A common
stock reaching a certain market price. Employee stock options that vest in this
manner require a charge to earnings for the difference between the fair value of
the stock and the exercise price multiplied by the number of options vested on
the date that the vesting condition is met. 260,000 of these options became
exercisable in 20% increments when the class A common stock attained or exceeded
each of the following per share bid prices for twenty consecutive trading days:
$7.50, $10.00, $12.50, $15.00 and $17.50. ICC recorded a total of $3,311,000 in
non-cash charges in connection with these options in 2000 and will not be
required to take any additional charges in connection with these options in the
future. In March 2000, ICC issued 100,000 options in connection with a
consulting agreement with a former executive officer and board member. The
options were valued at $6,318,850 and are being amortized as consulting expense
over the term of the consulting agreement. Non-cash charges for these options
amounted to $1,186,000 during the year ended July 31, 2000. In June 2000, ICC
recorded $663,000 in non-cash charges for 10,000 shares of class A common stock
valued at $176,000 and 50,000 stock options valued at $487,000 in connection
with the settlement of a dispute and the retention of a consultant in connection
with the settlement.
The non-cash charges in 1999 relate to stock and warrants issued throughout the
year for services received since we had insufficient funds to pay for these
services in cash. The non-cash charges consisted 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, (ii)
18,000 warrants to a consultant valued at $138,000 and (iii) 63,000 warrants
issued to another consultant valued at $88,000; (b) 20,000 shares of class A
common stock issued 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;
and (e) $623,000 for the vesting of certain options due to a change of control
feature attached to such options.
We earned income from investments of $737,000 in 2000 and $88,000 in 1999. The
increase in 2000 is due to higher average cash and marketable securities
balances in 2000 compared to 1999.
Interest expense decreased to $62,000 in 2000 from $1,578,000 in 1999. The
decrease was largely attributable to the conversion of our bridge notes into
series A preferred stock in April 1999. In 1999, debt discount and interest on
the bridge notes amounted to $1,348,000, of which $111,000 was interest expense,
and the amortization of debt issue costs amounted to $188,000. As a result of
the conversion of our bridge notes, there was no debt discount or interest on
the bridge notes and no amortization of debt issue cost in 2000. Interest
expense due to capital leases was $62,000 and $42,000 in 2000 and 1999,
respectively.
The net loss in 2000 was $14,486,000 compared to $9,621,000 in 1999. The net
loss includes non-cash charges for compensation in connection with stock-based
compensation, services and settlements of disputes, debt discount and debt issue
costs, in the amounts of $5,160,000 and $3,267,000 in 2000 and 1999,
respectively.
Liquidity and Capital Resources
At July 31, 2000 we had working capital of $17,831,000, of which $5,000,000
consisted of a note receivable from RTCI. The note receivable and unpaid accrued
interest on the note were converted into common stock of RTCI on August 15,
2000.
We have financed our operations through private placements during fiscal 1994,
our initial public offering during fiscal 1995 (the "IPO"), a private placement
in March 1997, a private placement of bridge note units during fiscal 1998 and
1999, a private placement of series A preferred stock in April 1999 and private
placements of our class A common stock, series C preferred stock and warrants in
November 1999. We anticipate losses through fiscal 2001, as we continue to
expand commercial markets for our ICC.NET service.
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As a result of operating losses, cash used in operating activities amounted to
$8,861,000 in 2000 and $4,201,000 in 1999. Cash flows used in investing
activities amounted to $1,463,000 in 2000 and $4,639,000 in 1999. Cash provided
by financing activities amounted to $24,213,000 in 2000 and $8,776,000 in 1999.
Our principal sources of liquidity at July 31, 2000 consisted of cash and cash
equivalents of $14,003,000.
We have a net operating loss carryforward of approximately $50 million to offset
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 2020. 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 in 1999, the net operating loss carryover of
approximately $18 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.
Certain Risk Factors
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 ICC.NET VAN service and the volume of the data, documents or other
information they send or retrieve utilizing this service. The success of our
ICC.NET 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 expenses to increase, especially in the
areas of sales and marketing. 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 manage our growth, our financial results will suffer. Our
ability to implement our business plan successfully in a new and
rapidly-evolving market requires effective planning and growth management. If we
cannot manage our anticipated growth effectively, our business and financial
results will suffer. We plan to expand our existing operations substantially,
particularly those relating to sales and marketing, customer installation and
technical support. We expect that we will need to continue to manage and to
expand multiple relationships with customers, Internet service providers and
other third parties. We also expect that we will need to continue to improve our
financial systems, procedures and controls and will need to expand, train and
manage our workforce, particularly our information technology staff. We also
intend to expand our services, which may require additional resources and
employees.
If we do not keep pace with rapid technological changes, customer demands and
intense competition, we will not be successful. Our market is characterized by
rapidly changing technology, customer demands and intense competition. If we
cannot keep pace with these changes, our ICC.NET 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 ICC.NET service 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 ICC.NET service or other proposed services that respond to
technological change or customer demands, our business will suffer.
If we are unable to obtain necessary future capital, our business will suffer.
As of July 31, 2000, we had unrestricted cash in the amount of approximately
$14.0 million. These resources will not be sufficient if we do not become
profitable or if achieving profitability takes longer than we anticipate. If we
are unable to obtain necessary
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additional financing, our business will suffer. In addition, we may need to
raise additional funds if we attempt to expand more rapidly or if competitive
pressures or technological changes are greater than anticipated. We cannot
assure you that any additional financing will be available on reasonable terms
or at all.
Raising additional funds in the future by issuing securities could adversely
affect our stockholders and negatively impact our operating results. If we raise
additional funds through the issuance of debt securities, the holders of the
debt securities will have a claim to our assets that will have priority over any
claim of our stockholders. The interest on these debt securities would increase
our costs and negatively impact our operating results. If we raise additional
funds through the issuance of class A common stock or securities convertible
into or exchangeable for class A common stock, the percentage ownership of our
then-existing stockholders will decrease and they may experience additional
dilution. In addition, any convertible or exchangeable securities may have
rights, preferences and privileges more favorable to the holders than those of
the class A common stock.
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.
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.
Risks associated with integrating our acquisitions. We have acquired IDC and
expect to acquire RTCI. We undertook these acquisitions to expand our service
offerings, expand our revenues and increase our ability to take advantage of
market opportunities. We may not achieve the anticipated benefits from these
acquisitions unless we successfully combine these companies with our business in
a timely and efficient manner.
Integrating these acquired companies may require us, among other things, to:
o consolidate certain operations, offices and facilities
o combine administrative, accounting, sales and marketing and
distribution functions
o expand accounting systems, controls and procedures and
o eliminate duplicate personnel.
We cannot assure you that we will be able to achieve integration without
disrupting our business. The process of integrating these and future acquired
companies into ICC may result in unforeseen difficulties. For example,
integration may divert ICC's management's attention and financial resources away
from the ongoing development and expansion of our existing operations. Our
inability to achieve integration, either at all or in a timely and efficient
manner, could materially and adversely affect our business, operating results
and financial condition.
We believe that our future growth depends, in part, on our ability to continue
to identify, acquire and integrate companies. Acquisitions can be risky and
attractive companies are often sought by numerous industry competitors. Even if
we identify an acquisition target, we cannot assure you that we will be able to
negotiate a definitive agreement, complete the acquisition upon negotiation of a
definitive agreement, realize the anticipated benefits of the acquisition upon
its completion or retain, motivate and manage key employees of the acquired
company. Moreover, we might incur additional debt and contingent liabilities in
our potential future acquisitions, which could materially and adversely impact
our financial condition and results of operations.
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 and if we do not successfully expand our business in
this way, we may lose current and future customers. Although we have established
alliances with Cable & Wireless and ThyssenKrupp to sell our service, these
alliances have only recently begun and we cannot predict their success. In
addition, our potential new service offerings may involve delivery of data and
use of the Internet in other countries which currently have or may 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
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and restrictions on delivery of data and use of the Internet will adversely
affect our business, operating results and financial condition.
Losing any of our key personnel could cause our revenue to decline. We are
substantially dependent on the continued services and performance of our
executive officers and other key employees. The loss of the services of any of
our executive officers or other key employees could impede the operation and
growth of our business and cause our revenues to decline. Although all of our
executive officers and some key employees have entered into employment
agreements, none of these agreements prevents any of them from leaving us.
We may suffer systems failures and business interruptions which would harm our
business. Our success depends in part on the efficient and uninterrupted
operation of our service that is required to accommodate a high volume of
traffic. Almost all of our network operating systems are located at a single
leased facility in New York, New York. Our systems are vulnerable to events such
as damage from fire, power loss, telecommunications failures, break-ins and
earthquakes. This could lead to interruptions or delays in our service, loss of
data or the inability to accept, transmit and confirm customer documents and
data. Our business may suffer if our service is interrupted. Although we have
implemented network security measures, our servers may be vulnerable to computer
viruses, electronic break-ins, attempts by third parties deliberately to exceed
the capacity of our systems and similar disruptions.
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.
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.
Privacy concerns may prevent customers from using our services. 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 rely upon 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.
Failure of our third-party providers to provide adequate Internet and
telecommunications service could result in significant losses of revenue. Our
operations depend upon third parties for Internet access and telecommunications
service. Frequent or prolonged interruptions of these services could result in
significant losses of revenues. Each of them has experienced outages in the past
and could experience outages, delays and other difficulties due to system
failures unrelated to our on-line architecture. These types of occurrences could
also cause users to perceive our services as not functioning properly and
therefore cause them to use other methods to deliver
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and receive information. We have limited control over these third parties and
cannot assure you that we will be able to maintain satisfactory relationships
with any of them on acceptable commercial terms or that the quality of services
that they provide will remain at the levels needed to enable us to conduct our
business effectively.
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.
Costs of transmitting documents and data could increase, which would harm our
business and operating results. The cost of transmitting documents and data over
the Internet could increase. We may not be able to increase our prices to cover
these rising costs. Several telecommunications companies have petitioned the
Federal Communications Commission to regulate Internet and on-line service
providers in a manner similar to long distance telephone carriers and to impose
access fees on these providers. Also, foreign and state laws and regulations
relating to the provision of services over the Internet are still developing. If
individual states or foreign countries impose taxes or laws that negatively
impact services provided over the Internet, our cost of providing our ICC.NET
and other services may increase.
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.
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 ICC, along with their respective ages
and positions with ICC at July 31, 2000, are as follows:
Name Age Position
Richard J. Berman 58 Chairman of the Board
Dr. Geoffrey Carroll 50 President and Chief Executive Officer,
Director
G. Michael Cassidy 48 Executive Vice President Sales, Director
David Hubbard 44 Chief Technology Officer
Walter M. Psztur 41 Chief Financial Officer, Secretary
Charles C. Johnston 65 Director
Arthur R. Medici 51 Director
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<PAGE>
James Ortenzio 54 Director
Matthew Wolk 46 Director
Richard J. Berman joined ICC in September 1998 as Chairman and Chief Executive
Officer 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 has been President and Chief Executive Officer of ICC
since June 1999. From January 1998 to October 1998, 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.
G. Michael Cassidy has been the Executive Vice President - Sales of ICC since
July 1999 and is the developer of our business model and 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. 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 Chief Executive Officer of Greentree Software, a
software development company specializing in supply chain management software
solutions for Fortune 1000 companies. He began his sales career at International
Business Machines Corporation and later managed strategic alliances for Coopers
& Lybrand, certified public accountants.
David Hubbard has been the Chief Technology Officer of ICC since April 1997. He
has more than 20 years of large systems design experience. Prior to joining ICC,
Mr. Hubbard was the Chief Technology Officer 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 served as Corporate Controller of ICC from September 1997 until
September 1998 when he was named Vice President of Finance and Administration
and assumed the duties of our principal financial officer. Mr. Psztur was named
our Chief Financial Officer in July 1999. From 1993 until September 1997, Mr.
Psztur was the Assistant Corporate Controller of Standard Motor Products, an
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 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 a director of ICC since November 1996. Since June 2000
he has been acting as an advisor to management of a variety of companies in the
Internet and telecommunications businesses. From February 1999 until June 2000
he was the Senior Vice President of Marketing of Cable & Wireless USA, Inc., the
United States subsidiary of a global telecommunications company. He was
President of ICC from November 1996 to January 1999. From November 1996 to
September 1998 he also served as the Chief Executive Officer of ICC. From August
1994 to November 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
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& 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 has been chairman of Jao Holdings since 1982. Jao Holdings is a
private company with investments in the fashion, food and real estate
industries. Since 1996, he has also served as chairman of the Hudson River
Park Trust 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.
Matthew Wolk has been a director of ICC since April 1999. Mr. Wolk has been Vice
President of Strategic Business Development - Global Operations of Cable &
Wireless PLC since October 1999. From August 1998 to March 1999, Mr. Wolk served
as Vice President of Wireless Data Products for Philips Consumer Communications
LP ("PCC"), a division of Royal Dutch Philips NV that manufactures and markets
consumer communications products sold worldwide. From September 1997 to March
1999, Mr. Wolk served as Vice President of Global Strategic Business Development
of PCC and from September 1996 to August 1997 he served as Vice President of
Marketing - Americas of PCC. Mr. Wolk was also a founder and President of 21st
Century Marketing Corporation, which provides consulting services, from 1983 to
1996 and of National Accounts Management Company, which is a national sales
organization, from 1983 to 1992. These companies assisted domestic and foreign
brand-name consumer manufacturing clients to enter the Americas markets and to
expand international business. Mr. Wolk has been a director of Telemac
Corporation since 1997.
During 2000, resignations were submitted by former board members Peter Ruel and
Michelle Golden, who also resigned as Executive Vice President - Business
Development. Ms. Golden was retained as a consultant.
ICC has three classes of directors, subject to a maximum of ten directors. Each
class of directors consists of a number of directors as nearly as possible equal
to the number of directors in the other classes. The classes of directors serve
staggered three-year terms. At each annual meeting of stockholders, the class of
directors whose term expires at such annual meeting will be elected for a
three-year term. Officers serve at the discretion of the Board of Directors,
subject to rights, if any, under contracts of employment.
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 served as our director of integration services from June 1997 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 joined ICC as a vice president of product marketing in June
1999. Mr. Capstick was previously Director of Product Marketing of GE
Information Services. 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.
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<PAGE>
Anthony 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 ICC 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 ICC.
In April 2000, we granted to each of Mr. Johnston, Mr. Medici, Mr. Ortenzio
and Mr. Wolk an option to acquire 50,000 shares of our class A common stock
under our amended and restated stock option plan. The exercise price for
these option grants was $19.00. These options are immediately exercisable.
These options expire if not exercised prior to April 2010.
Board Committees
In the fiscal year ended July 31, 1999, the audit committee consisted of Mr.
Johnston and Mr. Ruel. Mr. Ruel resigned from the Board of Directors as of
March 15, 2000 and was replaced on the audit committee by Mr. Ortenzio. The
audit committee acts as a liaison between ICC and its independent auditors.
The compensation committee initially consisted of Mr. Ortenzio and Mr. Ruel.
Mr. Ruel, upon his resignation from the Board of Directors, was replaced on
the compensation committee by Mr. Johnston. The compensation committee
currently consists of Mr. Johnston and Mr. Ortenzio. The compensation
committee has the power and authority to grant options under and to
administer ICC's Amended and Restated Stock Option Plan and review and
approve the compensation of the executive officers of ICC and such other
employees of ICC as are assigned thereto by the Board of Directors and to
make recommendations to the Board of Directors with respect to standards for
setting compensation levels.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and
stockholders owning more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. Executive officers, directors and such stockholders are required
by SEC regulations to furnish us with copies of all 16(a) forms they file. Based
solely on our review of the copies of such forms that we have received, or
written representations from reporting persons, we believe that during the
fiscal year ending July 31, 2000, all executive officers, directors and such
stockholders complied with all applicable filing requirements, except for
Matthew Wolk who failed to file three Forms 4 with respect to certain purchases
and sales of securities.
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<PAGE>
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, 1998, July 31, 1999 and
July 31, 2000 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, 2000 was more than $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
----------------------- Compensation Awards
Annual Compensation ------------------------
Fiscal ----------------------- Securities Underlying All other
Name and Principal Position Year Salary Bonus Options (#) Compensation
----------------------------------- -------- ---------- --------- ------------------------ -------------------
<S> <C> <C> <C> <C> <C>
Richard J. Berman (1)............ 2000 $180,000 -- 300,000 --
Chairman and former Chief 1999 180,000 -- 250,000 $ 38,500 (2)
Executive Officer 1998 67,500 -- -- --
Dr. Geoffrey S. Carroll.............. 2000 312,500 -- 500,000
President and 1999 16,667 -- 150,000 --
Chief Executive Officer 1998 -- -- -- --
David Hubbard.................. 2000 161,417 $1,200 100,000 --
Chief Technology Officer 1999 140,000 -- 16,606 --
1998 100,000 -- -- --
G. Michael Cassidy............. 2000 197,917 1,200 150,000 --
Executive Vice President - 1999 106,250 -- -- --
Sales 1998 100,000 -- -- --
Richard Blume (3).................. 2000 218,750 -- 290,000 --
Chief Operating Officer 1999 23,583 -- 18,000 --
1998 -- -- 0 --
Walter M. Psztur................ 2000 160,833 1,200 100,000 --
Chief Financial Officer, 1999 105,000 10,000 63,652 --
Principal Accounting Officer 1998 87,886 -- 36,348 --
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 starting on page 23 of this annual report.
(3) Mr. Blume resigned as chief operating officer in September 2000.
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<PAGE>
Option/SAR Grants
The following table sets forth the options that were granted during the fiscal
year ended July 31, 2000.
<TABLE>
<CAPTION>
Number of Percent of total
securities options/SAR's
underlying granted to
options/SAR's employees in Exercise Price
Name granted (#) fiscal 2000 Per Share Expiration date
-------------------------- -- ---------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Richard J. Berman 100,000 3.43% $12.00 June 29, 2009
100,000 3.43% 19.00 April 20, 2010
100,000 3.43% 19.00 April 20, 2010
Dr. Geoffrey S. Carroll 300,000 10.28% 12.00 June 29, 2009
100,000 3.43% 19.00 April 20, 2010
100,000 3.43% 19.00 April 20, 2010
David Hubbard 100,000 3.43% 19.00 April 20, 2010
G. Michael Cassidy 150,000 5.14% 19.00 April 20, 2010
Richard Blume 200,000 6.85% 12.00 June 29, 2009
90,000 3.08% 40.00 - 80.00 June 29, 2009
Walter M. Psztur 100,000 3.43% 19.00 April 20, 2010
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
The following table provides information relating to option exercises by the
executive officers identified in the summary compensation table during the
fiscal year ended July 31, 2000. In addition, it indicates the number and value
of vested and unvested options held by these executive officers as of July 31,
2000.
The "Value Realized" on option exercises is equal to the difference between the
fair market value of our class A common stock on the date of exercise less the
exercise price. The "Value of Unexercised In-the-Money Options at July 31, 2000"
is based on $17.50 per share, the closing sales price of our class A common
stock in trading on the Nasdaq Small Cap on July 31, 2000, less the exercise
price, multiplied by the aggregate number of shares subject to outstanding
options.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares July 31, 2000 July 31, 2000
Acquired Value --------------------------------- ----------------------------
Name on Exercise Realized Exercisable (#) Unexercisable (#) Exercisable Unexercisable
------------------------ ----------- --------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard J. Berman -- -- 350,000 200,000 $4,300,000 $ 0
Dr. Geoffrey S. Carroll -- -- 300,000 350,000 1,650,000 0
David Hubbard -- -- 130,000 100,000 2,203,485 0
G. Michael Cassidy -- -- 231,718 150,000 4,140,852 0
Richard Blume -- -- 218,000 100,000 1,100,000 0
Walter M. Psztur 37,000 $1,126,370 63,000 100,000 945,000 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
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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, 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 under our stock option plan,
one-third of which vested upon employment and the balance vested in 20%
increments when the class A common stock attained or exceeded each of the
following per-share bid prices for twenty consecutive trading days: $7.50,
$10.00, $12.50, $15.00 and $17.50.
Dr. Geoffrey S. Carroll joined ICC as President and Chief Executive Officer
under a three-year employment agreement beginning June 30, 1999. Under the
employment agreement, Dr. Carroll receives a base salary at an annual rate of
$350,000 per year. Dr. Carroll will also be eligible to receive an annual
performance bonus.
We have also entered into employment agreements with each of G. Michael
Cassidy, Walter M. Psztur, David Hubbard, Anthony D'Angelo and Steve Brett.
The employment agreements are each for a term of three years that ends on
July 31, 2003. Under their employment agreements, Mr. Cassidy, Mr. Psztur,
Mr. Hubbard, Mr. D'Angelo and Mr. Brett receive base salaries at the annual
rates of $250,000, $190,000, $175,000, $175,000 and $125,000, respectively.
Stock Option Plan
Pursuant to ICC's Amended and Restated Stock Option Plan, referred to as the
Plan, ICC may grant options to purchase an aggregate of 5,000,000 shares of
ICC's class A common stock. The 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, and consultants or
advisers to, ICC. The Plan, which expires in 2009, is administered by the
Compensation Committee of the Board of Directors. The purpose of the Plan is to
secure for ICC and its stockholders the benefits arising from capital stock
ownership by employees, officers and directors of, and consultants or advisers
to, ICC who are expected to contribute to ICC's future growth and success. The
Board of Directors of ICC has adopted an amendment to the Plan to increase the
number of shares of class A common stock reserved for issuance upon the exercise
of options that may be granted under the Plan from 5,000,000 to 7,000,000. This
amendment will be submitted to stockholders for approval at the meeting called
to consider the approval of the shares to be issued in connection with the RTCI
merger.
Options granted under the 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 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 option, payment may be made by cash, check or
any other means that the Compensation Committee determines. The options are
non-transferable during the life of the option holder.
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 Compensation Committee. Options vest as determined by the Compensation
Committee, 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 options expire immediately. The
Board of Directors will administer the Plan if there is no Compensation
Committee in the future.
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<PAGE>
Profit Sharing Plan
In January 1992, ICC adopted a Profit Sharing Plan, pursuant to which an amount
equal to 3.5% of the pretax profit of ICC 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, 2000 as ICC 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 class A common stock
owned beneficially as of September 28, 2000 by each person that beneficially
owns more than 5% of our outstanding class A common stock, by 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 ICC. Unless otherwise noted, each individual has sole voting and
investment power. Fractional shares are rounded to the nearest whole number.
Number of
Shares of %
class A
common
stock
-----------------------
Directors, Executive Officers
and 5% Beneficial Owners (1):
Richard J. Berman (2) 418,827 3.8%
Dr. Geoffrey S. Carroll (3) 450,000 4.0%
G. Michael Cassidy (4) 366,791 3.2%
Charles C. Johnston (5) 110,000 1.0%
Arthur R. Medici (6) 250,000 2.2%
James A. Ortenzio (7) 120,311 1.1%
Matthew Wolk (8) 51,650 *
David Hubbard (9) 130,000 1.2%
Walter M. Psztur (10) 73,000 *
Cable & Wireless PLC (11) 847,628 7.6%
All directors and executive
officers
as a group (9 persons) (12) 1,961,222 17.6%
-----------------
* Less than 1%
ICC also has 2,574 shares of Class B Common Stock outstanding at October 9, 2000
held by three stockholders.
(1) The conversion rate used to determine the number of shares of class A
common stock issuable upon conversion of shares of series C preferred
stock is 44.76 shares of class A common stock per share of series C
preferred stock. The address of each beneficial owner except Cable &
Wireless PLC is c/o Internet Commerce Corporation, 805 Third Avenue, New
York, New York 10022. The address of Cable & Wireless PLC is c/o Matthew
Wolk, 15635 Alton Parkway, Suite 400, Irving, California 92618.
(2) Includes 350,000 shares of class A common stock issuable upon the exercise
of options.
(3) Consists of 450,000 shares of class A common stock issuable upon the
exercise of options.
(4) Includes 241,021 shares of class A common stock issuable upon the exercise
of options.
(5) Includes 50,000 shares of class A common stock issuable upon the exercise
of options.
(6) Includes 174,404 shares of class A common stock issuable upon the
exercise of options
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<PAGE>
(7) Includes 30,000 shares of class A common stock issuable upon the exercise
of warrants and 50,000 shares of class A common stock issuable upon the
exercise of options.
(8) Includes 50,000 shares of class A common stock issuable upon the exercise
of options. Does not include 447,628 shares of class A common stock
issuable upon the conversion of 10,000 shares of series C preferred stock
or 400,000 shares of class A common stock issuable upon the exercise of
warrants owned by Cable & Wireless, of which Mr. Wolk is an officer, in
which shares Mr. Wolk disclaims any beneficial interest.
(9) Consists of 130,000 shares of class A common stock issuable upon the
exercise of options.
(10) Includes 63,000 shares of class A common stock issuable upon the exercise
of options. Does not include 16,357 shares as to which Mr. Psztur has
voting power but in which he disclaims beneficial ownership.
(11) Consists of 447,628 shares of class A common stock issuable upon the
conversion of series C preferred stock and 400,000 shares of class A
common stock issuable upon the exercise of warrants.
(12) See notes (2), (3), (4), (5), (6), (7), (8), (9) and (10) above.
Item 12. Certain Relationships and Related Transactions
In connection with her resignation for personal reasons as Executive Vice
President -- Business Development of ICC effective March 16, 2000, Michelle
Golden agreed to provide consulting services to ICC for two years under a
Consulting Agreement dated as of March 15, 2000. Under the Consulting Agreement,
ICC agreed to pay Ms. Golden $500,000 in eight equal quarterly installments and
granted Ms. Golden a ten-year option to purchase 100,000 shares of ICC's class A
common stock for $84.17 per share.
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
------ ------------------------------------------------
2.1 Agreement and Plan of Merger among ICC, ICC Acquisition
Corporation, Inc., a wholly-owned subsidiary of ICC,
Research Triangle Commerce, Inc., or RTCI, and the selling
shareholders of RTCI (14)
2.2 Agreement and Plan of Merger among ICC, IDC, and the
selling shareholders of IDC (15)
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(i).6 Certificate of Designations-- Series C Preferred Stock (11)
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)
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<PAGE>
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)
4.12 Warrant Agreement dated January 12, 2000, by and among ICC
and Cable and Wireless USA, Inc. (11)
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. and ICC 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, 2000
10.9* Employment Agreement for David Hubbard dated as of April
16, 2000
10.10* Employment Agreement for Walter M. Psztur dated as of
April 16, 2000
10.11 Master Agreement between Cable & Wireless PLC and ICC executed
on November 24, 1999 (10)
10.12 Consulting Agreement, dated as of March 15, 2000, between
Michele Golden and ICC (12)
10.13 Amended and restated stock option plan (13)
10.14* First Amendment to Lease Agreement, dated as of January, 2000,
by and between JB Squared LLC and ICC relating to the rental
of an additional approximately 4,800 square feet at the
Lakeview Executive Center, 45 Research Way, East Setauket, New
York, 11733
10.15* First Amendment of Lease Agreement between Madison Third
Building Companies LLC and ICC relating to the rental of
additional office space at 805 Third Avenue, New York, New
York
10.16* Lease Agreement, dated as of August 2, 2000, by and between
IDC Realty, LLC as landlord and ICC as tenant relating to the
rental of an approximately 8,000 square feet facility used by
ICC's IDC division
23(ii).1* Consent of Deloitte & Touche LLP
23(ii).2* Consent of Richard A. Eisner LLP
27.1* Financial Data Schedule
* Filed with this annual report.
-27-
<PAGE>
(1) Incorporated by reference to ICC's registration statement on form
S-3 (File no. 333-80043)
(2) Incorporated by reference to ICC's annual report on form 10-KSB
for the year ended July 31, 1998
(3) Incorporated by reference to ICC's registration statement on form
SB-2 (File no. 33-83940)
(4) Incorporated by reference to ICC's report on form 10-QSB dated
January 31, 1997
(5) Incorporated by reference to ICC's report on form 10-QSB dated
April 30, 1997
(6) Incorporated by reference to ICC's report on form 10-QSB dated
October 31, 1997
(7) Incorporated by reference to amendment no. 3 to ICC's
registration statement on form S-3 (File no. 333-80043)
(8) Incorporated by reference to ICC's current report on form 8-K
filed with the SEC on July 1, 1999
(9) Incorporated by reference to ICC's registration statement on form
S-3 (File no. 333-89591)
(10) Incorporated by reference to ICC's current report on form 8-K
dated December 1, 1999
(11) Incorporated by reference to amendment no. 1 to ICC's
registration statement on form S-3 (File no. 333-93301)
(12) Incorporated by reference to ICC's current report on form 8-K
dated March 28, 2000
(13) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999.
(14) Incorporated by reference to ICC's current report on form 8-K
dated June 15, 2000
(15) Incorporated by reference to ICC's current report on form 8-K
dated August 11, 2000
13(b) Document List
Independent Auditors' Reports
Financial Statements:
Balance Sheet
July 31, 2000
Statement of Operations - Year Ended
July 31, 2000
Statement of Operations - Year Ended
July 31, 1999
Statement of Changes in Shareholder Equity and Other Comprehensive
Income - Years Ended July 31, 2000 and 1999
Statements of Cash Flows - Year Ended
July 31, 2000
Statements of Cash Flows - Year Ended
July 31, 1999
13(c) Reports on Form 8-K
ICC filed a form 8-K on each of May 4, 2000 and May 18, 2000.
-28-
<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 12, 2000
INTERNET COMMERCE CORPORATION
by: /s/ Geoffrey S. Carroll
----------------------------------
Dr. Geoffrey S. Carroll
President and Chief Executive Officer
-29-
<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/ Geoffrey S. Carroll President, Chief Executive October 12, 2000
-------------------------- Officer and Director
Dr. Geoffrey S. Carroll (Principal Executive Officer)
/s/ Walter M. Psztur Chief Financial Officer October 12, 2000
--------------------- (Principal Financial
Walter M. Psztur and Accounting Officer)
/s/ Richard J. Berman Director October 12, 2000
--------------------------
Richard J. Berman
Director October __, 2000
---------------------
G. Michael Cassidy
/s/ Charles C. Johnston Director October 12, 2000
--------------------------
Charles C. Johnston
/s/ Arthur R. Medici Director October 12, 2000
---------------------
Arthur R. Medici
/s/ James Ortenzio Director October 12, 2000
---------------------
James Ortenzio
/s/ Matthew Wolk Director October 12, 2000
---------------------
Matthew Wolk
<PAGE>
Exhibit Index
-------------
Exhibit Reference
Number Number
------ ------
2.1 Agreement and Plan of Merger among ICC, ICC
Acquisition Corporation, Inc., a wholly-owned
subsidiary of ICC, Research Triangle Commerce, Inc.,
or RTCI, and the selling shareholders of RTCI (14) *
2.2 Agreement and Plan of Merger among ICC, IDC,
and the selling shareholders of IDC (15) *
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(i).6 Certificate of Designations-- Series C Preferred Stock (11) *
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) *
4.12 Warrant Agreement dated January 12, 2000, by and
among ICC and Cable and Wireless USA, Inc. (11) *
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) *
<PAGE>
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, 2000 10.8
10.9 Employment Agreement for David Hubbard dated as of
April 16, 2000 10.9
10.10 Employment Agreement for Walter M. Psztur dated as
of April 16, 2000 10.10
10.11 Master Agreement between Cable & Wireless PLC and
ICC executed on November 24, 1999 (10) *
10.12 Consulting Agreement, dated as of March 15, 2000,
between Michele Golden and ICC (12) *
10.13 Amended and Restated Stock Option Plan (13) *
10.14 First Amendment to Lease Agreement, dated as of January,
2000, by and between JB Squared LLC and ICC relating
to the rental of an additional approximately 4,800 square
feet at the Lakeview Executive Center, 45 Research
Way, East Setauket, New York, 11733 10.14
10.15 First Amendment of Lease Agreement between Madison
Third Building Companies LLC and ICC relating to the
rental of additional office space at 805 Third Avenue,
New York, New York 10.15
10.16 Lease Agreement, dated as of August 2, 2000, by
and between IDC Realty, LLC as landlord and ICC as
tenant relating to the rental of an approximately
8,000 square feet facility used by ICC's IDC division 10.16
23(ii).1 Consent of Deloitte & Touche LLP 23(ii).1
23(ii).2 Consent of Richard A. Eisner & Company 23(ii).2
27.1 Financial Data Schedule 27.1
(1) Incorporated by reference to ICC's registration statement on form
S-3 (File no. 333-80043)
(2) Incorporated by reference to ICC's annual report on form 10-KSB
for the year ended July 31, 1998
(3) Incorporated by reference to ICC's registration statement on form
SB-2 (File no. 33-83940)
(4) Incorporated by reference to ICC's report on form 10-QSB dated
January 31, 1997
(5) Incorporated by reference to ICC's report on form 10-QSB dated
April 30, 1997
(6) Incorporated by reference to ICC's report on form 10-QSB dated
October 31, 1997
(7) Incorporated by reference to amendment no. 3 to ICC'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 ICC's registration statement on form
S-3 (File no. 333-89591)
(10) Incorporated by reference to ICC's current report on form 8-K
dated December 1, 1999
(11) Incorporated by reference to amendment no. 1 to ICC's
registration statement on form S-3 (File no. 333-93301)
(12) Incorporated by reference to ICC's current report on form 8-K
dated March 28, 2000
(13) Incorporated by reference to ICC's proxy statement for the annual
meeting of stockholders for the year ended July 31, 1999
<PAGE>
(14) Incorporated by reference to ICC's current report on form 8-K
dated June 15, 2000
(15) Incorporated by reference to ICC's current report on form 8-K
dated August 11, 2000
<PAGE>
INTERNET COMMERCE CORPORATION
Index
Page
Financial Statements
Independent auditors' report F-2
Predecessor independent auditors' report F-3
Balance sheet as of July 31, 2000 F-4
Statements of operations for the years ended July 31, 2000 and
July 31, 1999 F-5
Statements of changes in stockholders' equity and other
comprehensive income for the years ended July 31, 2000
and July 31, 1999 F-6
Statements of cash flows for the years ended July 31, 2000
and July 31, 1999 F-7
Notes to financial statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Internet Commerce Corporation
We have audited the accompanying balance sheet of Internet Commerce Corporation
(the "Company") as of July 31, 2000 and the related statement of operations,
stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in United States of America. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of July 31, 2000 and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
New York, New York
September 29, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Internet Commerce Corporation
New York, New York
We have audited the accompanying statements of operations, changes in
stockholders' equity and comprehensive income, and cash flows for the year ended
July 31, 1999 of Internet Commerce Corporation (formerly Infosafe Systems, Inc.
and subsidiary). 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the results of operations of Internet Commerce Corporation
and its cash flows for the year ended July 31, 1999, in conformity with
generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
September 30, 1999
F-3
<PAGE>
INTERNET COMMERCE CORPORATION
Balance Sheet
As of July 31, 2000
<TABLE>
<CAPTION>
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 14,003,329
Accounts receivable (net of allowance for doubtful accounts of $74,388) 629,087
Note receivable 5,000,000
Prepaid expenses and other assets 209,112
------------
Total current assets 19,841,528
Restricted cash 523,863
Prepaid acquisition costs 369,486
Property and equipment, net 925,596
Software development costs, net 474,592
Goodwill, net 182,927
Other assets 14,237
------------
Total assets $ 22,332,229
============
LIABILITIES
-----------
Current liabilities:
Accounts payable $ 639,196
Accrued expenses 451,663
Accrued dividends 275,763
Deferred revenue 250,000
Capital lease obligation 307,677
Other liabilities 86,237
------------
Total current liabilities 2,010,536
Capital lease obligation - less current portion 231,457
------------
Total liabilities 2,241,993
Commitments and contingencies (Note K)
STOCKHOLDERS' EQUITY
--------------------
Preferred stock:
Preferred stock - 5,000,000 shares authorized, including 10,000 series A
preferred stock, 10,000 series C preferred stock and 175 series S preferred stock
Series A preferred stock - par value $.01 per share, $1,000 liquidation value
per share, 668 shares issued and outstanding 7
Series C preferred stock - par value $.01 per share, $1,000 liquidation value
per share, 44.76 votes per share; 10,000 shares issued and outstanding 100
Common stock:
Class A - par value $ .01 per share, 40,000,000 shares authorized,
one vote per share; 6,388,445 shares issued and outstanding 63,884
Class B - par value $ .01 per share, 2,000,000 shares authorized,
six votes per share; 2,574 shares issued and outstanding 26
Additional paid-in capital 58,432,187
Accumulated deficit
(38,405,968)
------------
Total stockholders' equity 20,090,236
------------
Total liabilities and stockholders' equity $ 22,332,229
============
</TABLE>
See notes to financial statements
F-4
<PAGE>
INTERNET COMMERCE CORPORATION
Statements of Changes in Stockholders' Equity and Other Comprehensive Income
F-5
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenue:
Services $ 1,303,441 $ 105,243
------------ ------------
Expenses:
Cost of services (excluding non-cash charges in connection with stock-based
compensation of $0 and $1,241 in 2000 and 1999 respectively) 2,514,282 452,306
Product development and enhancement (excluding non-cash charges in
connection with stock-based compensation of $97,809 and $93,610 in 2000
and 1999 respectively) 516,608
702,218
Selling and marketing (excluding non-cash charges in connection with
stock-based compensation of $767,639 and $304,828 in 2000 and 1999
respectively) 3,273,294 419,714
General and administrative (excluding non-cash charges in connection with
stock-based compensation, services and legal settlements of $4,294,897
and $2,866,841 in 2000 and 1999 respectively) 4,814,160 3,548,596
Non-cash charges in connection with stock-based
compensation, services and legal settlements 5,160,345
3,266,520
Write-down of assets 32,915
------------ ------------
16,464,299 8,236,659
------------ ------------
Operating loss (15,160,858) (8,131,416)
------------ ------------
Other income and expense:
Interest and investment income 88,143 737,442
Interest expense (62,211) (1,577,667)
------------ ------------
675,231 (1,489,524)
------------ ------------
NET LOSS $(14,485,627) $ (9,620,940)
Dividends attributable to preferred stock (457,535) (190,645)
Dividends attributable to preferred stock resulting from
discount for beneficial conversion feature (4,549,535) (1,222,072)
------------ ------------
Loss attributable to common stockholders $(19,492,697) $(11,033,657)
============ ============
Basic and diluted loss
per common share $ (4.49) $ (7.62)
============ ============
Weighted average number of common
shares outstanding - basic
and diluted loss per share 4,336,698 1,447,091
============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Series A Series C Series S
Preferred Stock Preferred Stock Preferred Stock
----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - July 31, 1998 $ $ $
----------------------------------------------------------------------------
Issuance of common stock for purchase
of minority interest
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 175 2
Issuance of common stock in exchange
for warrants and unit purchase options
Issuance of preferred stock for services 45 1
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
Repayment of subscription note receivable
Conversion of bridge loans into preferred
Stock 2,595 26
Conversion of preferred stock (50) (1)
Proceeds from exercise of warrants
Redemption of redeemable stock
Redemption of preferred stock (175) (2)
Dividend on preferred stock
Charge on price-based stock options
and for change of control
Net loss
Unrealized loss on marketable securities
Total comprehensive income
----------------------------------------------------------------------------
Balance - July 31, 1999 9,590 $ 96 $ $
============================================================================
Conversion of series A preferred stock (8,922) (89)
Exchange of common stock
Proceeds from exercise of warrants
Proceeds from exercise of employee
stock options
Proceeds from private placement of
preferred stock 10,000 100
Proceeds from private placement of
common stock
Issuance of common stock for settlement
Charge on price-based stock options
Charge for issuance of options for services
Cash dividends
Net loss
Unrealized gain - marketable securities
Total comprehensive income
----------------------------------------------------------------------------
Balance - July 31, 2000 668 $ 7 10,000 $ 100 $
============================================================================
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
---------------------------------------------------------------- Paid-In
Shares Amount Shares Amount Capital
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - July 31, 1998 947,951 $ 9,480 194,397 $ 1,944 $14,532,208
--------------------------------------------------------------------------------------
Issuance of common stock for purchase
of minority interest 334,495 3,345 467,039
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 79,934 799 682,518
Issuance of common stock in exchange
for warrants and unit purchase options 316,651 3,166 (3,166)
Issuance of preferred stock for services 44,999
Proceeds from private placement (net
of costs of $585,000) 6,414,930
Issuance of warrants for services 816,672
Issuance of warrants in connection with
Debt 2,043,304
Exchange of common stock 78,807 788 (78,807) (788)
Repayment of subscription note receivable
Conversion of bridge loans into preferred
Stock 1,952,744
Conversion of preferred stock 10,000 100 (99)
Proceeds from exercise of warrants 15,000 150 37,350
Redemption of redeemable stock 5,478
Redemption of preferred stock 13,462 135 (133)
Dividend on preferred stock 14,641 146 (458)
Charge on price-based stock options
and for change of control 1,996,503
Net loss
Unrealized loss on marketable securities
Total comprehensive income
--------------------------------------------------------------------------------------
Balance - July 31, 1999 1,810,941 $ 18,109 115,590 $ 1,156 $28,989,889
======================================================================================
Conversion of series A preferred stock 1,788,400 17,884 (17,795)
Exchange of common stock 113,016 1,130 (113,016) (1,130)
Proceeds from exercise of warrants 1,360,139 13,601 4,226,172
Proceeds from exercise of employee
stock options 849,765 8,498 859,997
Proceeds from private placement of
preferred stock 9,999,900
Proceeds from private placement of
common stock 434,184 4,342 9,495,434
Issuance of common stock for settlement 32,000 320 839,003
Charge on price-based stock options 3,311,257
Charge for issuance of options for services 1,185,865
Cash dividends (457,535)
Net loss
Unrealized gain - marketable securities
Total comprehensive income
--------------------------------------------------------------------------------------
Balance - July 31, 2000 6,388,445 $63,884 2,574 $ 26 $58,432,187
======================================================================================
<CAPTION>
Total
Note Accumulated Stockholders
Receivable Deficit OCI* Equity
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - July 31, 1998 $ (112,500) $ (14,299,401) $ $ 131,731
----------------------------------------------------------------------------
Issuance of common stock for purchase
of minority interest 470,384
Issuance of common stock for
compensation, termination of consulting
agreement and settlement of legal fees 683,319
Issuance of common stock in exchange
for warrants and unit purchase options
Issuance of preferred stock for services 45,000
Proceeds from private placement (net
of costs of $585,000) 6,415,000
Issuance of warrants for services 816,672
Issuance of warrants in connection with
Debt 2,043,304
Exchange of common stock
Repayment of subscription note receivable 112,500 112,500
Conversion of bridge loans into preferred
Stock 1,952,770
Conversion of preferred stock
Proceeds from exercise of warrants 37,500
Redemption of redeemable stock 5,478
Redemption of preferred stock
Dividend on preferred stock (312)
Charge on price-based stock options
and for change of control 1,996,503
Net loss (9,620,940) (9,620,940)
Unrealized loss on marketable securities (34,000) (34,000)
--------
Total comprehensive income (9,654,940)
----------------------------------------------------------------------------
Balance - July 31, 1999 $ $ (23,920,341) $ (34,000) $ 5,054,909
============================================================================
Conversion of series A preferred stock
Exchange of common stock
Proceeds from exercise of warrants 4,239,773
Proceeds from exercise of employee
stock options 868,495
Proceeds from private placement of
preferred stock 10,000,000
Proceeds from private placement of
common stock 9,499,776
Issuance of common stock for settlement 839,323
Charge on price-based stock options 3,311,257
Charge for issuance of options for services 1,185,865
Cash dividends (457,535)
Net loss (14,485,627) (14,485,627)
Unrealized gain - marketable securities 34,000 34,000
------
Total comprehensive income (14,451,627)
----------------------------------------------------------------------------
Balance - July 31, 2000 $ $(38,205,968) $ $20,090,236
============================================================================
* Other Comprehensive Income
</TABLE>
See notes to Financial statements
F-6
<PAGE>
INTERNET COMMERCE CORPORATION
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(14,485,627) $ (9,620,940)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 2,591
Software development cost amortization 237,297 2,409
Depreciation for fixed assets 435,218 290,800
Goodwill amortization 156,794 130,663
Writedown on disposal of assets 32,915
Loss on sale of marketable securities 14,937 7,611
Issuance of common stock and warrants for services,
compensation and consulting agreement termination 1,270,017
Non-cash charges for compensatory stock options issued,
change of control and legal settlement 5,160,445 1,996,503
Amortization of debt discount 1,237,357
Changes in:
Accounts receivables - net of allowance for doubtful accounts (579,663) (42,193)
Prepaid expenses and other assets (467,164) 164,593
Accounts payable 271,818 67,348
Accrued expenses 73,126 244,944
Deferred revenue 250,000
Other liabilities 69,418 16,819
------------ ------------
Net cash used in operating activities (8,860,810) (4,201,154)
------------ ------------
Cash flows from investing activities:
Notes receivable (5,000,000)
Purchases of property and equipment (362,048) (191,417)
Purchases of marketable securities (5,012,142)
Purchase of certificate of deposits (88,199) (435,664)
Proceeds from sales of marketable securities 3,987,126 999,876
------------ ------------
Net cash used in investing activities (1,463,121) (4,639,347)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 10,000,000 6,415,000
Proceeds from issuance of common stock 9,499,776
Proceeds from bridge loan 2,300,000
Proceeds from issuance of warrants 38,925
Proceeds from exercise of warrants 4,239,773 37,500
Proceeds from subscription receivable 112,500
Proceeds from exercise of employee stock options 868,495
Payment for redemption of redeemable common stock (277)
Payment of dividends (181,772) (312)
Payments of capital lease obligations (213,270) (126,864)
------------ ------------
Net cash provided by financing activities 24,213,002 8,776,472
------------ ------------
Net increase (decrease) in cash and cash equivalents 13,889,071 (64,029)
Cash and cash equivalents, beginning of period 114,258 178,287
------------ ------------
Cash and cash equivalents, end of period $ 14,003,329 $ 114,258
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 62,211 $ 111,283
</TABLE>
See notes to financial statements
F-7
<PAGE>
INTERNET COMMERCE CORPORATION
Notes to financial statements
July 31, 2000
NOTE A - ORGANIZATION AND NATURE OF BUSINESS
Internet Commerce Corporation (the "Company" or "ICC") was incorporated under
the name Infosafe Systems, Inc. on November 18, 1991 in the State of Delaware.
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 its ICC.NET or CommerceSense(R) service in 1997,
introduced ICC.NET for beta testing in November 1997 and launched the current
version of ICC.NET commercially in April 1999. The ICC.NET system uses the
Internet and proprietary technology to deliver the Company's customers'
documents and data files to members of their trading communities, many of which
have incompatible systems, by translating the documents and data files into any
format required by the receiver. The system can be accessed using a standard Web
browser or virtually any other communications protocol.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
[1] Revenue recognition:
The Company's revenues are derived from subscription fees which include
transaction, mailbox and fax transmission fees. The Company also derives
revenues through implementation fees, consulting and interconnection fees.
Subscription fees are charged for the use of the Company's service, which
include both fixed and usage based fees. These fees are recognized
currently, provided that all of the following conditions are met: a
noncancelable license agreement has been signed, the electronic data has
been delivered, there are no material uncertainties regarding customer
acceptance, collection of the resulting receivable is reasonably assured.
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-8
<PAGE>
NOTE B - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (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 Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). Under the
provision, the Company capitalizes costs associated with software
developed or obtained for internal use when both the preliminary project
stage is completed and management has authorized further funding for the
project which it deems probable will be completed and used to perform the
function intended. Capitalized costs include only (1) external direct
costs of materials and services consumed in developing or obtaining
internal-use software, (2) payroll and payroll-related costs for employees
who are directly associated with and devote time to the internal-use
software project and (3) interest costs incurred while developing
internal-use software. Capitalization of such costs ceases no later than
the point at which the project is substantially complete and ready for its
intended use. Software development costs are amortized using a
straight-line method over a three-year period. Amortization of software
development costs amounted to $237,296 and $2,485 for the years ended July
31, 2000 and 1999 respectively. No software development costs have been
capitalized during the fiscal year ended July 31, 2000.
[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, basic and diluted net loss per common share is computed by
dividing the net loss attributable to common stockholders by the weighted
average number of shares of common stock outstanding during each period.
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.
[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] Cash and cash equivalents:
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 accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenue
and expense during the reporting period. Actual results could differ from
those estimates.
F-9
<PAGE>
NOTE B - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
[8] Impairment of long-lived assets:
Long-lived assets of the Company are reviewed regularly as to whether
their carrying value has become impaired pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires long-lived assets, if impaired, to be
remeasured at fair value, whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Management also reevaluates the periods of amortization of long-lived
assets to determine whether events and circumstances warrant revised
estimates of useful lives. The Company wrote down fixed assets in the
amount of $0 and $32,915 for the years ended July 31, 2000 and 1999,
respectively.
[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] 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. Goodwill is being amortized over thirty six
months from the acquisition date using the straight-line method.
Accumulated amortization amounted to $287,457 as of July 31, 2000.
Amortization of goodwill amounted to $156,795 and 130,662 for the years
ended July 31, 2000 and 1999, respectively.
[11] 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.
[12] Segment:
Effective August 1, 1999, the Company adopted SFAS No. 131, Disclosure
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way business enterprises report information
about operating segments, as well as enterprise-wide disclosures about
products and services, geographic areas and major customers. Management
believes the Company operates in one segment. The Company's customers are
located in eight countries around the world with the majority being in the
United States. All of the Company's transactions have been conducted in
United States dollars. The Company does not have any material revenues or
assets outside of the United States.
F-10
<PAGE>
NOTE B - SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
[13] Recent Accounting Pronouncements:
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 was previously amended
by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
activities -- Deferral of the Effective Date of FASB Statement No. 133,"
which deferred the effective date of SFAS No. 133 to fiscal years
commencing after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, and for
hedging activities be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Company believes the adoption of
SFAS No. 133, as amended by SFAS No. 138 will not have a material impact
on the financial position or results of operations. The Company does not
currently engage or plan to engage in any derivative or hedging
activities.
In June 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation", ("FIN 44") an
interpretation of APB Opinion No. 25. This interpretation is effective
July 1, 2000, but certain conclusions in this interpretation cover
specific events that occur after either December 15, 1998, or January 12,
2000. The Company adopted FIN 44 in fiscal 2000. The adoption of FIN 44
did not have a material effect on the Company's financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 summarizes certain areas of the Staff's views
in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company believes that its
current revenue recognition principles comply with SAB No. 101.
NOTE C - NOTE RECEIVABLE
On June 14, 2000, the Company paid $5 million to Research Triangle
Commerce, Inc. ("RTCI") in exchange for a promissory note (the "Note").
The Note bears interest at 7.5% per annum. The Note shall be settled
immediately after the effective date of the merger with RTCI, provided
however, that upon the merger and in any event on August 15, 2000, the
Note shall automatically convert into shares of RTCI's common stock.
On August 15, 2000, the $5,000,000 Note and unpaid accrued interest on the
Note was converted into common stock of RTCI.
NOTE D - PREPAID ACQUISITION COSTS
Prepaid acquisition costs are comprised of costs incurred for the
acquisition of Intercoastal Data Corporation ("IDC") in August 2000 and
the proposed acquisition of RTCI expected to be consummated in November
2000. Acquisition costs will be allocated to the purchase price upon
consummation of the above acquisitions.
F-11
<PAGE>
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Computers and office equipment (including capital leases $1,311,524
of $810,911)
Furniture and fixtures 162,265
Office software (including capital leases of $145,055) 336,030
Leasehold improvements 64,072
-----------
1,873,891
Less accumulated depreciation 948,295
-----------
$925,596
===========
Depreciation expense was $435,218 and $290,800 for the years ended July
31, 2000 and 1999 respectively.
NOTE F - ACCRUED EXPENSES
Accrued expenses consists of the following:
Vacation $ 261,870
Wages 101,986
Other 87,807
-----------
$ 451,663
===========
NOTE G - DEFERRED REVENUE
In July 2000, the Company entered into an agreement with Hightech
International Services GmbH, ("Hightech") a subsidiary of ThyssenKrupp
Information Services Group GmbH (TKIS), providing Hightech with principal
partner status, along with Cable & Wireless, in the form of European
hosting rights for ICC services. TKIS has committed to a 5-year agreement,
which includes an $8,000,000 minimum revenue guarantee to ICC over the
first 24 months of the agreement. Hightech may, by written notice to ICC,
terminate this agreement in accordance with its terms.
Deferred revenue associated with this agreement totaled $250,000 at July
31, 2000.
NOTE H - 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.
F-12
<PAGE>
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[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.
[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 75% of 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. 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 total liquidation value of the series A
preferred stock was $668,000 at July 31, 2000.
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.
Series A preferred stock has no voting rights except as expressly required
by law.
F-13
<PAGE>
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
The Company paid dividends of $181,772 to series A preferred shareholders
of record on July 1, 2000 and on July 1, 1999, the Company issued 14,641
shares of class A common stock and $312 for payment of the dividend.
As of July 31, 2000, the Company accrued dividends on its series A
preferred stock of $2,538.
[5] Series C Preferred Stock
During the year ended July 31, 2000, the Company issued 10,000 shares of
series C preferred stock and 400,000 warrants to Cable & Wireless, PLC
("C&W") for total consideration of $10,000,000. A beneficial conversion
feature resulted from the allocation of the proceeds between the fair
value of the series C preferred stock and the fair value of the warrants,
which resulted in a discount on the preferred stock in the amount of
$4,549,535. The fair value of the warrants was calculated using the
Black-Scholes option-pricing model ("Black-Scholes"). The discount was
immediately accreted 100% due to all of the series C preferred stock
becoming eligible for conversion immediately upon issuance.
Series C preferred stock is convertible, at the option of the holder, into
class A common stock. The series C preferred stock shall be convertible
into 447,628 shares of class A common stock.
Series C preferred stock is redeemable, in whole or part, by the Company
at the option of the Company, at any time after January 1, 2005. The
redemption price for each share of series C preferred stock is $1,000 plus
unpaid dividends. Notice of redemption must be given 45 days prior to the
redemption date.
Series C preferred shall be preferred as to assets over all other classes
or series of preferred stock of the Company in the event of any
liquidation, dissolution or winding up of the Company. The holders of
series C preferred are entitled to receive an amount in cash equal to
$1,000 per share plus any unpaid or accrued dividends before any
distribution is made to holders of common stock.
The holders of the outstanding shares of series C preferred stock are
entitled to receive a 4% per share annual cumulative dividend payable in
cash or in non-assessable shares of common stock. In terms of stock
dividends, each share of series C preferred shall be deemed to have a
value of $1,000 and each share of common stock to be paid as a dividend
shall be deemed to have a value equal to the average of the Market Price
for ten consecutive trading days ending two days prior to the payment
date. Dividends are payable on January 1 of each year. Dividends shall
accrue and be cumulative on a daily basis, whether or not earned or
declared. No fractional shares of common stock shall be issued in the
payment of dividends.
Series C preferred stock is entitled to the number of votes per share
equal to the number of whole shares of common stock into which each share
of series C preferred is convertible as of the record date.
The holders of Series C preferred stock are entitled to receive a dividend
of 4% per share at the redemption price of $1,000. The dividends are
prorated from the date of that ICC entered into this agreement to the end
of the fiscal year. As of July 31, 2000, the Company accrued $273,224 for
dividends payable for 10,000 shares of Series C preferred stock
outstanding.
The total liquidation value of series C preferred stock was $10,000,000 at July
31, 2000.
F-14
<PAGE>
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
[6] Warrants:
As of July 31, 2000, 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 234,140 (a)(c) $29.16 February 18, 2002
Class B warrants 263,835 (b)(c) $39.23 February 18, 2002
Bridge warrants 116,000 (d) $2.50 December 2001 to July 2002
Bridge commission $2.50 July 2001 to January 2002
warrants 8,910 (e)
Private placement
commission warrants 43,350 (f) $5.00 April 29, 2002
Consulting warrants 18,000 (b) $9.94 March 31, 2004
C & W Warrants 400,000 (g) $22.21 January 12, 2005
</TABLE>
(a) Upon exercise of each warrant, holder is entitled to 1.36891 shares
of class A common stock and one class B warrant.
(b) Upon exercise of each warrant, holder is entitled to 1.36891 shares
of class A common stock.
(c) Redeemable at $.25 per warrant under certain conditions.
(d) Investors who provided the Company with bridge financing in 1998
purchased 10% notes with warrants attached. For $1.00 of bridge
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 the 1998 bridge
financing. Terms are substantially the same as (d).
(f) Issued to NASD registered broker/dealers in connection with an 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 C&W in private placement. Upon exercise, holder is
entitled to one share of class A common stock in exchange for each
warrant.
[7] 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 5,000,000
shares of class A common stock to employees, officers, directors and
consultants or advisors. The options granted may be either incentive stock
options or nonqualified options.
F-15
<PAGE>
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
Incentive stock options granted to employees have an exercise price equal
to the fair market value of the underlying shares at the date of grant.
The Board of Directors determines the exercise price of nonqualified
options granted to employees and consultants. The term of all options
granted may not exceed 10 years. Options vest as determined by the Board,
but generally vesting occurs over a period of three to four years.
Generally, vested options must be exercised within 90 days of termination
of the optionee's employment or other relationship with the Company. If
termination of employment is for cause, the option will expire
immediately.
The Company granted 390,000 price-vested options under the Plan from
September 1998 through December 1998. Price-vested options 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 vested options
on the date each price requirement is met. The number of options
immediately exercisable were 130,000. The remaining 260,000 became
exercisable, in 20% increments, when the class A common stock attained or
exceeded 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,
2000, 325,000 of these options remained outstanding and were exercisable
and as of July 31, 1999, 390,000 and 286,014 of these options were
outstanding and exercisable respectively. The Company took a total of
$3,311,257 and $1,374,069 in non-cash charges in connection with these
price-vested options during July 31, 2000 and 1999 respectively and will
not be required to take any charges in connection with these options in
the future.
In November 1998, the Company took a non-cash charge of $622,434 due to
certain options vesting from a change of control feature.
In March 2000, the Company issued 100,000 options in connection with a
consulting agreement with a former board member. The options were valued
at $6,318,850 using Black-Scholes and are being amortized as consulting
expense during the consulting agreement. Non-cash charges for these
options amounted to $1,185,865 during the year ended July 31, 2000.
In June 2000, the Company took $663,222 in non-cash charges for 10,000
shares of class A common stock valued at $176,150 and 50,000 stock options
valued using Black-Scholes at $487,072 in connection with a legal
settlement.
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 attributable to common stockholders and basic
and diluted loss per common share would have changed to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Year ended July 31,
------------------------------------------
2000 1999
------------------- ------------------
<S> <C> <C>
Net loss attributable to common stockholders As reported $ (19,492,697) $ (11,033,657)
Pro forma $ (21,911,882) $ (10,346,436)
Basic and diluted loss per common share As reported $ (4.49) $ (7.62)
Pro forma $ (5.05) $ (7.15)
</TABLE>
F-16
<PAGE>
NOTE H - STOCKHOLDERS' EQUITY (CONTINUED)
The weighted-average fair value at date of grant for options granted
during the years ended July 31, 2000 and 1999 was $16.87 and $1.51
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:
Year ended July 31,
------------------------------
2000 1999
----------- -----------
Risk-free interest rate 6.12% 4.53%
Expected lives 3 3
Expected volatility 156% 113%
Expected dividend yield 0% 0%
The following table summarizes the Company's 1994 Stock Option Plan
and options issued outside the plan as of July 31, 2000 and 1999, and
changes during the years then ended:
<TABLE>
<CAPTION>
Year ended July 31,
-----------------------------------------------------------------
(Shares in thousands) 2000 1999
-----------------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning
of year 1,947.7 $ 1.42 156.6 $ 19.65
Granted 3,069.0 $ 24.46 1,897.0 $ 1.41
Forfeited (78.3) $ 22.50 (105.9) $ 12.03
Exercised (849.8) $ 1.02
------------- --------------
Options outstanding at end of year 4,088.6 $ 18.39 1,947.7 $ 1.42
============= ==============
Options exercisable at end of year 2,113.6 $ 11.16 1,749.0 $ 1.20
============= ==============
</TABLE>
The following table presents information relating to stock options
outstanding as of July 31, 2000:
(Shares in thousands)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------- -----------------------
Weighted- Weighted-
Average Weighted- Average
Remaining Average Exercise
Range of Exercise Prices Shares Contractual Life Exercise Price Shares Price
------------------------------------------------------------------------------------ ---------------------
<S> <C> <C> <C> <C> <C>
$ 0.26 - $ 3.88 1,068.8 6.1 $ 1.52 1,031.1 $ 1.47
$ 11.50 - $ 19.00 2,337.3 9.3 $ 16.26 982.5 $ 13.59
$ 23.38 - $ 45.69 378.5 9.4 $ 34.85 0.0 $
$ 60.00 - $ 84.63 304.0 9.3 $ 73.65 100.0 $ 84.63
------------------------------------------------------- ---------------------
4,088.6 8.5 $ 18.39 2,113.6 $ 11.16
============= =======
</TABLE>
The Company had 250,487 options reserved for future issuance under
the Plan as of July 31, 2000.
F-17
<PAGE>
NOTE I - INCOME TAXES
The Company's effective tax rate varied from the statutory federal income tax
rate as follows:
<TABLE>
<CAPTION>
For the year ended July 31,
-----------------------------------------
2000 1999
--------------- -----------------
<S> <C> <C>
Expected tax rate (benefit) (34.0) % (34.0) %
Increase (decrease) in taxes resulting from:
Permanent differences from exercise of stock options (40.0) % 3.7 %
Other permanent differences 5.8 %
State and local income tax (benefit), net of federal effect (21.2)%
Increase in valuation allowance 89.4 % 30.3 %
--------------- -----------------
Effective tax rate 0% 0%
=============== =================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets, liabilities and the valuation allowance at
July 31, 2000 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Accrued expenses $ 161,486
Property and equipment 4,680
Federal, state and local net operating loss carryforwards 22,343,640
----------------
22,509,806
Less deferred tax liability:
Capitalized software development costs (213,566)
Deferred rent (37,893)
----------------
Net asset 22,258,347
Valuation allowance (22,258,347)
----------------
Net deferred tax asset $ 0
================
</TABLE>
The Company has provided a valuation allowance of 100% of its deferred tax
assets due to the uncertainty of generating future profits that would allow for
the realization of such deferred tax assets. The net increase in the total
valuation allowance for the year ended July 31, 2000 was approximately
$14,758,000.
The tax benefits associated with employee stock options provide a deferred tax
benefit of approximately $5.8 million in fiscal year 2000 which has been fully
offset by a valuation allowance and will be credited to additional paid-in
capital when realized.
The Company has a net operating loss carryforward for tax purposes of
approximately $50 million as of July 31, 2000. This carryforward expires from
2007 to 2020.
F-18
<PAGE>
NOTE I - INCOME TAXES (CONTINUED)
The Internal Revenue Code and Income Tax Regulations contain provisions which
limit the use of available net operating loss carryforwards in any given year
should significant changes (greater than 50%) in ownership interests occur. Due
to the initial public offering in 1995, the net operating loss carryover of
approximately $1.9 million incurred prior to the initial public offering 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 $18 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.
NOTE J - OBLIGATIONS UNDER CAPITAL LEASES
The Company has various capital leases for computers and office
equipment and office software. At July 31, 2000, minimum future lease
payments for capitalized leases were as follows:
2001
2002 $346,402
2003 209,906
34,559
--------
Amount representing imputed interest 590,867
51,733
--------
Present value of future minimum lease payments
Less current portion 539,134
307,677
--------
Capital lease obligation - less current portion
$231,457
========
NOTE K - COMMITMENTS AND CONTINGENCIES
[1] Employment and agreements:
The Company has employment agreements with two officers and five
other employees expiring July 31, 2003 and one officer and another
employee expiring in July and August 2002, respectively. The
agreements require aggregate annual payments of $1,460,000 per year.
The Company also has an employment contract with its Chairman, which
expires September 15, 2000. The contract with the Company's Chairman
calls for remaining payments of $22,500. The Company also entered
into a two-year consulting agreement with a former board member. The
agreement requires payments to the consultant of $250,000 per year
payable in quarterly installments beginning March 15, 2000.
[2] Profit sharing plan:
The Company has 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, 2000.
F-19
<PAGE>
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
[3] Obligations under operating leases:
The Company leases office facilities in New York City and Long
Island, New York under operating leases expiring through 2005. The
aggregate rentals under these leases were approximately $361,998 and
$207,000 for the years ended July 31, 2000 and July 31, 1999,
respectively. Certain leases contain escalation clauses for operating
expenses.
At July 31, 2000, minimum future rental payments due under all
operating leases are as follows:
2001 $ 654,216
2002 669,861
2003 687,308
2004 701,800
2005 253,975
----------
2,967,160
==========
[4] Letters of credit:
The Company has provided cash collateral for letters of credit in the
aggregate amount of $523,863 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] Definitive Merger Agreement:
The Company entered into an Agreement and Plan of Merger dated June
14, 2000 (the "Merger Agreement") with RTCI. Pursuant to the Merger
Agreement, RTCI will become a wholly owned subsidiary of ICC. ICC
will pay aggregate consideration common stock and cash, to RTCI's
stockholders and option and warrant holders based on the following
formula:
ICC shall pay aggregate consideration of $42,000,000 to the holders
of RTCI capital stock and holders of options and warrants to purchase
RTCI capital stock, consisting of (i) RTCI's cash on hand at the
effective time of the Merger, up to a maximum of $4,000,000 (the
"Cash at Closing"), and (ii) shares of ICC Class A Common Stock ("ICC
Common Stock"; such shares, the "ICC Shares") equal to the number of
shares obtained by dividing (x) $42,000,000 minus the Cash at Closing
by (y) the average closing price of the ICC Common Stock for the ten
days ending three days prior to the effective time of the Merger (the
"Market Price"). The Market Price is subject to a maximum of
$21.111111 and a minimum of $12.666667, so that a maximum of
3,315,890 ICC Shares and a minimum of 1,800,000 ICC Shares are
issuable in connection with the Merger.
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<PAGE>
NOTE L - 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,
---------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Debt discount in connection with bridge loan $ $ 1,816,197
Issuance of warrants in connection with bridge financing 188,182
Property acquired under capital lease 205,634 392,241
Issuance of common stock and warrants for legal settlements 839,322
Accrued dividends 275,763
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
Conversion of series A preferred 17,884
Class B shares exchanged for class A shares 1,130
</TABLE>
NOTE M - SUBSEQUENT EVENTS (UNAUDITED)
[1] Acquisition of Intercoastal Data Corporation:
On August 2, 2000, ICC into a definitive merger agreement with Intercoastal Data
Corporation ("IDC"); the merger closed on August 3, 2000 and IDC merged with and
into ICC. All issued and outstanding shares of the Company were surrendered by
IDC stockholders in consideration for $2 million in shares of ICC common stock
and additional shares equal to the value of the marketable equity securities
valued at the average of the average high and low trading prices for the ten
trading days ending four days prior to the closing date for a total of 190,861
shares of ICC common stock. The former stockholders of IDC have the right to
receive additional shares of ICC common stock equal to the difference between
the number of shares calculated at the closing date and the number of shares of
ICC common stock calculated using the value of ICC common stock on the date the
registration statement becomes effective, not to exceed 125% of the total number
of shares of ICC common stock calculated at the closing date or 238,576 shares.
It is the opinion of management that this transaction qualifies as a tax-free
reorganization within the meaning of section 368(a) of the Internal Revenue Code
of 1986.
The following table presents unaudited pro forma results assuming we had
acquired each of IDC and RTCI at the beginning of fiscal year 2000. This
information may not necessarily be indicative of our future combined results.
Revenues $ 10,002,000
Net loss (24,022,322)
Basic and diluted loss per share (4.49)
[2] Cancellation of option agreement:
On September 22, 2000, a consultant to the Company and the Company mutually
agreed to cancel and terminate an option agreement to purchase 100,000 shares of
the Company's class A common stock. Compensation charges in connection with
these options ceased being recorded as of this date.
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