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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [Mark One]þ
    
    
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2005 OR o
    
    
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
EXCHANGE ACT OF 1934
 For the transition period from to Commission File Number: 000-24996 INTERNET COMMERCE CORPORATION  Delaware
(State or Other Jurisdiction of Incorporation or Organization)
    
    13-3645702
(I.R.S. Employer Identification No.)
 6801 Governors Lake Parkway, Suite 110
Norcross, Georgia
(Address of Principal Executive Offices)
    
    30071
(Zip Code)
 Registrants Telephone Number, Including Area Code: (678) 533-8000 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 þ  No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes o
 No o þ As of June 3, 2005, the Registrant had outstanding 19,408,420 shares of Class A Common Stock.




---



INDEX TO FORM 10-Q PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated balance sheets as of April 30, 2005 (unaudited) and July 31, 2004
    
    
    3Consolidated statements of operations and comprehensive loss for the three and nine
months ended April 30, 2005 (unaudited) and April 30, 2004 (unaudited)
    
    
    4Consolidated statements of cash flows for the nine months ended April 30, 2005 (unaudited)
and April 30, 2004 (unaudited)
    
    
    5Notes to consolidated financial statements (unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    24Item 2. Changes in Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24SIGNATURES
    
    
    26EXHIBIT INDEX
    
    
    27CERTIFICATIONS
    
    
    28EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 Consolidated Balance Sheets April 30,
    
    
    July 31,2005
    
    
    2004(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,576,192
    
    
    $
    3,789,643Accounts receivable, net of allowance for doubtful accounts of
$405,054 and $308,867, respectively
    
    
    2,990,020
    
    
    
    2,154,463Prepaid expenses and other current assets
    
    
    421,869
    
    
    
    244,900Total current assets
    
    
    6,988,081
    
    
    
    6,189,006Restricted cash
    
    
    529,260
    
    
    
    107,658Property and equipment, net
    
    
    578,152
    
    
    
    295,556Software development costs, net
    
    
    
    
    
    
    17,860Goodwill
    
    
    3,819,790
    
    
    
    2,539,238Other intangible assets, net
    
    
    2,103,232
    
    
    
    2,265,010Other assets
    
    
    14,237
    
    
    
    14,237Total assets
    
    $
    14,032,752
    
    
    $
    11,428,565LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    264,123
    
    
    $
    523,703Accrued expenses
    
    
    1,195,675
    
    
    
    1,004,461Accrued dividends  preferred stock
    
    
    131,507

    
    
    
    232,787Deferred revenue
    
    
    154,158
    
    
    
    133,063Capital lease obligation
    
    
    10,695
    
    
    
    52,291Other current liabilities
    
    
    1,289,044
    
    
    
    45,111Total current liabilities
    
    
    3,045,202
    
    
    
    1,991,416Capital
lease obligation - less current portion
    
    
    
    
    
    
    2,908Other liabilities
    
    
    1,292,905Total liabilities
    
    
    4,338,107
    
    
    
    1,994,324Stockholders Equity:Preferred stock  5,000,000 shares authorized, including 10,000 shares of series A,
10,000 shares of series C, 250 shares of series D and 175 shares of series S:Series A preferred stock  par value $.01 per share, none issued and outstanding
    
    
    
    
    
    
    Series C preferred stock  par value $.01 per share, 44.76 votes per share; 10,000 shares
issued and outstanding (liquidation value of $10,433,880)
    
    
    100
    
    
    
    100Series D preferred stock  par value $.01 per share, 769 votes per share; 250 shares
issued and outstanding (liquidation value of $250,000)
    
    
    3
    
    
    
    3Common stock:Class A
- par value $.01 per share, 40,000,000 shares authorized, one vote per share;
and 19,408,420 shares issued and outstanding, respectively
    
    
    194,084
    
    
    
    190,582Additional paid-in capital
    
    
    95,794,134
    
    
    
    95,143,356Accumulated deficit
    
    
    (86,293,676
    )
    
    
    (85,899,800
    )Total stockholders equity
    
    
    9,694,645
    
    
    
    9,434,241Total liabilities and stockholders equity
    
    $
    14,032,752
    
    
    $
    11,428,565
 See notes to consolidated financial statements. 3




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Condensed Consolidated Statements of Operations and Comprehensive Loss (unaudited) Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Services
    
    $
    4,388,156
    
    
    $
    2,892,390
    
    
    $
    11,627,840
    
    
    $
    8,751,474Expenses:Cost of services administrative (excluding non-cash
compensation of $1,760 and $4,758 for the three and nine
months ended April 30, 2005 respectively, and of $15,952
and $35,022 for the three and nine months ended April 30,
2004)
    
    
    1,339,183
    
    
    
    1,561,756
    
    
    
    4,096,955
    
    
    
    5,173,050Impairment of capitalized software
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,983Product development and enhancement (excluding non-cash
compensation of $6,630 and $21,734 for the three and nine
months ended April 30, 2005 respectively, and of $6,638 and
$118,278 for the three and nine months ended April 30,
2004)
    
    
    197,397
    
    
    
    233,635
    
    
    
    661,405
    
    
    
    685,639Selling and marketing (excluding non-cash compensation of
$3,296 and $13,969 for the three and nine months ended
April 30, 2005 respectively, and of $16,739 and $92,154 for
the three and nine months ended April 30, 2004)
    
    
    593,496
    
    
    
    733,752
    
    
    
    2,134,224
    
    
    
    2,371,330General and administrative (excluding non-cash compensation
of $133,327 and $508,860 for the three and nine months
ended April 30, 2005 respectively, and of $72,610 and
$392,571 for the three and nine months ended April 30,
2004)
    
    
    1,830,535
    
    
    
    892,873
    
    
    
    4,603,855
    
    
    
    2,842,886Non-cash charges for stock-based compensation and services
    
    
    145,013
    
    
    
    111,939
    
    
    
    549,321
    
    
    
    638,0254,105,624
    
    
    
    3,533,955
    
    
    
    12,045,760
    
    
    
    11,755,913Operating Income/(loss)
    
    
    282,532
    
    
    
    (641,565
    )
    
    
    (417,920
    )
    
    
    (3,004,439
    )Other income and (expense):Interest and investment income
    
    
    14,133
    
    
    
    926
    
    
    
    28,332
    
    
    
    2,330Investment gain/(loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,834Interest expense
    
    
    (506
    )
    
    
    (20,718
    )
    
    
    (4,288
    )
    
    
    (47,756
    )Loss on sale of asset
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (147
    )13,627
    
    
    
    (19,939
    )
    
    
    24,044
    
    
    
    22,261Net income/(loss)
    
    $
    296,159
    
    
    $
    (661,504
    )
    
    $
    (393,876
    )
    
    $
    (2,982,178
    )Dividends on preferred stock
    
    
    (97,627
    )
    
    
    (98,361
    )
    
    
    (298,720
    )
    
    
    (300,515
    )Income/(loss) attributable to common stockholders
    
    $
    198,532
    
    
    $
    (759,865
    )
    
    $
    (692,596
    )
    
    $
    (3,282,693
    )Basic and diluted income/(loss) per common share
    
    $
    0.01
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.23
    )Weighted average number of common shares outstanding -
basic and diluted
    
    
    19,327,749
    
    
    
    14,544,859
    
    
    
    19,170,299
    
    
    
    14,050,246COMPREHENSIVE INCOME/(LOSS):Net income/(loss)
    
    $
    296,159
    
    
    $
    (661,504
    )
    
    $
    (393,876
    )
    
    $
    (2,982,178
    )Other comprehensive income:Unrealized gain  marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,169Reclassification of unrealized gain on marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67,834
    )Comprehensive income/(loss)
    
    $
    296,159
    
    
    $
    (661,504
    )
    
    $
    (393,876
    )
    
    $
    (3,007,843
    )
 See notes to consolidated financial statements. 4




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Condensed Consolidated Statements of Cash Flows (unaudited) Nine Months Ended April 30,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (393,876
    )
    
    $
    (2,982,178
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities (net of effect of MEC acquisition):Depreciation and amortization
    
    
    1,115,281
    
    
    
    1,097,198Bad debt expense
    
    
    142,757
    
    
    
    4,761Non-cash interest expense
    
    
    
    
    
    
    25,535Realized (gain) loss on sale of marketable securities
    
    
    
    
    
    
    (67,834
    )Impairment of capitalized software
    
    
    
    
    
    
    44,983Non-cash charges for equity instruments issued for compensation
and services
    
    
    549,321
    
    
    
    638,025Changes in:Accounts receivable
    
    
    (978,314
    )
    
    
    (28,749
    )Prepaid expenses and other assets
    
    
    (86,531
    )
    
    
    (82,205
    )Accounts payable
    
    
    (259,580
    )
    
    
    (420,396
    )Accrued expenses
    
    
    1,658
    
    
    
    (426,140
    )Deferred revenue
    
    
    21,094
    
    
    
    (65,142
    )Other liabilities
    
    
    (130,196
    )
    
    
    (92,832
    )Net cash (used in) provided by operating activities
    
    
    (18,386
    )
    
    
    (2,354,974
    )Cash flows from investing activities:Additional costs of previous acquisition
    
    
    (121,296
    )
    
    
    Cash received in connection with MEC acquisition
    
    
    231,351
    
    
    
    Purchases of property and equipment
    
    
    (271,879
    )
    
    
    (60,013
    )Proceeds from sales of marketable securities
    
    
    
    
    
    
    134,110Net cash (used in) provided by investing activities
    
    
    (161,824
    )
    
    
    74,097Cash flows from financing activities:Borrowings under accounts receivable financing agreement
    
    
    
    
    
    
    2,339,467Repayment of borrowings under accounts receivable financing agreement
    
    
    
    
    
    
    (1,692,545
    )Net payments for the issuance of common stock and warrants
    
    
    (23,512
    )
    
    
    4,467,803Payments of capital lease obligations
    
    
    (44,504
    )
    
    
    (115,082
    )Dividends paid on preferred stock
    
    
    
    
    
    
    (60,000
    )Proceeds from exercise of warrants
    
    
    
    
    
    
    42,404Proceeds from exercise of employee stock options
    
    
    34,775
    
    
    
    4,065Net cash (used in) provided by financing activities
    
    
    (33,241
    )
    
    
    4,986,112Net increase (decrease) in cash and cash equivalents
    
    
    (213,451
    )
    
    
    2,705,235Cash and cash equivalents, beginning of period
    
    
    3,789,643
    
    
    
    2,283,339Cash and cash equivalents, end of period
    
    $
    3,576,192
    
    
    $
    4,988,574
 See notes to consolidated financial statements. 5




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Condensed Consolidated Statements of Cash Flows (unaudited) (Continued) Nine Months Ended April 30,2005
    
    
    2004Supplemental disclosure of cash flow information:Cash paid for interest during the period
    
    $
    4,288
    
    
    $
    17,740Noncash investing and financing activities:Issuance of common stock for dividends on preferred stock
    
    
    400,000
    
    
    
    340,000Issuance of warrants in exchange for private placement fees
    
    
    
    
    
    
    225,905Acquisition of MEC business in exchange for assumption of
building lease
and other liabilitiesEquipment, furniture, and fixtures
    
    
    (209,623
    )
    
    
    Goodwill
    
    
    (1,159,256
    )
    
    
    Intangible asset  Customer list
    
    
    (736,739
    )
    
    
    Restricted cash
    
    
    (420,122
    )
    
    
    Building lease
    
    
    2,291,035
    
    
    
    Accrued and other liabilities
    
    
    466,056
    
    
    
    Cash received in MEC acquisition
    
    
    231,351
    
    
    
    
 See notes to consolidated financial statements. 6




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Notes to consolidated financial statements (unaudited) The accompanying unaudited consolidated financial statements of Internet Commerce
Corporation (the Company or ICC) have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP) for interim financial
information. In the opinion of management, such statements include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair presentation of the
Companys financial position, results of operations and cash flows at the dates and for the
periods indicated. Pursuant to the requirements of the Securities and Exchange Commission
(the SEC) applicable to Quarterly Reports on Form 10-Q, the accompanying financial
statements do not include all the disclosures required by GAAP for annual financial
statements. While the Company believes that the disclosures presented are adequate to make
the information not misleading, these unaudited interim consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes
included in the Companys Annual Report on Form 10-K for the year ended July 31, 2004.
Operating results for the three and nine-month periods ended April 30, 2005 are not
necessarily indicative of the results that may be expected for the fiscal year ending July
31, 2005. 1. ORGANIZATION AND NATURE OF BUSINESS The Companys main source of revenue is derived from subscriptions to its value added
network (VAN) sold under the brand name ICC.NET. These services include transaction,
mailbox and fax transmission activities for which fees are charged. Revenue is also derived
from fixed fee data mapping and professional internet services. In addition, the Company
operates a Service Bureau with revenue derived from electronic data interchange (EDI)
services including data translation services, purchase order and invoice processing from
EDI-to-print and print-to-EDI, Universal Product Code (UPC) number generation, UPC catalog
maintenance and UPC label printing. The Company also sells EDI software and software
maintenance, the revenue of which is immaterial in the periods presented. 2. RECENT EVENTS On March 17, 2005, the Company completed the acquisition of the assets of QRS
Corporations (QRS) Managed ECÔ business (MEC), from the parent company of QRS,
Inovis International, Inc. In accordance with the Asset Purchase Agreement (Agreement) of
that date, the Company received tangible assets of approximately $861,000, which included a
cash payment of approximately $231,000, fixed assets of approximately $210,000 and a lease
security deposit of approximately $420,000 that will be recorded as restricted cash. Under
the Agreement, the Company assumed estimated liabilities of approximately $2.9 million,
which consist of the estimated present value expense of an unfavorable lease on space
housing the MEC operations in New York City of approximately $2.5 million and estimated
costs of closing the New York facility and other transition and employment costs of
approximately $376,000. The Company intends to close the MEC operations in New York City and move the MEC
operations to the Companys existing Carrollton, Georgia service center (Carrollton). The
Company is actively seeking a sublessee for the New York City lease, has substantially
completed the hiring process for the additional personnel required in Carrollton, is in the
process of updating its physical facility in Carrollton and is executing a transition plan
for moving the document processing for the MEC customer base to Carrollton and to the
Companys VAN for EDI delivery. The Company estimates these activities will be completed
sometime in the first quarter of fiscal 2006. The operating results of MEC are included in
the Service Bureau segment. See Critical Accounting Policies and Estimates  Acquisition
of QRS Corporations Managed ECÔ Assets for a description of the accounting treatment
for the purchase of these assets. 7




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3.Significant Accounting Policies and Procedures Deferred revenue: Deferred revenue is comprised of deferrals for subscription fees, professional
services, license fees, and maintenance associated with contracts for which amounts have
been received in advance of services to be performed. Stock-based Compensation: In January 2004, the Company adopted the fair value provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). SFAS 123 established a fair-value-based method of accounting for stock-based
compensation plans. The fair value of stock options and stock-based compensation plans is
determined on the date of grant using the Black-Scholes option-pricing model and is being
expensed over the vesting period of the related stock options and stock-based compensation
plans. Pursuant to the transition provisions of SFAS 148, Accounting for Stock-Based
Compensation  Transition and Disclosure (SFAS 148), the Company has elected the
prospective method and will apply the fair value method of accounting to all equity
instruments issued to employees on or after August 1, 2003. The fair value method is not
applied to stock option awards granted in fiscal years prior to 2004. Such awards will
continue to be accounted for under the intrinsic value method pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25),
except to the extent that prior years awards are modified subsequent to August 1, 2003.
Therefore, the cost related to stock-based employee compensation included in the
determination of the net loss for 2004 is less than that which would have been recognized if
the fair value based method had been applied to all awards since their date of grant. The following table illustrates the effect on net earnings and earnings per share as if the
Company had applied the fair value recognition provisions of SFAS 123 to all stock-based
compensation in each period: Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income/(loss), as reported
    
    $
    198,532
    
    
    $
    (759,865
    )
    
    $
    (692,596
    )
    
    $
    (3,282,693
    )Add: Stock-based employee
compensation expense included
in reported net loss, net of related
tax effects
    
    
    91,013
    
    
    
    80,779
    
    
    
    416,296
    
    
    
    518,419Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects
    
    
    (91,013
    )
    
    
    (114,392
    )
    
    
    (419,862
    )
    
    
    (799,950
    )Pro forma net loss
    
    $
    198,532
    
    
    $
    (793,478
    )
    
    $
    (696,162
    )
    
    $
    (3,564,224
    )Basic and diluted loss per common share:As reported
    
    $
    0.01
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.23
    )Pro forma
    
    $
    0.01
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.25
    )
 Recent Accounting Pronouncements: On December 6, 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS 123.
Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees and
amends FASB Statement No. 95, Statement of Cash Flows. The approach to accounting for
share-based payments in Statement 123(R) is similar to the approach described in Statement
123. However, Statement 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements based on
their fair values and no longer allows pro forma disclosure as an alternative to financial
statement recognition. The Company has used financial statement recognition since its
adaptation of Statement 123. 8




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Significant Accounting Policies and Procedures (continued) In November 2002, the Emerging Issues Task Force of the FASB (EITF) reached a
consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. The EITF was effective for
revenue arrangements entered into in fiscal years and interim periods beginning after June
15, 2003. The adoption of this consensus, effective August 1, 2003, did not have a
significant impact on the Companys consolidated financial position or results of
operations. In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes
standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as equity. This
Statement is effective for financial instruments entered into or modified after May 31,
2003, and otherwise shall be effective at the beginning of the first interim period
beginning after June 15, 2003. For financial instruments created before the issuance date
of this Statement and still existing at the beginning of the interim period of adoption,
transition shall be achieved by reporting the cumulative effect of a change in an
accounting principle by initially measuring the financial instruments at fair value or
other measurement attribute required by this Statement. The adoption of this Statement,
effective August 1, 2003, did not have a material impact on the Companys consolidated
financial position or results of operations. 4. Pro Forma Disclosures Related To Recent Acquisitions In June 2004, the Company completed the acquisition of Electronic Commerce Systems,
Inc. (ECS). In accordance with the terms of the Agreement and Plan of Merger, dated May
25, 2004 (the Merger Agreement), ICC Acquisition Corporation, Inc., a wholly-owned
subsidiary of ICC, merged with and into ECS and ECS became a wholly-owned subsidiary of
ICC. ICC issued a total of 1,941,409 shares of its class A common stock, valued at
$2,465,589, in connection with the acquisition, of which 345,183 shares were issued in
exchange for approximately $471,000 of outstanding debt ECS owed to certain of its
shareholders and in payment of ECSs legal fees. In determining the purchase price of the
acquisition, the shares of ICC class A common stock issued were valued at $1.28 per share,
the average market price of ICCs class A common stock over the 2-day period before and
after the terms of the acquisition were agreed to and announced. The following unaudited pro forma summary financial information presents the
consolidated results of operations of the Company as if the acquisition of ECS had occurred
on August 1, 2003. The pro forma results are shown for illustrative purposes only and do
not purport to be indicative of the results of the Company that would have been reported
had the acquisition of ECS occurred on August 1 or indicative of results that may occur in
the future. Three months ended
    
    
    Nine months endedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    4,388,156
    
    
    $
    3,456,630
    
    
    $
    11,627,840
    
    
    $
    10,327,606Net loss
    
    
    198,532
    
    
    
    (660,996
    )
    
    
    (692,596
    )
    
    
    (3,057,994
    )Basic and diluted
loss per common
share
    
    $
    0.01
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.22
    )
 9




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##### Table of Contents



5. BUSINESS SEGMENT INFORMATION The Companys two operating segments are:  
    ICC.NET - The Companys global Internet-based value added
network, or VAN, uses the Internet and proprietary technology to deliver
customers supply chain documents and data files to members of their trading
communities, many of which may have incompatible systems, by translating the
documents and data files into any format required by the receiver, and the
development and operation of comprehensive business-to-business e-commerce
solutions.
    Service Bureau - The Service Bureau manages and translates the
data of small and mid-sized companies that exchange EDI data with large
companies and provides various EDI and UPC services. The Service Bureau also
licenses EDI software. Effective in June 2004, the Company combined the
activities of ECS in the Service Bureau segment. The tables below summarizes information about operations and long-lived assets as of
and for the three and nine -month periods ended April 30, 2005 and 2004. ServiceICC.NET
    
    
    Bureau
    
    
    TotalThree
Months   April 30, 2005Revenues from external customers
    
    $
    2,740,435
    
    
    $
    1,647,720
    
    
    $
    4,388,156Operating income (loss)
    
    $
    (294,491
    )
    
    $
    577,023
    
    
    $
    282,532Other income (expense), net
    
    
    13,627
    
    
    
    
    
    
    
    13,627Net income (loss) (1)
    
    $
    (280,864
    )
    
    $
    577,023
    
    
    $
    296,159Supplemental segment information:Amortization and depreciation
    
    $
    282,678
    
    
    $
    92,036
    
    
    $
    374,714Non-cash charges for stock-based
compensation and services
    
    $
    145,013
    
    
    $
    
    
    
    $
    145,013Nine Months  April 30, 2005Revenues from external customers
    
    $
    8,307,092
    
    
    $
    3,320,748
    
    
    $
    11,627,840Operating income (loss)
    
    $

    (936,397
    )
    
    $
    518,477
    
    
    $
    (417,920
    )Other income (expense), net
    
    
    24,044
    
    
    
    
    
    
    
    24,044Net income (loss) (1)
    
    $
    (912,353
    )
    
    $
    518,477
    
    
    $
    (393,876
    )Supplemental segment information:Amortization and depreciation
    
    $
    877,841
    
    
    $
    237,440
    
    
    $
    1,115,281Non-cash charges for stock-based
compensation and services
    
    $
    549,321
    
    
    $
    
    
    
    $
    549,321As of April 30, 2005Property and Equipment, net
    
    $
    536,174
    
    
    $
    41,978
    
    
    $
    578,152Goodwill
    
    
    26,132
    
    
    
    3,793,658
    
    
    
    3,819,790Other intangibles assets, net
    
    
    478,000
    
    
    
    1,625,232
    
    
    
    2,103,232Long lived assets, net
    
    $
    1,040,306
    
    
    $
    5,460,868
    
    
    $
    6,501,174
   1)
    
    Commencing in the first quarter of fiscal 2005, certain costs for
selling and marketing functions were allocated to the Service Bureau
from ICC.NET based on the level of service performed. ICC.NET
allocated $24,000 and $72,000 of selling and marketing costs to the
Service Bureau during the three and nine-month ended April 30, 2005,
respectively. Also commencing in the first quarter of fiscal 2005,
certain costs for executive management, MIS, human resources and
accounting and finance functions were allocated to the Service Bureau
from ICC.NET based on the level of service performed. ICC.NET
allocated $150,000 and $420,000 of general and administrative costs
for these services to the Service Bureau for the three and nine-month
ended April 30, 2005, respectively. 10




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##### Table of Contents



Business Segment Information (continued) ServiceICC.NET
    
    
    Bureau
    
    
    TotalThree Months  April 30, 2004Revenues from external customers
    
    $
    2,561,875
    
    
    $
    330,515
    
    
    $
    2,892,390Operating loss
    
    $
    (670,483
    )
    
    $
    28,918
    
    
    $
    (641,565
    )Other income (expense), net
    
    
    (19,939
    )
    
    
    
    
    
    
    (19,939
    )Net loss
    
    $
    (690,422
    )
    
    $
    28,918
    
    
    $
    (661,504
    )Supplemental segment information:Amortization and depreciation
    
    $
    324,155
    
    
    $
    6,454
    
    
    $
    330,609Impairment of capitalized software
    
    $
    
    
    
    $
    
    
    
    $
    Non-cash charges for stock-based
compensation and services
    
    $
    111,939
    
    
    $
    
    
    
    $
    111,939Nine Months  April 30, 2004Revenues from external customers
    
    $
    7,841,765
    
    
    $
    909,708
    
    
    $
    8,751,474Operating loss
    
    $
    (2,904,656
    )
    
    $
    (99,783
    )
    
    $
    (3,004,439
    )Other income (expense), net
    
    
    22,261
    
    
    
    
    
    
    
    22,261Net loss
    
    $
    (2,882,395
    )
    
    $
    (99,783
    )
    
    $
    (2,982,178
    )Supplemental segment information:Amortization and depreciation
    
    $
    1,064,167
    
    
    $
    33,031
    
    
    $
    1,097,198Impairment of capitalized software
    
    $
    
    
    
    $
    44,983
    
    
    $
    44,983Non-cash charges for stock-based
compensation and services
    
    $
    638,025
    
    
    $
    
    
    
    $
    638,025As of April 30, 2004Property and Equipment, net
    
    $
    282,159
    
    
    $
    21,187
    
    
    $
    303,346Capitalized software, net
    
    
    
    
    
    
    31,256
    
    
    
    31,256Goodwill
    
    
    26,132
    
    
    
    
    
    
    
    1,434,000Acquired identified intangibles, net
    
    
    1,434,000
    
    
    
    1,185,793
    
    
    
    1,211,925Long lived assets, net
    
    $
    1,742,291
    
    
    $
    1,238,236
    
    
    $
    2,980,527
 6. Stock Options Cancellation and Exchange: In January 2004, the Company implemented a voluntary stock option exchange program
whereby the Company offered to exchange certain outstanding options to purchase shares of
the Companys class A common stock held by eligible employees of the Company, with exercise
prices per share greater than or equal to $11.50, for new options to purchase shares of the
Companys class A common stock (the Offer to Exchange). Under the terms of the Offer to
Exchange, the 26 participating employees agreed to cancel, as of January 30, 2004, their
existing options to purchase a total of 823,500 shares of the Companys common stock and
were granted options to purchase 494,100 shares of the Companys class A common stock with
an exercise price of $1.25 per share, the closing market price per share on January 20,
2004. Each new employee option was fully vested at the date of grant. Additionally, under
the terms of the Offer to Exchange, two directors cancelled as of January 30, 2004 existing
options to purchase 250,000 shares of the Companys class A common stock and were granted
options to purchase 150,000 shares of the Companys common stock with an exercise price of
$2.00 per share. The options granted to directors vest in two equal annual installments
commencing one year after the date of grant. One director was eligible but declined to
participate in the exchange and surrendered to the Company options to purchase 50,000 shares
of the Companys class A common stock at an exercise price of $19.00 per share. 11




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##### Table of Contents



7. Guarantees and Indemnifications As part of its standard license agreements, the Company agrees to indemnify its
customers against liability if the Companys products infringe a third partys intellectual
property rights. Historically, the Company has not incurred any significant costs related to
performance under these indemnities. As of April 30, 2005, the Company was not subject to
any litigation alleging that the Companys products infringe the intellectual property
rights of any third parties. 8. Accounts Receivable Financing Agreement On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement
(Financing Agreement) with Silicon Valley Bank (Bank) with a term of one year. Under
the Financing Agreement, the Company may borrow, subject to certain conditions, up to 80% of
its outstanding accounts receivable up to a maximum of $2,000,000. Interest accrues at the
prime rate plus .35% plus a collateral handling fee equal to .20% on the average daily
outstanding financed receivable balance. On October 22, 2003; August 31, 2004 and December
29, 2004, the Company and the Bank amended the Financing Agreement to extend its term to
August 31, 2004; December 29, 2004 and February 12, 2005, respectively. On March 16, 2005, the Company executed a fourth loan modification agreement that
changes the interest under the Financing Agreement to prime rate plus .25% plus a collateral
handling fee equal to .15% on the average daily outstanding financed receivable balance as
long as the Company maintains an Adjusted Quick Ratio (as defined in the Financing
Agreement) of not less 1.25 to 1. Should the Company fail to maintain an Adjusted Quick
Ratio of 1.25 to 1, the interest rises to prime rate plus .75% and the collateral handling
fee increases to .35% on the average daily outstanding financed receivable balance. As of
April 30, 2005 and July 31, 2004, no amounts were outstanding under the Financing Agreement. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations This quarterly report on Form 10-Q contains a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Specifically,
all statements other than statements of historical facts included in this Quarterly Report
regarding our financial position, business strategy and plans and objectives of management for
future operations are forward-looking statements. These forward-looking statements are based on
the beliefs of management, as well as assumptions made by and information currently available to
management. When used in this Report, the words anticipate, believe, estimate, expect,
may, will, continue and intend, and words or phrases of similar import, as they relate to
our financial position, business strategy and plans, or objectives of management, are intended to
identify forward-looking statements. These 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 and in our registration
statements and periodic reports filed with the SEC under the Securities Act and the Exchange Act. Although we believe that our expectations are reasonable, we cannot assure you that our
expectations will prove to be correct. Should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Quarterly Report as anticipated, believed, estimated,
expected or intended. In this Item 2, references to the Company, we, or us means Internet Commerce
Corporation. Overview We are in the e-commerce (EC) business-to-business communication services market providing
complete EC infrastructure solutions. Our business operates in two segments: namely, ICC.NET 
and Service Bureau. 12




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##### Table of Contents



ICC.NET  includes the Companys global Internet-based value added network, or VAN,
which uses the Internet and our proprietary technology to deliver our customers documents and data
files to members of their trading communities, many of which may have incompatible systems, by
translating the documents and data files into any format required by the receiver. We believe that
our ICC.NET  service has certain advantages over traditional VANs as well as email-based
and other Internet-based software systems because our service is provided at a low cost, with a
transmission speed that is nearly real-time and offers features that facilitate the
development and operation of comprehensive business-to-business e-commerce solutions. Our Service
Bureau manages and translates the data of small and mid-sized companies that exchange EDI data with
large companies that require that data be transmitted to them electronically. The Service Bureau
delivers business-to-business EDI standards-based documents for companies that do not have EDI
capabilities. The value added network business has become significantly more price competitive over the last
few years, with major networks restructuring to reduce their overhead cost to be better positioned
to compete on a price point basis against Internet based networks such as ICC.NET  . We
have been successful in maintaining our margins through cost reductions, but we have experienced
continued price erosion in competing for larger customers. Although we expect to continue to add
new customers and increase the volume of data transmitted through our service, we do not expect our
revenue from VAN services to continue to grow as rapidly as in the past. This trend is expected to
continue in the short term until such time as a cost-based pricing floor is reached by our larger
competitors. To counteract this negative impact on our revenue growth, management has deployed a
dual pronged strategy. We are adding revenue through strategic acquisitions and have developed
additional product and service offerings (AS2 and Data Synchronization) to improve our value
proposition. AS2 is a service offering on the Internet which handles primary XML documents that
are an extension of traditional EDI. We have incorporated this communication methodology into our
standard network services and continue to attract customers network traffic in competition to
those who could otherwise purchase an AS2 software offering. We rely on many of our competitors to interconnect, at reasonable cost, with our service and
have interconnection arrangements with more than 65 business-to-business networks for the benefit
of our customers. We believe that these arrangements will satisfy the business requirements of our
existing customers, but there can be no assurance that this will continue to be the case. During the fiscal quarter ended April 30, 2005, we further improved our operational leverage
by increasing our consolidated revenue by $1,495,766 over the same period from the prior year and
by eliminating our operating loss of $641,565 from the fiscal quarter ended April 30, 2004 and
reporting the Companys first operating income of $282,532. Consolidated revenue for the three months ended April 30, 2005 increased from the three months
ended January 31, 2005 by $895,012 primarily due to revenue generated from the MEC acquisition. Critical Accounting Policies and Estimates The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principals accepted in the United States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues
and expenses. We consider certain accounting policies related to revenue recognition, valuation of
acquired intangibles and impairment of long-lived assets, and valuation of investments to be
critical policies due to the estimation process involved in each. Management discusses its
estimates and judgments with the companys Audit Committee of the board of directors. For a more detailed description on the application of these and other accounting policies, see
in Note 2 of the Consolidated Financial Statements included in our annual report on Form 10-K for
the fiscal year ended July 31, 2004. Reference is also made to the discussion of the application
of these critical accounting policies and estimates contained in Managements Discussion and
Analysis in our annual report on Form 10-K for 2004. During the nine months ended April 30, 2005
there were no significant or material changes in the application of critical accounting policies
that would require an update to the information provided in the Form 10-K for 2004. 13




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##### Table of Contents



Acquisition of QRS Corporations Managed ECÔ Assets On March 17, 2005, the Company completed the acquisition of the assets of QRS Corporations
(QRS) Managed ECÔ business (MEC), from the parent company of QRS, Inovis International,
Inc. (Inovis). The consideration for the acquisition of these assets was the assumption of
certain liabilities that have been recorded on the Companys books per Statement of Financial
Accounting Standards No. 141 Business Combinations (FASB 141). The Company was aided in
arriving at the estimates required under FASB 141 by a third party valuation. As part of the transaction, the Company assumed an unfavorable lease as defined by FASB 141.
The Company has recorded the present value of the estimated difference between the cash amounts due
under the existing terms of the lease; cash received from Inovis as part of the transaction plus
the estimated current market value of cash flows receivable under the terms of an assumed sublease.
The estimates of the sublease cash flows are subject to change as per FASB 141. As of the date of
the transaction, the Company recorded approximately $2,291,000 as other liabilities under the
assumed lease. In addition, the Company assumed certain employee obligations, transition services
fees payable to Inovis and other estimated closing costs of the MEC New York location that have
been recorded as other accrued liabilities for approximately $466,000. Under the FASB 141 allocation, the Company recorded fixed assets and leasehold improvements of
approximately $210,000, restricted cash of approximately $420,000, intangibles for customer
relationships of approximately $737,000 and goodwill of approximately $1,159,000. The recorded
fixed assets are estimated to have a life of two years; the leasehold improvements over the term of
the lease and the customer relationship intangible will be amortized over five years. The recorded
goodwill will be subject to annual impairment testing under Statement of Financial Accounting
Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. Stock-Based Compensation In January 2004, the Company adopted the fair value method of recording stock-based
compensation expense in accordance with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123). The fair value of stock options and
stock-based compensation plans as determined on the date of grant using the Black-Scholes
option-pricing model is being expensed over the vesting period of the related stock options and
stock-based compensation plans. The use of this model required management to make certain
estimates for values of variables used by the model. Management estimated the values for stock
price volatility, the expected life of the equity instruments and the risk free rate based on
information that was available to management at the time the Black-Scholes option-pricing
calculations were performed. During the three and nine-month period ended April 30, 2005, the
Company recorded non-cash charges for stock-based compensation of $145,013 and $549,321,
respectively. Warrants Issued for April 2004 Private Placement The Company has entered into several transactions involving the issuance of warrants and
options to purchase shares of the Companys class A common stock to consultants, lenders, warrant
holders, placement agents and other business associates and vendors. The issuance of these
securities required management to estimate their value using the Black-Scholes option-pricing
model. In connection with the Companys April 2004 private placement, the Company incurred fees
that were paid by issuing warrants to purchase 283,170 shares of class A common stock at an
exercise price of $2.22 per share. The fair value of the warrants was determined by management to
be $225,905 by utilizing the Black-Scholes option pricing model. 14




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##### Table of Contents



Three Months Ended April 30, 2005 Compared with Three Months Ended April 30, 2004. Results of Operations - Consolidated The following table reflects consolidated operating data by reported segments. All
significant intersegment activity has been eliminated. Accordingly, the segment results below
exclude the effect of transactions with our subsidiary. Three Months EndedApril 30,2005
    
    
    2004Consolidated net profit (loss):ICC.NET
    
    $
    (280,864
    )
    
    $
    (690,422
    )Service Bureau
    
    
    577,023
    
    
    
    28,918Consolidated profit (loss)
    
    $
    296,159
    
    
    $
    (661,504
    )
 Results of Operations  ICC.NET  Our ICC.NET  service, the Companys global Internet-based VAN uses the
Internet and our proprietary technology to deliver our customers documents and data files to
members of their trading communities. The following table summarizes operating results for our
ICC.NET  service for the three months ended April 30, 2005 and 2004: Three Months EndedApril 30,
    
    
    Variance2005
    
    
    2004
    
    
    $
    
    
    %Revenues:VAN services
    
    $
    2,578,382
    
    
    $
    2,297,016
    
    
    
    281,366
    
    
    
    12Professional services
    
    
    104,003
    
    
    
    182,194
    
    
    
    (78,191
    )
    
    
    (43
    )Mapping services
    
    
    58,050
    
    
    
    82,665
    
    
    
    (24,615
    )
    
    
    (30
    )2,740,435
    
    
    
    2,561,875
    
    
    
    178,560
    
    
    
    7Expenses:Cost of services
    
    
    960,088
    
    
    
    1,395,564
    
    
    
    (435,476
    )
    
    
    (31
    )Product development and enhancement
    
    
    102,254
    
    
    
    192,766
    
    
    
    (90,512
    )
    
    
    (47
    )Selling and marketing
    
    
    409,563
    
    
    
    718,546
    
    
    
    (308,983
    )
    
    
    (43
    )General and administrative
    
    
    1,418,008
    
    
    
    813,543
    
    
    
    604,465
    
    

    
    74Non-cash charges for stock-based compensation
    
    
    145,013
    
    
    
    111,939
    
    
    
    33,074
    
    
    
    303,034,926
    
    
    
    3,232,358
    
    
    
    (197,432
    )
    
    
    6Operating loss
    
    
    (294,491
    )
    
    
    (670,483
    )
    
    
    375,992
    
    
    
    56Other income (expense), net
    
    
    13,627
    
    
    
    (19,939
    )
    
    
    33,566
    
    
    
    168Net loss
    
    $
    (280,864
    )
    
    $
    (690,422
    )
    
    
    409,558
    
    
    
    59
 Revenues  ICC.NET Revenue from ICC.NET  services was 62% of
consolidated revenues for the quarter ended April 30, 2005 (2005 Quarter) compared to 89% for the
quarter ended April 30, 2004 (2004 Quarter), reflecting the increased revenue in the Service
Bureau segment due the acquisition of ECS and MEC. ICC.NET service revenues increased $179,000,
or 7%, to $2,740,000 for the 2005 Quarter compared to $2,562,000 for the 2004 Quarter. VAN service
revenue increased $281,000, or 12%, to $2,578,000 for the 2005 Quarter compared to $2,297,000 for
the 2004 Quarter. The additional revenue was primarily due to increased volume in VAN traffic and
an increase in the monthly mailbox fee during the fiscal quarter ended October 31, 2004.
Professional services revenue decreased $78,000, or 43%, to $104,000 for the 2005 Quarter compared
to $182,000 for the 2004 Quarter. This decrease is primarily due to the Companys inability to
source new customers for the professional services we provide. Mapping services revenue decreased
$25,000, or 30%, to $58,000 for the 2005 Quarter compared to $83,000 for the 2004 Quarter. The
decrease was primarily due to a decrease in the number of customers coupled with smaller mapping
projects. The decrease in customers stems from cheaper, overseas competition for similar services
and potential customers using their own internal resources aided by improved mapping software
tools. 15




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##### Table of Contents



Cost of services  ICC.NET  Cost of services was 35% of revenue from the
ICC.NET  services for the 2005 Quarter, compared to 54% for the 2004 Quarter. Total
cost of services decreased $435,000, or 31%, to $960,000 for the 2005 Quarter compared to
$1,396,000 for the 2004 Quarter. Cost of services consists primarily of salaries and employee
benefits, connectivity fees, amortization, allocation from product and development and rent. This
decrease was the result of a $134,000 decrease in salaries and benefits due to a decrease in
headcount to 23 in April 2005 from 26 in April 2004 and a decrease in the use of consultants as
well as tighter cost controls. There was also a $38,000 decrease in rent and a $106,000 decrease
in connectivity fees due primarily to a decrease in office space occupied by client services
personnel. Allocation of salaries from product and development decreased $56,000 in the 2005
Quarter from the 2004 Quarter due to less developer time spent on projects directly related to
ICC.NET services and the decrease in headcount in product development as mentioned below. Product development and enhancement - ICC.NET  - Product development and enhancement
costs relating to our ICC.NET service consist primarily of salaries and employee benefits. Product
development and enhancement costs decreased $91,000 in the 2005 Quarter from the 2004 Quarter.
Salaries and benefits decreased $112,000 in the 2005 Quarter from the 2004 Quarter, primarily due
to a decrease in the number of employees to 7 at the end of the 2005 Quarter from 9 at the end of
the 2004 Quarter. Offsetting this decrease, allocation of product development salaries to other
departments decreased $37,000 in the 2005 Quarter from the 2004 Quarter. Selling and marketing - ICC.NET - Selling and marketing expenses relating to our
ICC.NET service consist primarily of salaries and employee benefits, rent, travel-related costs,
advertising and trade-show costs. Selling and marketing expenses relating to our ICC.NET service
decreased $309,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits decreased
$212,000 in the 2005 Quarter from the 2004 Quarter primarily due to a decrease in the number of
employees to 8 at the end of the 2005 Quarter from 14 at the end of the 2004 Quarter. Travel and
entertainment expenses decreased by $50,000 in the 2005 Quarter from the 2004 Quarter primarily due
to the decrease in employees and tighter cost controls. Commencing in the quarter ended October
31, 2004, ICC.NET began allocating a portion of the cost of sales and marketing functions to the
Service Bureau segment based on the level of effort utilized in selling Service Bureau products.
This corporate allocation to the Service Bureau segment was $24,000 in the 2005 Quarter. General and administrative- ICC.NET  - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee benefits, legal and
professional fees, facility costs, travel meals and entertainment and insurance. General and
administrative costs supporting our ICC.NET service increased $604,000 in the 2005 Quarter from
the 2004 Quarter. Salaries and benefits increased $458,000 in the 2005 Quarter from the 2004
Quarter primarily due to the accrual for an executive bonus program. Consultant costs increased
$174,000 in the 2005 Quarter from the 2004 Quarter related primarily to compliance efforts under
the Sarbanes-Oxley Act of 2002. These increases were offset by increase in the corporate
allocation to the Service Bureau. Commencing in the second fiscal quarter of 2003, ICC.NET began
allocating a portion of the cost of executive management, human resources, accounting and finance
functions to the Service Bureau segment based on the level of services provided. Beginning in the
first quarter of fiscal year 2005, the cost of the MIS function was added to those being allocated. Non-cash charges - ICC.NET -  Non-cash charges of approximately $145,000 in the 2005
Quarter consist of $91,000 for stock options issued to employees and directors and of $54,000 for
shares of class A common stock to be issued to non-employee directors as compensation for three
months of calendar year 2005 directors fees. Non-cash charges of approximately $112,000 in the
2004 Quarter consist of $81,000 for stock options issued to employees and directors and $31,000 for
shares of class A common stock issued to non-employee directors as compensation for three months of
calendar year 2004 directors fees. 16




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##### Table of Contents



Results of Operations  Service Bureau Our Service Bureau manages and translates supply chain information for small and mid-sized
companies that exchange EDI data with other companies and provides various EDI and UPC services.
Our Service Bureau also licenses EDI software. On June 22, 2004 and March 17, 2005, we acquired
Electronic Commerce Systems, Inc. (ECS) and QRS Corporations Managed ECÔ assets (MEC),
respectively, the operating results of which are reported in the Service Bureau segment. The
following table summarizes operating results for our Service Bureau: Three Months EndedApril 30,
    
    
    Variance2005
    
    
    2004
    
    
    $
    
    
    %Revenues:Services
    
    $
    1,647,720
    
    
    $
    330,515
    
    
    
    1,317,205
    
    
    
    399Expenses:Cost of services
    
    
    379,094
    
    
    
    166,192
    
    
    
    212,902
    
    
    
    128Product development and enhancement
    
    
    95,143
    
    
    
    40,869
    
    
    
    54,274
    
    
    
    133Selling and marketing
    
    
    183,933
    
    
    
    15,207
    
    
    
    168,726
    
    
    
    1,110General and administrative
    
    
    412,527
    
    
    
    79,329
    
    
    
    333,198
    
    
    
    4201,070,697
    
    
    
    301,597
    
    
    
    769,100
    
    
    
    255Operating income
    
    
    577,023
    
    
    
    28,918
    
    
    
    548,105
    
    
    
    1,895Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    577,023
    
    
    $
    28,918
    
    
    
    548,105
    
    
    
    1,895
 Revenue  Service Bureau Revenue from Service Bureau was 38% of consolidated revenues
for the 2005 Quarter compared to 11% for the 2004 Quarter. The revenue increased $1,317,000, or
399%, to $1,648,000 for the 2005 Quarter compared to $331,000 for the 2004 Quarter. The revenue
was primarily generated from services performed, customer support and licensing fees. The increase
was primarily the result of the acquisition of ECS and MEC. Cost of services - Service Bureau- Cost of services relating to our service bureau was 23% of
revenue derived from the Service Bureau in the 2005 Quarter, compared to 50% of such revenue in the
2004 Quarter. Cost of services relating to our Service Bureau consists primarily of salaries and
employee benefits, amortization, connectivity fees and rent. Cost of services relating to our
Service Bureau increased $213,000 in the 2005 Quarter from the 2004 Quarter. Salaries and benefits
increased $195,000 related to the acquisition of ECS and MEC with headcount increasing from 10 at
the end of the 2004 Quarter to 48 at the end of the 2005 Quarter. Amortization was $43,000 in the
2005 Quarter with no amount in the 2004 Quarter primarily due to the amortization of technology
obtained in the acquisition of ECS. Connectivity fees increased $64,000 in the 2005 Quarter from
the 2004 Quarter due an increase in the level of business conducted. Offsetting these increases,
allocation of expense from the product development and enhancement department decreased $19,000 in
the 2005 Quarter from the 2004 Quarter. Product development and enhancement - Service Bureau- Product development and enhancement
costs consist primarily of salaries and employee benefits. Product development and enhancement
costs incurred by our Service Bureau increased $54,000 in the 2005 Quarter from the 2004 Quarter.
Salaries and benefits increased $35,000 in the 2005 Quarter from the 2004 Quarter due primarily to
a change in the mix of employees with the ECS acquisition. In addition, allocation of product
development salaries to other departments decreased $21,000 in the 2005 Quarter from the 2004
Quarter. Selling and marketing - Service Bureau- Selling and marketing expenses relating to our
Service Bureau consist primarily of salaries and employee benefits and amortization. Selling and
marketing expenses incurred by our Service Bureau increased $169,000 in the 2005 Quarter from the
2004 Quarter. Salaries and benefits increased $107,000 in the 2005 Quarter from the 2004 Quarter
due to an increase in the number of employees to five at the end of the 2005 Quarter from one at
the end of the 2004 Quarter. Amortization was $18,000 in the 2005 Quarter with no amount in the
2004 Quarter due to the amortization of customer relationships obtained in the acquisition of ECS.
Allocation of selling and marketing expenses from ICC.NET increased $24,000 in the 2005 Quarter
from the 17




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##### Table of Contents



2004 Quarter. See Selling and marketing - ICC.NET above for a discussion of the allocation
of selling and marketing expenses between segments. General and administrative - Service Bureau- General and administrative expenses relating to
our Service Bureau consist primarily of salaries and employee benefits, office expenses,
depreciation, telephone and rent. General and administrative expenses incurred by our Service
Bureau increased $291,000 in the 2005 Quarter from the 2004 Quarter. Salaries and employee
benefits increased $99,000 in the 2005 Quarter from the 2004 Quarter due primarily to an increase
in the number of employees to five at the end of the 2005 Quarter from two at the end of the 2004
Quarter. Bad debt expense increased $75,000 in the 2005 Quarter from the 2004 Quarter due to fully
reserving several uncollected customer accounts. Allocation of general and administrative expenses
from ICC.NET increased $105,000 in the 2005 Quarter from the 2004 Quarter. See General and
administrative - ICC.NET  above for a discussion of the allocation of general and administrative
expenses between segments. Nine Months Ended April 30, 2005 Compared with Nine Months Ended April 30, 2004. Results of Operations - Consolidated The following table reflects consolidated operating data by reported segments. All
significant intersegment activity has been eliminated. Accordingly, the segment results below
exclude the effect of transactions with our subsidiary. Nine Months EndedApril 30,2005
    
    
    2004Consolidated net loss:ICC.NET
    
    $
    (912,353
    )
    
    $
    (2,882,394
    )Service Bureau
    
    
    518,477
    
    
    
    (99,784
    )Consolidated loss
    
    $
    (393,876
    )
    
    $
    (2,982,178
    )
 Results of Operations  ICC.NET  The following table summarizes operating results for our ICC.NET  service for
the nine months ended April 30, 2005 and 2004: Nine Months EndedApril 30,
    
    
    Variance2005
    
    
    2004
    
    
    $
    
    
    %Revenues:VAN Services
    
    $
    7,809,292
    
    
    $
    6,772,216
    
    
    
    1,037,076
    
    
    
    15Professional services
    
    
    323,801
    
    
    
    816,484
    
    
    
    (492,683
    )
    
    
    (60
    )Mapping Services
    
    
    173,999
    
    
    
    253,065
    
    
    
    (79,066
    )
    
    
    (31
    )8,307,092
    
    
    
    7,841,765
    
    
    
    465,327
    
    
    
    6Expenses:Cost of services
    
    
    3,215,643
    
    
    
    4,606,369
    
    
    
    (1,390,726
    )
    
    
    (30
    )Product development and enhancement
    
    
    396,005
    
    
    
    580,517
    
    
    
    (184,512
    )
    
    
    (32
    )Selling and marketing
    
    
    1,651,984
    
    
    
    2,318,178
    
    
    
    (666,194
    )
    
    
    (29
    )General and administrative
    
    
    3,430,536
    
    
    
    2,603,331
    
    
    
    827,205
    
    
    
    32Non-cash charges for stock-based compensation
    
    
    549,321
    
    
    
    638,025
    
    
    
    (88,704
    )
    
    
    (14
    )9,243,489
    
    
    
    10,746,420
    
    
    
    1,502,931
    
    
    
    (14
    )Operating loss
    
    
    (936,397
    )
    
    
    (2,904,655
    )
    
    
    1,968,259
    
    
    
    68Other income (expense), net
    
    
    24,044
    
    
    
    22,261
    
    
    
    1,783
    
    
    
    8Net loss
    
    $
    (912,353
    )
    
    $
    (2,882,394
    )
    
    
    1,970,042
    
    
    
    68
 Revenues  ICC.NET Revenue from ICC.NET  services was 71% of
consolidated revenues for the nine months ended April 30, 2005 (2005 Nine Months) compared to 90%
for the nine months ended April 30, 2004 (2004 Nine Months), reflecting the increased revenue in
the Service Bureau segment due to the acquisition 18




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##### Table of Contents



of ECS and MEC. ICC.NET  service revenues increased $465,000, or 6%, to $8,307,000
for the 2005 Nine Months compared to $7,842,000 for the 2004 Nine Months. VAN service revenue
increased $1,037,000, or 15%, to $7,809,000 for the 2005 Nine Months compared to $6,772,000 for the
2004 Nine Months. The increase was primarily due to an increase in the monthly mailbox fee and
increased VAN traffic volume. Professional service revenue decreased $493,000, or 60%, to $324,000
for the 2005 Nine Months compared to $816,000 for the 2004 Nine Months. This decrease is primarily
due to the Companys inability to source new customers for the professional services we provide and
to a decrease of $149,000 in revenue from EDI educational services and seminars. We discontinued
our EDI educational services and seminars in January 2004. Mapping service revenue decreased
$79,000, or 31%, to $174,000 for the 2005 Nine Months compared to $253,000 for the 2004 Nine
Months. The decrease was primarily due to a decrease in the number of customers coupled with
smaller mapping projects. The decrease in customers stems from cheaper, overseas competition for
similar services and potential customers using their own internal resources aided by improved
mapping software tools. Cost of services  ICC.NET Cost of services was 39% of revenue from the ICC.NET services
for the 2005 Nine Months, compared to 59% for the 2004 Nine Months. Total cost of services
decreased $1,391,000, or 30%, to $3,216,000 for the 2005 Nine Months compared to $4,606,000 for the
2004 Nine Months. Cost of services consists primarily of salaries and employee benefits,
connectivity fees, amortization, allocation from product and development and rent. This decrease
was the result of a $630,000 decrease in salaries and benefits due to a reduction in personnel, an
$195,000 decrease in connectivity fees due to a switch in our primary connectivity vendor, and a
$87,000 decrease in rent due primarily to a decrease in office space occupied by client services
personnel. The decrease was also as a result of a $161,000 decrease in allocation of product and
development costs due to a decrease in headcount in product development as well as a decrease in
depreciation of $59,000 for the 2005 Nine Months from the 2004 Nine Months. Product development and enhancement ICC.NET  Product development and enhancement
costs decreased $185,000, or 32%, to $396,000 for the 2005 Nine Months compared to $581,000 for the
2004 Nine Months. Salaries and benefits decreased $279,000 in the 2005 Nine Months from the 2004
Nine Months. Depreciation expense decreased $27,000 in the 2005 Nine Months from the 2004 Nine
Months due to assets reaching the end of their useful lives subsequent to the 2004 Nine Months.
Offsetting these decreases, allocation of product development salaries to other departments
decreased $138,000 in the 2005 Nine Months from the 2004 Nine Months. Selling and marketing  ICC.NET  Selling and marketing expenses decreased $666,000,
or 29%, to $1,652,000 for 2005 Nine Months compared to $2,318,000 for 2004 Nine Months. Selling
and marketing expenses consist primarily of salaries and employee benefits, travel-related costs,
rent, depreciation, advertising and trade-show costs. This decrease was due primarily to a
$423,000 decrease in salaries and benefits and a $117,000 decrease in travel expenses attributable
to a decrease in the number of employees to 8 at the end of the 2005 Nine Months from 14 at the end
of the 2004 Nine Months. In addition, commencing in the first quarter of fiscal 2005, the Company
began allocating a portion of the cost of sales and marketing functions to the Service Bureau
segment based on the level of effort utilized in selling Service Bureau products. The allocation
was $72,000 for the 2005 Nine Months. General and administrative  ICC.NET   General and administrative expenses
increased $827,000, or 32%, to $3,431,000 for the 2005 Nine Months compared to $2,603,000 for the
2004 Nine Months. General and administrative expenses consist primarily of salaries and employee
benefits, facility costs, legal and professional fees, insurance, travel meals and entertainment
and depreciation. Salaries and benefits increased $931,000 in the 2005 Nine Months from the 2004
Nine Months due to retention payments of $118,000 as a result of the move out of New York City,
establishment of an executive bonus program, and the strengthening of executive management by the
addition of a new chief executive officer and chief operating officer in March 2004. One-time
relocation expenses for the corporate office including moving costs were approximately $50,000 in
the 2005 Nine Months and Bad debt expense increased by $138,000 in the 2005 Nine Months from the
2004 Nine Months due primarily to fully reserving an allowance for a large overdue customer balance
due to bankruptcy. These increases were offset by an increase in the corporate allocation to the
Service Bureau. Commencing in the second fiscal quarter of 2003, ICC.NET began allocating a
portion of the cost of executive management, human resources, accounting and finance functions to
the Service Bureau segment based on the level of services provided, and in the 2005 Quarter, the
cost of 19




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##### Table of Contents



the MIS function was added to those being allocated. This corporate allocation to the Service
Bureau segment increased $300,000 in the 2005 Nine Months from the 2004 Nine Months, to $420,000
from $120,000. Non-cash
charges  ICC.NET - Non-cash charges for stock-based compensation decreased
$89,000, or 14%, to $549,000 for the 2005 Nine Months compared to $638,000 for the 2004 Nine
Months. Non-cash charges for stock-based compensation consist of value for stock options issued to
employees and directors and for shares of class A common stock issued to non-employee directors as
compensation for the directors fees. The fair value method has been applied prospectively to all
employee and director awards granted, modified, or settled after July 31, 2003 (see Note 3). Results of Operations  Service Bureau The following table summarizes operating results for our Service Bureau for the nine months
ended April 30, 2005 and 2004: Nine Months EndedApril 30,
    
    
    Variance2005
    
    
    2004
    
    
    $
    
    
    %Revenues:Services
    
    $
    3,320,748
    
    
    $
    909,708
    
    
    
    2,411,040
    
    
    
    265Expenses:Cost of services
    
    
    881,312
    
    
    
    566,681
    
    
    
    314,631
    
    
    
    56Impairment of capitalized software
    
    
    
    
    
    
    44,983
    
    
    
    (44,983
    )
    
    
    (100
    )Product development and enhancement
    
    
    265,400
    
    
    
    105,122
    
    
    
    160,278

    
    
    
    152Selling and marketing
    
    
    482,240
    
    
    
    53,152
    
    
    
    429,088
    
    
    
    807General and administrative
    
    
    1,173,319
    
    
    
    239,553
    
    
    
    933,766
    
    
    
    3902,802,271
    
    
    
    1,009,491
    
    
    
    1,792,780
    
    
    
    178Operating income/(loss)
    
    
    518,477
    
    
    
    (99,783
    )
    
    
    618,260
    
    
    
    620Other income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income/(loss)
    
    $
    518,477
    
    
    $
    (99,783
    )
    
    
    618,260
    
    
    
    620
 Revenue  Service Bureau Revenue from Service Bureau was 29% of consolidated revenues
for the 2005 Nine Months compared to 10% for the 2004 Nine Months. The revenue increased
$2,411,000, or 265%, to $3,321,000 for the 2005 Nine Months compared to $910,000 for the 2004 Nine
Months. The revenue was primarily generated from services performed, customer support and
licensing fees. The increase was primarily due to the acquisition of ECS and MEC subsequent to
2004 Nine Months. Cost of services  Service Bureau Cost of services was 27% of revenue from the service
bureau for the 2005 Nine Months, compared to 62% for the 2004 Nine Months. Total cost of services
increased $315,000, or 56%, to $881,000 for the 2005 Nine Months compared to $567,000 for the 2004
Nine Months. Cost of services relating to our Service Bureau consists primarily of salaries and
employee benefits, amortization, connectivity fees and rent. Salaries and benefits increased
$243,000 related to the acquisition of ECS in June 2004 and MEC in March 2005 with headcount
increasing from 10 at the end of the 2004 Nine Months to 48 at the end of the 2005 Nine Months.
Amortization was $132,000 in the 2005 Nine Months with no amount in the 2004 Nine Months due to the
amortization of technology obtained in the acquisition of ECS. Connectivity fees increased $63,000
in the 2005 Nine Months from the 2004 Nine Months due an increase in the level of business
conducted from the acquisition of ECS. Offsetting these increases, allocation of expense from the
product development and enhancement department decreased $76,000 in the 2005 Nine Months from the
2004 Nine Months. 20




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##### Table of Contents



Impairment of capitalized software  Service Bureau -In January 2004, the Company recorded an
impairment charge of approximately $45,000 for previously capitalized software development costs
related to a completed development project of its Service Bureau. The Company determined during
the quarter ended January 31, 2004 that projected sales of this software were not sufficient to
support its carrying value. Product development and enhancement  Service Bureau Product development and enhancement
costs increased $160,000, or 152%, to $265,000 for the 2005 Nine Months compared to $105,000 for
the 2004 Nine Months. Salaries and benefits increased $81,000 in the 2005 Nine Months from the
2004 Nine Months due primarily to a change in the mix of employees with the ECS acquisition. In
addition, allocation of product development salaries to other departments decreased $81,000 in the
2005 Nine Months from the 2004 Nine Months. Selling and marketing  Service Bureau- Selling and marketing expenses increased $429,000, or
807%, to $482,000 for 2005 Nine Months compared to $53,000 for 2004 Nine Months. Salaries and
benefits increased $277,000 in the 2005 Nine Months from the 2004 Nine Months due to an increase in
the number of employees to five at the end of the 2005 Nine Months from one at the end of the 2004
Nine Months. Amortization was $50,000 in the 2005 Nine Months with no amount in the 2004 Nine
Months due to the amortization of customer relationships obtained in the acquisition of ECS.
Allocation of selling and marketing expenses increased $72,000 in the 2005 Nine Months from the
2004 Nine Months. See Selling and marketing - ICC.NET above for a discussion of the allocation
of selling and marketing expenses between segments. General and administrative  Service Bureau General and administrative expenses increased
$934,000, or 390%, to $1,173,000 for the 2005 Nine Months compared to $240,000 for the 2004 Nine
Months. General and administrative expenses consist primarily of salaries and employee benefits,
facility costs, legal and professional fees, insurance, travel meals and entertainment and
depreciation. Salaries and employee benefits increased $372,000 in the 2005 Nine Months from the
2004 Nine Months due primarily to an increase in the number of employees to four at the end of the
2005 Nine Months from two at the end of the 2004 Nine Months. Bad debt expense increased $75,000
in the 2005 Nine Months from the 2004 Nine Months due to the addition of estimated reserves
required for uncollected accounts. Rent, travel, depreciation and telephone costs increased
$55,000, $26,000, $26,000 and $29,000, respectively, in the 2005 Nine Months from the 2004 Nine
Months as a result of the addition of new facilities resulting from the acquisition of ECS.
Allocation of general and administrative expenses from ICC.NET increased $285,000 in the 2005 Nine
Months from the 2004 Nine Months. See General and administrative - ICC.NET above for a
discussion of the allocation of general and administrative expenses between segments. Liquidity and Capital Resources Our principal sources of liquidity, which consist of unrestricted cash and cash equivalents,
decreased to $3,576,000 as of April 30, 2005 from $3,790,000 as of July 31, 2004. We believe these
resources will provide us with sufficient liquidity to continue in operation through July 31, 2005. On April 20, 2004, the Company completed a private placement of common stock and warrants to
purchase shares of common stock (the 2004 Private Placement) that provided aggregate gross
proceeds of approximately $4,955,000. In the 2004 Private Placement, the Company sold 2,831,707
shares of its class A common stock and warrants to purchase 849,507 shares of our class A common
stock. These warrants are exercisable for five years commencing on October 20, 2004 at an exercise
price of $2.22 per share. In connection with the 2004 Private Placement, the Company incurred fees and expenses of
$772,001, of which $423,274 was paid in cash at closing, $122,822 is payable in cash and $225,905
was paid by issuing warrants to purchase 283,170 shares of class A common stock. The fair value of
the warrants was estimated by management using the Black-Scholes option-pricing model. These
warrants have substantially the same terms as the warrants issued in the 2004 Private Placement.
No directors, officers or entities with which the Companys directors, or officers are affiliated
participated in the 2004 Private Placement. Under the terms of the 2004 Private Placement, the Company entered into a registration rights
agreement with the investors, dated as of April 20, 2004, and filed a registration statement with
the SEC on April 30, 2004 pursuant to this agreement. The registration statement was declared
effective on August 20, 2004 and the Company 21




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##### Table of Contents



is required to pay the holders of shares issued in the 2004 Private Placement liquidated
damages totaling $3,300 because of a two-day delay in causing the registration statement to become
effective. If the effectiveness of the registration statement is not maintained for the period
required by the registration rights agreement, the Company may be required to pay to the holders of
shares issued in the 2004 Private Placement liquidated damages of one percent of the purchase price
paid for the shares by the holders for each 30 day period (or portion thereof on a pro rata basis)
that the effectiveness of the registration statement is not maintained. On May 30, 2003, the Company executed an Accounts Receivable Financing Agreement (Financing
Agreement) with Silicon Valley Bank (the Bank) with a term of one year. Under the Financing
Agreement, the Company may borrow, subject to certain conditions, up to 80% of its outstanding
accounts receivable up to a maximum of $2,000,000. The applicable interest rate is the prime rate
plus .35% plus a collateral handling fee equal to .20% on the average daily outstanding receivable
balance, and interest is payable monthly. The Financing Agreement contains certain restrictive
covenants that are customary for a commercial transaction of this type, including, without
limitation, restrictions on the disposition or encumbrance of the collateral pledged to the Bank,
restrictions on incurring additional indebtedness and restrictions on the payment of dividends and
the redemption or repurchase of any capital stock. In addition, the Company is required to
maintain at all times a ratio of Quick Assets (i.e., consolidated, unrestricted cash, cash
equivalents, net accounts receivable and investments with maturities of fewer than 12 months
determined according to GAAP) to Current Liabilities (i.e., all obligations and liabilities of the
Company to Bank, plus, without duplication, the aggregate amount of the Companys total liabilities
which mature within one year) minus Deferred Revenue (i.e., all amounts received in advance of
performance under contracts and not yet recognized as revenue) of at least 1.10 to 1.0. The Bank
has been granted a security interest in substantially all of the Companys assets. On October 22,
2003; August 31, 2004 and December 29, 2004, the Company and the Bank amended the Financing
Agreement to extend its term to August 31, 2004; December 29, 2004 and February 15, 2005,
respectively On March 16, 2005, the Bank approved a fourth loan modification agreement extending the term
an additional year that changes the interest under the Financing Agreement to prime rate plus .25%
plus a collateral handling fee equal to .15% on the average daily outstanding financed receivable
balance as long as the Company maintains an Adjusted Quick Ratio (as defined in the Financing
Agreement) of not less 1.25 to 1. Should the Company fail to maintain an Adjusted Quick Ratio of
1.25 to 1, the interest rises to prime rate plus .75% and the collateral handling fee increases to
..35% on the average daily outstanding financed receivable balance. As of April 30, 2005 and July
31, 2004, no amounts were outstanding under the Financing Agreement. The Company has net operating loss carryforwards for tax purposes of approximately $78.5
million as of July 31, 2004. These carryforwards expire from 2007 to 2024. 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 January 1995, the net operating loss
carryover of approximately $1.9 million incurred prior to the initial public offering is subject to
an annual limitation of approximately $400,000 until that portion of the net operating loss is
utilized or expires. Due to the private placement of series A preferred stock in April 1999, the
net operating loss carryover of approximately $18 million incurred prior to the private placement
and subsequent to the initial public offering is subject to an annual limitation of approximately
$1 million until that portion of the net operating loss is utilized or expires. Due to a 100%
ownership change of RTCI in November 2000, the acquired net operating loss of approximately $6.5
million incurred prior to the ownership change is subject to an annual limitation of approximately
$1.4 million until that portion of the net operating loss is utilized or expires. Also, due to a
100% ownership change of ECS in June 2004, the acquired net operating loss of approximately $1.1
million incurred prior to the ownership change is subject to an annual limitation of approximately
$128,000 until that portion of the net operating loss is utilized or expires. Consolidated Working Capital Consolidated working capital decreased to $3,943,000 at April 30, 2005 from $4,198,000 at July
31, 2004. This decrease was primarily due to the increase in other current liabilities of
$1,244,000, offset by an increase in accounts receivable of $836,000, both of which were primarily
due to the MEC acquisition. 22




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##### Table of Contents



Analysis of Cash Flows Cash used by operating activities was $18,000 in the nine months ended April 30, 2005 compared
to cash used in operating activities of $2,355,000 in the nine months ended April 30, 2004. The
decrease in the nine months ended April 30, 2005 of $2,337,000 was primarily the result of a
significantly lower net loss of $2,588,000. Cash used in investing activities increased to $162,000 in the nine months ended April 30,
2005 from $74,000 provided by investing activities in the nine months ended April 30, 2004. Cash
used in investing activities in the nine months ended April 30, 2005 primarily resulted from the
purchase of property and equipment of $272,000 and additional costs relating to the ECS acquisition
of $121,000. This was offset by the receipt of $231,000 in connection with the MEC acquisition.
Cash provided by investing activities in the nine months ended April 30, 2004 was primarily the
result of proceeds from the sale of marketable securities of $134,000 partially offset by the
purchase of property and equipment of $60,000. Cash used in financing activities was $33,000 in the nine months ended April 30, 2005 compared
to $4,986,000 provided by financing activities in the nine months ended April 30, 2004. Cash used
in financing activities in the nine months ended April 30, 2005 was primarily the result of capital
lease payments of $45,000, net payments for the issuance of common stock and warrants of $24,000,
and proceeds from the exercise of employee stock options of $35,000. Cash provided by financing
activities in the nine months ended April 30, 2004 is primarily the result of financing agreement
net borrowings of $647,000 and net payments for the issuance of common stock and warrants of
$4,468,000. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is primarily exposed to interest rate risk, equity risk and credit risk. Interest Rate Risk- Interest rate risk refers to fluctuations in the value of a security
resulting from changes in the general level of interest rates. Investments that are classified as
cash and cash equivalents have original maturities of three months or less. Changes in interest
rates may affect the value of these investments. Credit Risk- Our accounts receivables are subject, in the normal course of business, to
collection risks. We regularly assess these risks and have established policies and business
practices to protect against the adverse effects of collection risks. As a result we do not
anticipate any material losses in this area. 
 Item 4. Controls and Procedures Our management, including our chief executive officer and chief financial officer, have
carried out an evaluation of the effectiveness of our disclosure controls and procedures as of
April 30, 2005, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon that
evaluation, our chief executive officer and chief financial officer have concluded that as of such
date, our disclosure controls and procedures in place are adequate to ensure material information
and other information requiring disclosure is identified and communicated on a timely basis. 23




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings None. 
 Item 2. Changes in Securities and Use of Proceeds None. 
 Item 3. Defaults Upon Senior Securities 
 The Company has recorded the issuance of the payment in kind of the 4% annual dividend due in
January 2005 per the terms of the Companys Series C preferred stock in the financial statements.
The Company is currently in discussions to eliminate the Series C preferred stock, and accordingly
has not delivered the documentation for the issued shares pending completion of those discussions. Item 4. Submission of Matters to a Vote of Security Holders (a) The 2004 Annual Meeting of Stockholders (the Annual Meeting) of the Company was held on
March 1, 2005. There were present at the Annual Meeting, in person or by proxy, holders of
14,270,292 shares (or 74.9%) of the common stock entitled to vote. (b) The following directors were elected to hold office for a term expiring at the Annual
Meeting specified or until their successors are elected and qualified, with the vote for each
director being reflected below: Name
    
    Class
    
    
    Term Expires
    
    
    Votes For
    
    
    Votes WithheldDonald R. Harkleroad
    
    
    I
    
    
    
    2006
    
    
    
    14,016,888
    
    
    
    253,404Spencer I. Browne
    
    II
    
    
    2007
    
    
    
    14,011,888
    
    
    
    251,838John S. Simon
    
    II
    
    
    2007
    
    
    
    14,200,885
    
    
    
    251,838Thomas J. Stallings
    
    II
    
    
    2007
    
    
    
    14,200,411
    
    
    
    251,838G. Michael Cassidy
    
    III
    
    
    2005
    
    
    
    13,994,927
    
    
    
    251,838Arthur R. Medici
    
    III
    
    
    2005
    
    
    
    14,179,876
    
    
    
    251,838
 The affirmative vote of the holders of a plurality of the outstanding shares of common stock
represented at the Annual Meeting was required to elect each director. (c) The appointment of Tauber & Balser, P.C. as independent public auditors to audit the
consolidated financial statements of the Company and its subsidiaries for the year ending July 31,
2005, was ratified with 14,175,096 affirmative votes cast, 65,440 negative votes cast and 29,756
abstentions. The affirmative vote of the holders of a majority of the outstanding shares of common
stock represented at the Annual Meeting was required to ratify the appointment of Tauber & Balser,
P.C. 
 Item 5. Other Information None. 
 Item 6. Exhibits  31.1
    Certificate of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    Certificate of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    Certification of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002* 24




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32.2
    Certification of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002**
    In accordance with Release No. 34-47986, this Exhibit is hereby
furnished to the SEC as an accompanying document and is not deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be deemed incorporated
by reference into any filing under the Securities Act of 1933. 25




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##### Table of Contents



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: June 8, 2005 INTERNET COMMERCE CORPORATIONBy:
    
    /s/ Thomas J. StallingsThomas J. StallingsChief Executive OfficerBy:
    
    /s/ Glen ShipleyGlen ShipleyChief Financial Officer
 26




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    DocumentExhibit 31.1
    
    Certificate of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2
    
    Certificate of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of the Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*Exhibit 32.2
    
    Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*
   *
    In accordance with Release No. 34-47986, this Exhibit is hereby
furnished to the SEC as an accompanying document and is not deemed filed for
purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise
subject to the liabilities of that Section, nor shall it be deemed incorporated
by reference into any filing under the Securities Act of 1933. 27