UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended SEPTEMBER 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-27865
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ICEWEB, INC.
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(Name of small business issuer in its charter)
DELAWARE 13-2640971
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 VAN BUREN STREET, SUITE 150
HERNDON, VA 20170 20170
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (703) 964-8000
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
NONE
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NONE
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Securities registered under Section 12(g) of the Exchange Act:
common stock, par value $0.001 per share
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(Title of class)
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act [ }
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes[X] No[ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
State issuer's revenues for its most recent fiscal year. $6,809,590 for the 12
months ended September 30, 2005.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of a
specified date within the past 60 days. As of December 31, 2005 the aggregate
market value of the common stock held by non-affiliates at the closing price of
the registrant's common stock is approximately $3,132,818.
State the number of shares outstanding of each of the issuer's class of common
equity, as of the latest practicable date. As of December 31, 2005, 6,329,797
shares of common stock are outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly describe them
and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to security holders;
(2) any proxy or information statement; and (3) any prospectus filed pursuant to
Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act"). Not
applicable.
Transitional Small Business Disclosure Form (check one): Yes ___ No _X_
When used in this annual report, the terms "IceWEB," " we," "our," and "us"
refers to IceWEB, Inc., a Delaware corporation, and our subsidiaries. The
information which appears on our web site at www.iceweb.com is not part of this
annual report.
All per share information contained in this annual report gives effect to the
ten for one (10:1) forward stock split of our common stock effective October 13,
2004 and a one for eighty (1:80) reverse stock split effective April 27, 2005.
2
ICEWEB, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
INDEX
PART I
Item 1. Description of Business...............................................5
Item 2. Description of Property..............................................15
Item 3. Legal Proceedings....................................................15
Item 4. Submission of Matters to a Vote of Security Holders .................15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..............................................................16
Item 6. Management's Discussion and Analysis or Plan of Operation............17
Item 7. Financial Statements.................................................21
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................33
Item 8A. Controls and Procedures..............................................33
Item 8B. Other Information....................................................34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act ...................35
Item 10. Executive Compensation...............................................39
Item 11. Security Ownership of Certain Beneficial Owners and Management.......42
Item 12. Certain Relationships and Related Transactions ......................43
Item 13. Exhibits ............................................................44
Item 14. Principal Accountant Fees and Services ..............................45
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this annual report contain or may contain forward-looking
statements that are subject to known and unknown risks, uncertainties and other
factors which may cause actual results, performance or achievements to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results to differ
materially from those in the forward-looking statements. Potential risks and
uncertainties include, among other things, such factors as: our high level of
indebtedness and ability to satisfy the same, our history of unprofitable
operations, the continued availability of financing in the amounts, at the times
and on the terms required, to support our future business and capital projects,
the extent to which we are successful in developing, acquiring, licensing or
securing patents for proprietary products, changes in economic conditions
specific to any one or more of our markets, changes in general economic
conditions, our ability to produce and install product that conforms to contract
specifications and in a time frame that meets the contract requirements, and the
other factors and information disclosed and discussed in other sections of this
report.
You should consider the areas of risk described in connection with any
forward-looking statements that may be made in this annual report. Readers are
cautioned not to place undue reliance on these forward-looking statements and
readers should carefully review this annual report in its entirety, including
the risks described in "Risk Factors." Except for our ongoing obligations to
disclose material information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events. For any
forward-looking statements contained in any document, we claim the protection of
the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. These forward-looking statements speak
only as of the date of this annual report, and you should not rely on these
statements without also considering the risks and uncertainties associated with
these statements and our business.
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PART I
ITEM 1. Description of Business
OVERVIEW
We are a diversified technology company headquartered in Herndon,
Virginia, which was founded in 2000 and became public in 2002 through a reverse
merger. While our business plan has been in evolution since that time, our focus
has consistently remained on enabling governmental organizations and small to
medium size businesses to independently manage, create, publish and deliver
content easily and affordably. Our products and services are used by
organizations in both the public and private sectors with large, dispersed
audiences of customers, employees, or other trading or strategic partners.
Through internal software development and a series of acquisitions, we have
developed a suite of robust, scalable content creation, management, publication
and delivery tools that can be implemented on any website, as well as e-learning
content and customized e-learning portals. Our goal is to make this technology
available and affordable and to open up the world of independent web management
and publishing to any organization. Complementing these products is our hosted
e-mail solution, IceMAIL. We also offer consulting and product support services
on a project-by-project basis. In addition to our proprietary software and
professional services, we also market an array of information technology
services and third party computer hardware and software.
Our solutions are centered on knowledge based support, enabling
customers to increase organizational efficiency by converging knowledge based
information with easy to manage websites and e-learning portals. Going forward,
we intend to leverage our expertise in content management, creation and
delivery, and our portal framework, to develop a Smart Enterprise Suite ("SES")
that extends beyond digital content to include dynamic human intelligence for
greater information sharing and organizational efficiency across the extended
enterprise. According to the Gartner Group, an SES "covers enterprise needs for
content management, knowledge management and collaboration, and supports the
extended virtual workplace - inside and between enterprises. The SES combines
the functionality of portal, collaborative and content management technologies,
and delivers these in an integrated suite; provides a broad foundation to
support knowledge or information work within an enterprise, or between groups in
different enterprises, and may be considered the platform for knowledge
management; and focuses on support for unstructured work processes, but through
portal-based integration with business applications can provide a comprehensive
digital or electronic workplace." Our objective is to provide an affordable SES
solution for governmental, association and small to medium size business
customers.
OUR PRODUCTS AND SERVICES
Our products and services are designed to provide customers with a
comprehensive view of their core business, promote better cross pollination of
strategies and objectives between development, sales, marketing and service
organizations, and guide strategic planning efforts to meet key corporate
objectives of profitability and growth. These products form the basis of our
emerging SES. The two key components currently consist of:
ICEWEB VISTA
This is a powerful tool for efficient website management, built upon
open source architecture (.Net) that allows users to quickly, easily and
affordably update their Web content and site structure. With IceWEB Vista, users
can manage, update, control and publish new content for Web sites anytime and
anyplace. Among the many advantages of IceWEB Vista is the ability to easily,
quickly and affordably deploy Web content as well as to control who can edit,
access and view content. IceWEB Vista eliminates the costs and constraints of
utilizing "third party" vendors for website management. With IceWEB Vista
organizations can reduce the cost of managing records and documents, and extend
the access and power of information to members, customers, or other site users,
while maintaining data security. IceWEB Vista empowers users with advanced
membership and profile management, a revamped HTML publisher, and more advanced
workflow and versioning capabilities. In addition, our mailing list management
tool enhances the ability of users to stay in contact with clients or members.
IceWEB Vista's single sign-on support enables users to easily access records and
documents through a customized interface.
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We released the IceWEB Vista portal software solution during the third
quarter of fiscal 2005. We believe that IceWEB Vista is a major step forward in
terms of usability by eliminating several complexities that existed in previous
versions of the product. IceWEB Vista unified our earlier offering, IceWEB CMS,
and a number of new application modules including HTML Publishing Tool, News
Content Management, Advanced Mailing List Manger and Custom Forms Creator to
provide one product from the end user's perspective. We believe IceWEB Vista
provides the end user with powerful tools to manage not only text but also rich
media in a "what you see is what you get" or WYSIWYG environment. IceWEB Vista
also provides comprehensive and enterprise wide portal deployment features in a
single turnkey solution.
ICEMAIL
In the fourth quarter of fiscal 2005 we launched IceMAIL, a packaged
service that provides a network-hosted groupware, email, calendaring, and
collaboration solution utilizing Microsoft Exchange 2003, the most widely used
enterprise system available. Customers will be able to leverage the full
capabilities of Microsoft Exchange 2003 and Outlook without the initial
implementation and maintenance costs associated with such an advanced system. In
addition to providing hosted exchange services, IceMAIL will have a substantial
focus on providing wireless PDA/Smart Phone synchronization services that enable
our customers to have everything in Outlook/Exchange available while traveling
away from their office. IceWEB will be a single-source provider of wireless
PDA/Smart Phones, GoodLink or Blackberry software, and the cellular carrier
services through reseller arrangements with those companies.
IceWEB will leverage existing technologies from several software and
hardware manufacturers and combine them with customized software systems to make
ordering and using our Internet hosted applications easy and quick. Most of the
solutions we will offer are somewhat common place for large organizations, but
cost prohibitive for small and medium sized businesses to manage much less
procure the initial technology. We will seek to leverage our expertise in
large-scale enterprise systems to build our service offerings that will share
these systems across numerous small to medium-sized business customers. We
believe that this scale of economy will allow us to offer our services to small
to medium-sized business customers at a fraction of the cost would pay if an
individual small to medium-sized business customer were to deploy it themselves.
IceMAIL is based on the advanced Microsoft Exchange 2003 platform which
provides industry-leading features such as calendars, group scheduling, contact
management, task management, notes, and shareable public folders. Using the
latest in network hosting, wireless, and Internet technologies, IceMAIL will be
accessible from anywhere on the Internet via Microsoft Outlook 2003 or a
web-browser. For the true "road warrior", we will also offer wireless handheld
PDA access using a Handspring Treo, RIM Blackberry, Windows PocketPC, or Smart
Phone devices.
LEARNINGSTREAM.COM
LearningStream.com is an online business education portal that offers
pay-per-view online classes to mid-level managers seeking to update their
management and project skills. Additionally, LearningStream.com has a user
interface that enables experts and instructional designers to create and publish
courses online. The courses have to pass scrutiny and upon acceptance by
LearningStream.com staff will be published to the site. We provide the hosting
and streaming and share in the revenue generated by the content providers.
Business professionals can choose among many different subjects such as making
presentations, managing people and learning software applications from training
developers such as Fred Pryor Seminars, CareerTrack and Evelyn Woods.
CUSTOM SMART ENTERPRISE SOLUTIONS
Through the acquisition of assets of DevElements in May 2004, we
increased our capabilities to provide a custom smart enterprise solution, as
DevElements has experience developing and deploying complex web-based business
solutions in over 27 languages, primarily for Fortune 1000 businesses with
offices in multiple countries. By leveraging the core competencies acquired by
us through DevElements, we can assist organizations with:
- Custom Application/Software Development: full, life-cycle web
development of applications that improve everyday business tasks &
processes.
- Portal Integration: deploying, customizing and maintaining portal
frameworks, including custom development of applications to assist with
single sign-on authentication and extending the framework to meet
multiple language needs.
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- Collaboration: integration of today's hottest collaboration packages,
from embedded awareness in applications to custom "Webinar" reservation
management tools.
- Extension of Legacy Systems: extension of well-documented and developed
legacy systems to the web for either secured or public access.
STORAGE AND DISTRIBUTION
We offer a competitive level of data security, backup and disaster
recovery in order to ensure the integrity of our clients' data. We have
redundant production services, a three-tier development cycle, tape backups and
redundant connectivity.
CONSULTING SERVICES
Our consulting staff has years of experience in providing custom, rich
media solutions. Our consulting services include personalized project
management, multimedia development, synchronization of media assets, application
design and development, software integration, instructional design, graphic
design, foreign language translations and delivery methods
SUPPORT AND MAINTENANCE SERVICES
We provide engineering and technical support to both government and
commercial organizations. These services include everything from security and
network analysis to full network technology refreshment and deployment. We also
provide support and maintenance to ensure that its solutions are deployed
correctly and continue to operate efficiently into the future.
THIRD PARTY HARDWARE
Through open market sales in the private sector and primarily through
United States General Services Administration (GSA) Schedule sales to the
Federal government under GSA Schedules held by certain of our subsidiaries, we
sell a broad array of hardware, including large uninterruptible power supplies
and other power equipment through our Integrated Power Solutions, Inc.
subsidiary.
TECHNOLOGY
The Company has engineers on staff with expertise specifically in
Microsoft products and solutions. In addition, the Company has developed
partnerships with RSA Security, Cisco Systems, SonicWall Inc, Good Technologies,
Research In Motion (RIM), Cingular, Verizon, Sprint, Sabari, and Hitec. The
combination of our internally developed software and our vendor expertise allows
IceWEB to offer customized end-to-end solutions.
The Company's software is designed for Microsoft's Windows Operating
Systems and applications that use Microsoft's SQL 7 database software. The
majority of the Company's applications are based on client-server technology.
IceWEB Vista was developed using Microsoft.NET technology. Since a majority of
the processing is done on the server, clients only need a browser to author and
manage their web content.
The Company believes that it successfully surmounted a significant
product development challenge by leveraging the capabilities of the
Microsoft.NET development environment and integrating many of the disparate
technologies driving the Company's core software platforms. All of the Company's
products utilize their original technology in one form or another. By leveraging
the code of existing products, the Company has been able to decrease product
development costs, shorten time to market and realize revenues from new products
quickly. This has also provided a significant advantage to the Company's
customers by enhancing the stability of new software versions, new product
offerings and reducing the effort required to upgrade or deploy the Company's
software.
In summary, fiscal 2005 was a positive year for the Company's
technology. In addition to the transition from a Java based environment to a
Microsoft .NET technology for IceWEB Vista, the company also developed and
deployed IceMAIL, the Hosted Microsoft Exchange service. With this development,
the Company has made great strides in providing customers with a full service
hosted source for both interactive web portals and communication and
collaboration. Scalability of our products has been tested with real world
customer deployments, and has provided us with positive validation of our
engineering design objectives. The transition to the .NET technology has allowed
the Company to expand our product offerings and provide customers with a more
cost effective and faster to market set of solutions.
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MARKET AND TRENDS
The market for hosted network applications and wireless access to web
content is expanding exponentially. According to varying sources, the current
estimated market size for the Company's products and services is between $20 and
$50 billion. The Company's goal is to attempt to achieve a one percent (1%)
market share within five years or roughly $200 million in revenue, derived from
some of the estimated potential 78,000,000 worldwide potential Company
customers, as a result of having identified a market focal point in small to
medium sized businesses and governmental organizations that rely on their
websites and email for communication and collaboration with customers,
constituents and members.
SALES AND MARKETING
We sell our products through our direct sales, online marketing, and
the company's ecommerce websites. We intend to expand our indirect sales channel
through additional relationships with systems integrators, value-added resellers
and original equipment manufacturers. In addition, we generate leads through
search engine optimization. Our fiscal 2006 marketing plan includes radio and
print advertising, Webinars, Seminars and Tradeshows, Direct Mail, and
customer-centric newsletters, Public Relations, as well as online Pay Per Click
venues such as Overture and Google. We also generate leads from a variety of
sources, including businesses seeking partners to develop Web-based
applications. Initial sales activities typically include a demonstration of our
product capabilities followed by one or more detailed technical reviews.
Additional relationship marketing and community building methods to be
used include; the use of events bulletin boards and expert discussions, online
surveys and questionnaires to gather valuable feedback and encourage customer
communications, the creation and seeding of focused user groups, adopting a
charitable cause, initiating a referral program, building membership communities
and services that revolve around IceWEB's offerings, and the development and
support of customer evangelists that promote, and are promoted by IceWEB's
products. Establishing partnerships with major industry leaders will also add
value and distribution for our products.
RESEARCH AND DEVELOPMENT
In addition to our focus on subscription-based "software as a service"
offerings, we are engaged in a comprehensive research and development plan to
integrate our portal and email/collaboration offerings into the next generation
of online applications. This next generation of online hosted application
services will focus on integrating "traditional email" and portal systems into
an integrated Smart Enterprise Suite with both applications running on both
Internet/Intranet as well as synchronized wireless/PDA systems. We anticipate
that we will launch these product before the end of fiscal 2005. For the fiscal
years ended September 30, 2005 and 2004 we spent $157,500 and $580,053,
respectively, on research and development.
INTELLECTUAL PROPERTY
Our success depends in part on our ability to protect our intellectual
property. The source codes, object codes, and documentation related to our
products are all proprietary to us and as to which copyright in favor of our
company arose from the date of creation of the products or the date on which the
products were assigned to us, whichever is later. We also rely on common law
rights to our trademark and service mark "IceWEB" in both block letters and
stylized form. To protect our proprietary rights, we rely generally on copyright
and trade secret laws, confidentiality agreements with employees and third
parties, and agreements with consultants, vendors and customers, although we
have not signed such agreements in every case. Despite such protections, a third
party could, without authorization, copy or otherwise obtain and use our
intellectual property.
It is also possible that our competitors will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion. We can give no assurance that our
agreements with employees, consultants and others who participate in development
activities will not be breached, or that we will have adequate remedies for any
breach, or that our trade secrets will not otherwise become known or
independently developed by competitors. There can be no assurance that we will
be able to adequately protect our trade secrets. Third parties may assert
infringement claims against us or against third parties upon whom we rely and,
in the event of an unfavorable ruling on any claim, we may be unable to obtain a
license or similar agreement to use technology that we rely upon to conduct our
business.
8
In the future we may pursue copyright protection of our source codes,
object codes and documentation as well as the registration of certain of our
trademarks and service marks in the United States. In general, there can be no
assurance that our efforts to protect our intellectual property rights through
copyright, trademark and trade secret laws will be effective to prevent
misappropriation of our content. Our failure or inability to protect our
proprietary rights could materially adversely affect our business, financial
condition and results of operations.
COMPETITION
Our competitors include portal vendors, application service providers,
software vendors, systems integrators and information technology consulting
service providers who offer some or all of the same products as we do to the
small to medium sized business and government markets. Our competitors,
particularly for larger customers within our target markets, include Plumtree,
Vignette, Hummingbird, Websphere, Oracle, SAP, MailStreet, Intermedia.net, Mi8
Inc, and USA.net. Our competitive strategy is to undercut the pricing model of
our competitors while delivering a higher value to customers and building brand
name recognition for our company and our products. We face significant
competition from these and other companies, most of which have greater brand
recognition, are better capitalized than us and can obtain financing on more
favorable terms. We may never be able to successfully compete in our target
market.
There are relatively low barriers to entry into the Company's business,
and the Company does not believe its proprietary technology would preclude or
inhibit competitors from entering its markets. As such, the Company anticipates
that new entrants will try to develop competing products and services as well as
new forums for conducting eCommerce that could be deemed competitors. However,
the Company believes it can continue to compete successfully by relying on the
Company's established infrastructure, marketing strategies, systems and
procedures. In addition, the Company will continue to add additional products
and services in the future and periodically revise its methods of doing business
and also pursue its expansion into international markets, where the Company
believes there is an overall lower level of competition.
STRATEGY
During fiscal 2006 the Company plans on greater automation for both
IceWEB Vista and IceMAIL products. By using internal and external technical
resources the Company will enable customers to manage and control their own
environment whether it is manipulating web content through IceWEB Vista or
adding, managing and controlling their communication and collaboration
environment through IceMAIL. IceWEB will be one of the few companies that allow
customers almost total control of their features. In addition, the company plans
to expand its number of product hardware offerings in relation to both software
services.
ACQUISITIONS
The Company plans to continue to pursue strategic acquisitions that
will broaden its product offerings and customer base, advance and expand its
technological abilities, increase its cash flow and profitability, and diversify
its operations.
EMPLOYEES
As of December 31, 2005, IceWEB employed a total of 32 employees, all
of whom work full-time. The Company has no collective bargaining agreements with
any unions and believes that the overall relations with its employees are
satisfactory. We also use the full-time services of 12 consultants in areas of
network consulting.
OUR HISTORY
We were originally formed under the laws of the State of Delaware in
February 1969. For many years, we were a wholesaler of custom one, two, three
and four-color processed commercial printing, as well as disposable and durable
office equipment including stock paper, fax paper, fax and copy machines,
computers, file cabinets and safes. We conducted our business throughout the
United States of America and Puerto Rico from our headquarters in New York.
In March 1999, we changed the focus of our business and closed a
transaction by which we acquired 100% of the outstanding capital stock of North
Orlando Sports Promotions, Inc., a privately held Florida corporation. From 1999
until July 2001, we operated a variety of Internet-related services, however, we
were unable to generate positive cash flow from these Internet-related
businesses.
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In May 2001, we executed an Agreement and Plan of Reorganization and
Stock Purchase Agreement with Disease S.I., Inc. Under the terms of the
agreement, we acquired 100% of the issued and outstanding stock of Disease S.I.,
Inc. in exchange for 750,000 shares of our common stock. The transaction was
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies was recorded as
a recapitalization of Disease S.I., Inc., pursuant to which Disease S.I., Inc.
was treated as the continuing entity. Disease S.I., Inc. was a developmental
stage biopharmaceutical clinical diagnostics company planning to employ a broad
array of technologies to detect, identify and quantify substances in blood or
other bodily fluids and tissues. It intended to derive revenues from patent
sub-licensing fees, royalties from pharmaceutical sales, appropriate milestone
payments and research and development contracts.
Following completion of the acquisition of Disease S.I., Inc., it
became apparent to us that it would be in our best long-term interest that the
Internet operations be conducted apart from the biopharmaceutical clinical
diagnostics operations. On July 24, 2001, we sold a former officer and director
100% of our subsidiary North Orlando Sports Promotions, Inc., in exchange for
the assumption of all liabilities related to North Orlando Sports Promotions,
Inc. and its operations estimated at approximately $112,000, and which included
the forgiveness of $91,500 in accrued compensation. Included in the sale along
with the capital stock of North Orlando Sports Promotions, Inc. were fixed
assets, rights to several domain names and various contractual rights and
obligations.
On November 27, 2001, we acquired 9,050,833 shares of the common stock
of Healthspan Sciences, Inc., a privately held California corporation in
exchange for 5,000 shares of our common stock in a private transaction exempt
from registration under the Securities Act of 1933 in reliance on Section 4(2)
of that act. This agreement was rescinded on March 21, 2002. Pursuant to the
rescission, Healthspan Sciences, Inc. returned all 5,000 shares of our common
stock issued in the exchange and we returned all 9,050,833 shares of Healthspan
Sciences, Inc. we had received.
On March 21, 2002, we executed an Agreement and Plan of Merger with
IceWEB Communications, Inc., a Delaware corporation and its stockholders.
Founded in 2000, IceWEB Communications, Inc. enabled interactive communications
and education on the web. In June 2001, it had acquired the assets in bankruptcy
of Learning Stream, Inc., a provider of streaming services. Pursuant to the
agreement, each of the 22,720,500 shares of common stock of IceWEB
Communications, Inc. issued and outstanding immediately prior to the merger were
converted into the right to receive 0.13375 shares of our common stock, for an
aggregate of 303,888 shares of common stock. Each of the warrants to purchase an
aggregate of 680,125 shares of IceWEB Communications, Inc. common stock issued
and outstanding immediately prior to the merger were converted into the right to
receive one warrant to purchase 0.13375 shares of our common stock upon exercise
of said warrant.
In June 2003, we acquired 100% of the capital stock of Interlan
Communications, Inc., a privately held corporation, in exchange for 25,000
shares of our common stock. In June 2003, we also acquired 100% of the capital
stock of Seven Corporation in exchange for 37,500 shares of our common stock and
cash consideration of $123,000.
In October 2003, we acquired 19% of the capital stock of Iplicity, Inc.
of Virginia, together with substantially all of its assets including software
licenses, source code, potential patents and trademarks for a combined stock and
cash value of approximately $632,000 which included the issuance of 191,381
shares of our common stock and cash consideration of $65,500.
In May 2004, we acquired substantially all of the assets of
DevElements, Inc. of Virginia, including software licenses, source code,
potential patents and trademarks, cash, hardware, and equipment. As
consideration for the purchase of the assets, we paid DevElements $100,000 and
agreed to the assumption of liabilities up to an aggregate of $150,000. In
exchange for the 19% interest in DevElements, we issued to the shareholders of
DevElements 187,500 shares of our common stock and options to purchase 187,500
shares of common stock exercisable at a price of $27.20 per share and expiring
May 13, 2009. We issued to the stockholders options to purchase 6,250 shares,
which were contingently exercisable upon the satisfaction of certain performance
criteria. The performance criteria, which required contracts, task orders and
other work assignments involving billing of at least $840,000 during the
six-month period ending November 13, 2004, was not met and the options were
cancelled.
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On October 18, 2004, we entered into a non-binding letter of intent to
acquire 100% of the issued and outstanding stock of Plan Graphics, Inc. The
transaction was subject to approval by the Plan Graphics, Inc. shareholders, and
certain terms and conditions, including terms and conditions which are customary
to this type of transaction. On April 29, 2005 the letter of intent expired with
a definitive agreement having been executed or all conditions precedent to the
closing having been completed.
PRIMARY RISK FACTORS
The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in new and rapidly evolving
markets. As a result, the Company will encounter various risks in implementing
and executing its business strategy and we can provide no assurance that we will
be successful in addressing such risks, and note that our failure to do so could
have a material adverse effect on our business. Specific risks facing the
Company include, but are not limited to the following.
WE HAVE AN ACCUMULATED DEFICIT AND WE ANTICIPATE CONTINUING LOSSES THAT WILL
RESULT IN SIGNIFICANT LIQUIDITY AND CASH FLOW PROBLEMS ABSENT A MATERIAL
INCREASE IN OUR REVENUES.
We have an accumulated deficit of $6,500,655 at September 30, 2005. For
the years ended September 30, 2005 and 2004, we had a net loss of approximately
$904,000 and $2 million, respectively, and cash used in operations was
approximately $920,000 and $795,000, respectively. The report of our independent
registered public accounting firm on our financial statements for the fiscal
year ended September 30, 2005 contained a qualification expressing substantial
doubt as to our ability to continue as a going concern as a result of our net
losses and cash used in operations. While we reported a modest increase in our
revenues for fiscal 2005 as compared to fiscal 2004, we cannot assure you that
our revenues will increase in future periods, nor can we assure you that they
will not decrease. As long as our cash flow from operations remains insufficient
to fund our operations, we will continue depleting our cash and other financial
resources. Our failure to achieve profitable operations in future periods will
adversely affect our ability to continue as a going concern. In this event, you
could lose all of your investment in our company.
WE WILL NEED ADDITIONAL FINANCING WHICH WE MAY NOT BE ABLE TO OBTAIN ON
ACCEPTABLE TERMS. IF WE CANNOT RAISE ADDITIONAL CAPITAL AS NEEDED, OUR ABILITY
TO EXECUTE OUR GROWTH STRATEGY AND FUND OUR ONGOING OPERATIONS WILL BE IN
JEOPARDY.
Historically, our operations have been financed primarily through the
issuance of equity. Capital is typically needed not only to fund our ongoing
operations and to pay our existing obligations, but capital is also necessary if
we wish to acquire additional assets or companies and for the effective
integration, operation and expansion of these businesses. Our future capital
requirements, however, depend on a number of factors, including our ability to
internally grow our revenues, manage our business and control our expenses. At
September 30, 2005, we had a working capital surplus of $319,137 as compared to
a working capital deficit of $1,049,557 at September 30, 2004. This change is
primarily attributable to proceeds we received from the sale of equity
securities during fiscal 2005. However, we will need to raise additional capital
to fund our ongoing operations, pay our existing obligations and for future
growth of our company. We cannot assure you that additional working capital is
available to us in the future upon terms acceptable to us. If we do not raise
funds as needed, our ability to provide for current working capital needs, make
additional acquisitions, grow our company, and continue our existing business
and operations is in jeopardy. In this event, you could lose all of your
investment in our company.
11
WHILE SHARES OF OUR SERIES A CONVERTIBLE PREFERRED STOCK AND SHARES OF OUR
SERIES B CONVERTIBLE PREFERRED STOCK ARE OUTSTANDING WE ARE PROHIBITED FROM
UNDERTAKING CERTAIN CAPITAL RAISING TRANSACTIONS WHICH MAY MATERIALLY ADVERSELY
EFFECT OUR ABILITY TO RAISE FUNDS IN FUTURE PERIODS.
The designations of the Series A Convertible Preferred Stock prohibit
us from selling common stock or any other security which is convertible into
common stock or issuing any rights, options or warrants which entitle the holder
to purchase shares of our common stock at a price less than $0.60 per share,
subject to adjustment. So long as shares of our Series A Convertible Preferred
stock are outstanding, this prohibition will prevent us from raising additional
capital at an effective offering price of less than $0.60 per share. While the
market value of our common stock as is presently greater than $0.60 per share,
we do not know if the trading price of our common stock will remain above $0.60
per share in future periods, particularly in light of the fact that we may be
significantly increasing the number of shares of our common stock which will be
freely tradable following the effectiveness of a pending registration statement
as a result of sales made by the selling security holders under that prospectus.
If the market price of our common stock should fall to a price range which is
near or below $0.60 per share we may be unable to raise capital in future
periods as needed which could adversely affect our liquidity, operation of our
company and ability to continue as a going concern.
In addition, under the terms of the Preferred Stock Purchase Agreement
for the Series A Convertible Preferred Stock for a period of three years
beginning March 30, 2005 we have contractually agreed not to issue any
additional shares of preferred stock or any convertible debt, not to enter into
any transactions which contain a reset provision which could result in
additional shares being issued at some future date and not to enter into certain
other types of financing transactions. Under the terms of the Preferred Stock
Purchase Agreement for the Series B Convertible Preferred Stock for as long as
the purchaser, which is the same purchaser as our Series A Convertible Prefered
Stock, owns shares of our Series B Convertible Preferred Stock, we have
contractually agreed not to issue any additional shares of preferred stock or
any convertible debt, not to enter into any transactions which contain a reset
provision which could result in additional shares being issued at some future
date and not to enter into certain other types of financing transactions. These
contractual limitations may limit our ability to raise capital as needed in
future periods which could adversely affect our ability to continue our
operations.
WE ARE RELIANT ON REVENUES FROM TWO CUSTOMERS. BECAUSE WE ARE NOT A PARTY TO
LONG TERM AGREEMENTS WITH EITHER CUSTOMER, THE LOSS OF ONE OR BOTH OF THESE
CUSTOMERS WOULD BE ADVERSE TO OUR FINANCIAL RESULTS IN FUTURE PERIODS.
Revenues from two customers represented approximately 37% and
approximately 34% of total revenues for the years ended September 30, 2005 and
2004, respectively, and approximately 53% of our accounts receivable at
September 30, 2005 are due from these two customers. Both of these customers
purchase products and services from us on a purchase order basis and,
accordingly, may elect at any time to purchase similar products or services from
our competitors. Until such time, if ever, as we are able to sufficiently expand
our sales efforts and remove this dependency on revenues from these two
customers, if one or both of them should cease purchasing products and services
from us our revenues and results of operations would be materially adversely
affected.
OUR MANAGEMENT MAY BE UNABLE TO EFFECTIVELY INTEGRATE OUR ACQUISITIONS AND TO
MANAGE OUR GROWTH AND WE MAY BE UNABLE TO FULLY REALIZE ANY ANTICIPATED BENEFITS
OF THESE ACQUISITIONS.
Our business strategy includes growth through acquisition and internal
development. We are subject to various risks associated with our growth
strategy, including the risk that we will be unable to identify and recruit
suitable acquisition candidates in the future or to integrate and manage the
acquired companies. Acquired companies' histories, geographical locations,
business models and business cultures can be different from ours in many
respects. Our directors and senior management face a significant challenge in
their efforts to integrate our businesses and the business of the acquired
companies or assets, and to effectively manage our continued growth. There can
be no assurance that our efforts to integrate the operations of any acquired
assets or companies acquired in the future will be successful, that we can
manage our growth or that the anticipated benefits of these proposed
acquisitions will be fully realized. The dedication of management resources to
these efforts may detract attention from our day-to-day business. There can be
no assurance that there will not be substantial costs associated with these
activities or of the success of our integration efforts, either of which could
have a material adverse effect on our operating results.
12
WE HAVE NOT VOLUNTARILY IMPLEMENTED VARIOUS CORPORATE GOVERNANCE MEASURES, IN
THE ABSENCE OF WHICH, STOCKHOLDERS MAY HAVE MORE LIMITED PROTECTIONS AGAINST
INTERESTED DIRECTOR TRANSACTIONS, CONFLICTS OF INTEREST AND SIMILAR MATTERS.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE or The Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Because our stock is not listed on an
exchange or quoted on Nasdaq, we are not required to adopt these corporate
governance standards. While our board of directors has adopted a Code of Ethics
and Business Conduct and our Board has established Audit and Compensation
Committees, we have not adopted all of the corporate governance measures which
we might otherwise have been required to adopt if our securities were listed on
a national securities exchange or Nasdaq. It is possible that if we were to
adopt all of these corporate governance measures, stockholders would benefit
from somewhat greater assurances that internal corporate decisions were being
made by disinterested directors and that policies had been implemented to define
responsible conduct. Prospective investors should bear in mind our current lack
of corporate governance measures in formulating their investment decisions.
THE EXERCISE OF WARRANTS AND OPTIONS AND THE CONVERSION OF SHARES OF OUR SERIES
A CONVERTIBLE PREFERRED STOCK WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
At December 31, 2005 we had outstanding:
o 6,329,787 shares of our common stock,
o 1,666,667 shares of Series A Convertible Preferred Stock which is
convertible into 1,666,667 shares of our common stock,
o 1,833,333 shares of Series B Convertible Preferred Stock which is
convertible into 1,833,333 shares of our common stock,
o common stock purchase warrants to purchase a total of 6,750,000 shares
of our common stock with exercise prices ranging from $0.70 to $16.00
per share, and
o options granted under our 2000 Management and Director Equity Incentive
and Compensation Plan which are exercisable into 882,479 shares of our
common stock with a weighted average exercise price of $1.55 per share.
The conversion of the Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and/or the exercise of outstanding options and
warrants may materially adversely affect the market price of our common stock
and will have a dilutive effect on our existing stockholders.
CERTAIN OF OUR OUTSTANDING WARRANTS CONTAIN CASHLESS EXERCISE PROVISIONS WHICH
MEANS WE WILL NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.
In March 2005 and December 2005, we issued common stock purchase
warrants to purchase an aggregate of 6,925,000 shares of our common stock with
exercise prices ranging from $2.00 to $9.60 per share in connection with the
sales of shares of our Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock.
All of these five-year warrants are exercisable on a cashless basis
which means that the holders, rather than paying the exercise price in cash, may
surrender a number of warrants equal to the exercise price of the warrants being
exercised. The utilization of this cashless exercise feature will deprive us of
additional capital which might otherwise be obtained if the warrants did not
contain a cashless feature.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT A
TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws may be deemed
to have anti-takeover effects, which include when and by whom special meetings
of our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of the Delaware General Corporations
Law also may be deemed to have certain anti-takeover effects which include that
control of shares acquired in excess of certain specified thresholds will not
possess any voting rights unless these voting rights are approved by a majority
of a corporation's disinterested stockholders.
13
In addition, our certificate of incorporation authorizes the issuance
of up to 10,000,000 shares of preferred stock with such rights and preferences
as may be determined from time to time by our Board of Directors. We presently
have outstanding 1,666,667 shares of our Series A Convertible Preferred Stock
and 1,833,333 shares of Series B Convertible Preferred Stock. Our Board of
Directors may, without stockholder approval, issue additional series of
preferred stock with dividends, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
our common stock.
THE COMPANY'S ABILITY TO GENERATE REVENUES COULD BE ADVERSELY AFFECTED BY
SYSTEMS INTERRUPTIONS
The Company's ability to generate revenues depends, in part, on the
ability of the Company's customers to reliably access servers and on the appeal
of the Company's web site and product offerings. Any system interruptions that
result in the unavailability of the Company's IT systems could reduce the
attractiveness of the Company's products and services. Like many companies whose
operations are dependent upon IT systems, the Company has occasionally
experienced system interruptions in the past, and it is likely that the Company
will continue to experience system interruptions from time to time in the
future.
THE COMPANY WILL BE REQUIRED TO MAKE SOFTWARE AND HARDWARE UPGRADES TO REMAIN
COMPETITIVE
The Company will be required to add additional software and hardware
and further develop and upgrade the Company's existing technology. Any delay or
inability on the Company's part in upgrading its systems or technology may cause
unanticipated system disruptions, slower response times, impaired quality and or
delays in reporting information. There can be no assurance that the Company will
be able to accurately project the rate of increases, if any, in the use of the
Company's web site or in a timely manner upgrade the Company's existing systems.
Any inability to do so could have a material adverse effect on the Company's
business, prospects, financial condition and results of operations.
THE COMPANY DOES NOT HAVE A DISASTER RECOVERY PLAN
The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure, break-ins
and similar events. The Company's headquarters are physically located in Fairfax
County, Virginia, a Washington, DC suburb, in close proximity to the US Capitol,
White House, Pentagon, CIA, and numerous other agencies within the intelligence
community. All these government installations are considered potential targets
of any future terrorist attacks. The Company does not currently have a disaster
recovery plan, and the Company does not carry business interruption insurance to
compensate the Company for losses that may occur. The Company is also vulnerable
to computer viruses and/or physical disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept orders. The
occurrence of any of the foregoing events could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations.
THE COMPANY'S STRATEGY OF SEEKING JOINT VENTURES OR STRATEGIC ALLIANCES MAY BE
UNSUCCESSFUL
The Company may also choose to expand the Company's operations by
entering into joint ventures or other strategic alliances with other parties.
Any such transaction would be accompanied by the risks commonly encountered in
such transactions. These include, among others, the difficulty of assimilating
the operations and personnel, vicarious liability for the acts or omissions of
joint venture partners, and other various factors. There can be no assurance
should the Company enter into any strategic alliance with a third party that the
Company will be successful in overcoming these risks or any other problems
encountered in connection with joint ventures or other strategic alliances, or
that such transactions will not have a material adverse effect on the Company's
business, financial condition and results of operations.
14
CERTAIN OF THE COMPANY'S SUBSIDIARIES ARE INVOLVED IN BUSINESSES WITH RISKS FOR
WHICH THEY MAY NOT BE INSURED
The Company's Integrated Power Solutions, Inc. (IPS) subsidiary sells
uninterruptible power supplies (UPS) that back up substantial computer networks.
If a UPS sold by IPS were to fail and bring down a large computer network, IPS
and the Company could both be sued for damages caused by this failure. IPS and
the Company's current insurance coverage may not cover all of the damages
resulting from such a catastrophe. The Company's Seven Corporation subsidiary
performs computer network engineering services for the District of Columbia
government in mission critical areas of the government. Were a District of
Columbia government network to fail, Seven Corporation and the Company could
both be sued for damages caused by this failure. Seven Corporation and the
Company's current insurance coverage may not cover all of the damages resulting
from such a catastrophe. Other Company divisions carry comparable risks.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leased approximately 12,000 square feet of office space on
a 19 month sub-lease which ended on December 31, 2005, for an average of
approximately $12,500 per month through December 2005. In November 2005, we
entered into a three year lease for approximately 7,900 square feet of office
space located in the same building in which our principal executive offices had
been located. This new lease provides for annual base rental of approximately
$202,000 which escalates to approximately $215,000 annually in the third year of
the lease term. We are also responsible for our pro rata share of certain pass
through costs. We have the option to renew this lease for one additional five
year term and we have a right of first refusal to lease as additional
approximately 7,200 square feet of adjoining office space should it become
available.
The Company also leases approximately 2,000 square feet of office
space. The lease ends on June 30, 2006 at 1455 Pennsylvania Ave. NW Washington
DC. The price per month is $2,100.
ITEM 3. LEGAL PROCEEDINGS
Two related lawsuits have been filed against the Company in the Circuit
Court of Fairfax County, Virginia, captioned Bonnie Edenfield vs. IceWEB, Inc.,
et al., Chancery No. CH 2005 4303; and Christopher MacDonald vs. IceWEB, Inc.,
et al., Chancery No. CH 2005 4304. Both suits are brought by former shareholders
of DevElements, Inc., the assets of which were purchased by a Company
subsidiary. Edenfield and MacDonald were parties to the asset purchase agreement
between DevElements and the Company subsidiary. The plaintiffs seek money
damages from the Company for alleged breach of the asset purchase agreement, and
damages related to stock options. The Company intends to vigorously defend this
litigation. The Company believes the litigation is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTCBB. On April 27, 2005 our symbol
was changed from ICEW to IWEB in connection with a 1:80 reverse split of our
common stock effective on that date. The reported high and low bid prices for
the common stock as reported on the OTCBB are shown below for the periods
indicated. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
High Low
---- ---
Fiscal 2004
-----------
First quarter ended December 31, 2003 $3.82 $1.28
Second quarter ended March 31, 2004 $5.20 $1.28
Third quarter ended June 30, 2004 $4.08 $2.56
Fourth quarter ended September 30, 2004 $4.72 $1.92
Fiscal 2005
-----------
First quarter ended December 31, 2004 $5.60 $2.40
Second quarter ended March 31, 2005 $3.20 $1.60
Third quarter ended June 30, 2005 $2.20 $0.80
Fourth quarter ended September 30, 2005 $1.30 $0.65
Fiscal 2006
-----------
First quarter ended December 31, 2005 $1.05 $0.65
As of January 9, 2006 the last sale price of our common shares as
reported on the OTC Bulletin Board was $0.80 per share. As of September 30, 2005
there were approximately 1,727 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our
surplus, as defined in the relevant Delaware statutes, or if there is no such
surplus, out of our net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. If, however, the capital of our
company, computed in accordance with the relevant Delaware statutes, has been
diminished by depreciation in the value of our property, or by losses, or
otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets, we are prohibited from declaring and
paying out of such net profits any dividends upon any shares of our capital
stock until the deficiency in the amount of capital represented by the issued
and outstanding stock of all classes having a preference upon the distribution
of assets shall have been repaired.
Under the terms of our Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock or shares of our Series B Convertible Preferred
Stock, we cannot pay dividends on our common stock so long as shares of our
Series A Convertible Preferred Stock are outstanding. We do not anticipate that
any cash dividends will be declared or paid on our common stock in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
None.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth securities authorized for issuance under
our 2000 Management and Director Equity Incentive and Compensation Plan and any
compensation plan not approved by our stockholders as of September 30, 2005.
16
Weighted Average
Shares Exercise Price
--------- ----------------
Outstanding at September 30, 2003 ............. 487,750 $2.75
Granted ....................................... 847,000 2.60
Exercised ..................................... (151,000) (2.25)
Forfeited ..................................... (327,619) (3.60)
--------- -----
Outstanding at September 30, 2004 ............. 856,131 $1.99
Granted ....................................... 470,250 1.21
Exercised ..................................... - -
Forfeited ..................................... (443,902) (2.01)
--------- -----
Outstanding at September 30, 2005 ............. 882,479 $1.55
--------- -----
Options exercisable at end of period .......... 882,479 $1.55
-------- -----
Weighted-average fair value of options granted
during the period ............................. 470,250 $1.21
Item 6. Management's Discussion and Analysis or Plan of Operation
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was released by the U.S. Securities
and Exchange Commission, encourages all companies to include a discussion of
critical accounting policies or methods used in the preparation of financial
statements. Our consolidated financial statements include a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. Management believes the following critical
accounting policies affect the significant judgments and estimates used in the
preparation of the financial statements.
Revenue Recognition - Generally, revenues from sales of products are recognized
when products are shipped unless we have obligations remaining under sales or
licensing agreements, in which case revenue is either deferred until all
obligations are satisfied or recognized ratably over the term of the contract.
We use the Percentage of Completion method to recognize revenue and expense from
contracts extending through fiscal quarters. Revenue from services is recorded
each month as it is earned. Customers are generally billed every two weeks based
on the units of production for the project. Each project has an estimated total
which is based on the estimated units of production and agreed upon billing
rates.
Use of Estimates - Management's discussion and analysis of financial condition
and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
evaluates these estimates, including those related to allowances for doubtful
accounts receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis of making judgments about the carrying value of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
17
OVERVIEW
We provide hosted web-based collaboration solutions that enable organizations to
establish Internet, Intranet, and email/collaboration services immediately and
with little or no up-front capital investment. Our portal and IceMAIL
collaboration software services are available on a monthly or annual
subscription basis to small and medium-sized businesses and non-profit and
government organizations. We also provide consulting services to our larger
enterprise and government customers including network infrastructure, enterprise
email/collaboration, and Internet/Intranet portal implementation and support
services. We offer pre-packaged and custom services, using proven best practices
to help organizations define their online business objectives and quickly deploy
their Internet, Intranet, and email/collaboration systems. Although most of our
small to medium-sized business customers purchase and activate our solutions
online, our professional services teams work closely with our government,
non-profit and larger customers to deploy customized solutions. We also market
an array of information technology services and third party computer hardware
and software.
Our history and acquisition strategy has been key in our growth as a company. We
began as a full service provider of computer systems and professional services
to private sector corporations and to the federal government under a General
Services Administration (GSA) schedule contract for computer systems and
peripherals. Beginning in 2001, we began a series of strategic acquisitions
which have resulted in our current business and operations, including:
o in June 2001, we acquired the assets of Learning Stream, Inc., a
provider of digital content streaming services, which coincided with
the transition of our business model to a focus on e-learning. Learning
Stream had developed custom streaming solutions which we believed were
more efficient and effective thank the solutions we had implemented at
that time. We considered the software we acquired to be competitive
because it helped remove the complexity and unnecessary cost from the
implementation of the streaming technology,
o in June 2003, we acquired all of the outstanding stock of Interlan
Corporation, a provider of data communications and networking solutions
for business, government, and education. Interlan provided technical
services including presales design and consulting, installation,
troubleshooting, and long term maintenance and support contracts,
o in June 2003, we also acquired all of the outstanding stock of The
Seven Corporation, a provider of network engineering services to
commercial and government customers throughout the United States,
o in October 2003, we acquired the software ownership rights and
customers of Iplicity, Inc. of Virginia. Iplicity had developed a
complete content management software platform based on open source
architecture to run in any operating environment. In this transaction
we acquired software licenses, source code, potential patents and
trademarks, and
o in May 2004 we acquired substantially all of the assets of DevElements,
Inc. of Virginia, a professional IT consultancy firm that designs,
develops and implements web-based productivity solutions for the
customers. In this transaction we acquired software licenses, source
code, potential patents and trademarks, as well as some cash and
tangible assets.
We generate revenues from sales of software licenses and provision of software
application services, application development and network management services
and integrated technology, infrastructure solutions and third party hardware
sales. As a result of the growth of our company both through acquisitions and
organically, we significantly increased both our revenues and expenses during
fiscal 2004. During fiscal 2005 we capitalized on our growth through these
acquisitions to organically grow our company and introduce new products. As a
result of this growth, and as described elsewhere herein, we anticipate that
both revenues and expenses will continue to increase in future periods.
We believe that the key factors to our continued growth and profitability
include the following:
o the introduction of our IceWEB Vista portal software which was
released to general availability during June 2005. IceWEB Vista is a powerful
tool for efficient website management, built upon open source architecture
(.Net) that allows users to quickly, easily and affordably update their Web
content and site structure,
18
o the launch of IceMAIL, a packaged service that provides a
network-hosted groupware, email, calendaring, and collaboration solution
utilizing Microsoft Exchange 2003, the most widely used enterprise system
available, which was released in December 2005. Customers will be able to
leverage the full capabilities of Microsoft Exchange 2003 and Outlook without
the initial implementation and maintenance costs associated with such an
advanced system. We plan a launch of IceMAIL before the end of fiscal 2005,
o raising approximately $4 million of additional working capital to
expand our marketing, support our growth and for an acquisition of an additional
company in the software services group,
o hiring additional qualified, technical employees, and
o improving our internal financial reporting systems and processes.
While we launched the first of our new software offering during June 2005 and
our second in December 2005, and the sale of these products are the focus of our
business, we face a number of challenges in other areas which we believe are key
to our growth, many of which are beyond our control. We have not identified any
potential acquisition candidates and do not have any firm commitments for
additional working capital as of the date of this annual report, and we cannot
assure you that we will be successful in either undertaking. While we recently
hired a Chief Financial Officer and intend to implement upgrades to our internal
systems, we face continuing difficulties in locating sufficient qualified
technical personnel. Our company is located in the "Tech Corridor" of Northern
Virginia and we compete with a number of companies for employees, many of which
have been in business longer than we have and which are more attractive to
prospective employees. Our inability to accomplish one or more of these key
goals may limit our growth in future periods.
RESULTS OF OPERATIONS
REVENUES
We generate revenues from application network management services and
integration technology, infrastructure solutions and third party hardware sales.
For the year ended September 30, 2005, we generated revenues of $6,809,590
compared to $6,662,652 for the prior year ended September 30, 2004, an increase
of approximately 3%.
COST OF SALES
Our cost of sales consists of products purchased for resale, salaries of
technical personnel, third party contractors, hosting and sales commissions. For
the year ended September 30, 2005, cost of sales was $4,753,276 or approximately
70% of revenues, compared to $5,015,494, or approximately 75% of revenues, for
the prior year ended September 30, 2004. The primary reason for the increase in
our gross margin percentages from the prior fiscal year is that over the course
of the year, we increased the commission revenue as a percentage of total
revenue compared to infrastructure and hardware revenue.
TOTAL OPERATING EXPENSES
Our total operating expense decreased approximately 21% for the year ended
September 30, 2005 as compared to the year ended September 30, 2004. These
decreases include:
Research and Development expense in the amount of $154,734 was capitalized for
the development of our Vista software and IceMAIL hosting services.
General and administrative expense - our general and administrative expense
consists primarily of personnel costs, rent, legal, accounting, human resources,
telecommunications, office supplies and corporate governance and compliance.
These expenses remained relatively unchanged for the year ended September 30,
2005 and 2004. As we continue to implement our business strategies, we expect
general and administrative expenses to potentially decrease as a percentage of
sales due to the process efficiencies we have already put in place. At this
time, we do not anticipate any significant changes in the number of employees
through hiring or firing practices, however, any additional acquisitions could
result in increased general and administrative expenses.
DEPRECIATION EXPENSE
Depreciation expense is provided by use of the straight-line method over the
estimated useful lives of the assets. The property and equipment are stated at
cost. For the year ended September 30, 2005, depreciation expense was $51,096 as
compared to $52,716 for the prior year ended September 30, 2004.
19
INTEREST EXPENSE
Interest expense consists primarily of the amounts accrued on the notes payable
to a third party shareholder as described in Note 5 of the Notes to Consolidated
Financial Statements and the interest paid to Comerica Bank on the line of
credit as described in Note 6 of the Notes to Consolidated Financial Statements,
appearing elsewhere herein. For the year ended September 30, 2005 interest
expense was $94,540 as compared to $60,879 for the prior year ended September
30, 2004.
AMORTIZATION EXPENSE
Amortization expense for intangibles is provided by use of the straight-line
method for developed software and the expected cash flow method for customer
relationship capitalized at the date of acquisitions.
INCOME TAXES
Because we incurred net operating losses in the years ended September 30, 2005
and 2004, we paid no federal, state or foreign income taxes in those periods. We
have also not recognized any tax benefits for the related tax operating loss
carry forwards and may not until we conclude that such benefits will be
utilized.
Overall, our loss was ($903,508) or ($.15) per share for the fiscal year ended
September 30, 2005 compared to ($2,035,443) or ($.41) for the prior year ended
September 30, 2004. The decreased loss per share in 2005 is due primarily to the
decreased expenses and the increase in gross margin.
As we continue to implement our plan of operation, we expect general and
administrative expenses to remain nearly flat and actually decrease as a
percentage of sales due to the process efficiencies we have already put in
place.
In order for the company to continue its current exponential growth rates and
secure market position, the Company will need to raise additional capital. There
are no assurances that the Company will obtain the additional capital.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, we had a cash balance of $557,175 and a working capital
surplus of $319,137. The report of our independent auditors on our financial
statements for the year ended September 30, 2005 contains an explanatory
paragraph regarding our ability to continue as a going concern. Net cash used in
operations was ($920,515) for the year ended September 30, 2005, as compared to
net cash used in operations of ($794,861) for the prior year ended September 30,
2004. For the year ended September 30, 2005, we used cash to fund our loss of
($903,508) offset by non-cash items such as depreciation expense of $51,096,
amortization expense of $782,764.
Our operations continue to use more cash than they currently generate. We have
expended funds not only for our continuing operations but to fund research and
development costs associated with our software. We currently do not have any
commitments for capital expenditures. Because of the continued need for
substantial amounts of working capital to fund the growth of the business and to
pay our operating expenses, we expect to experience negative operating and
investing cash flows for the foreseeable future. While we presently expect an
increase in software and network engineering services as well as third party
hardware sales into fiscal 2006, which would have a positive effect on the
operating cash flow, as a result of the current uncertainty of the these
revenues it is likely that our existing working capital will not be sufficient
to fund the continued implementation of our plan of operation during the next 12
months and to meet our capital commitments and general operating expenses. We
are unable to predict at this time the exact amount of additional working
capital we will require, however, in order to provide any additional working
capital which we may require, we will in all likelihood be required to raise
additional capital through the sale of equity or debt securities. We currently
have no commitments to provide us with any additional working capital and there
are no assurances additional working capital will be available to us when
needed, if at all. If we do not have sufficient working capital to fund our
ongoing operations, our ability to implement our business model and continue to
grow our company will be adversely affected.
Recent Capital Raising Transaction
As described later in this annual report under Item 8B., in December
28, 2005, we consummated the sale of 1,833,333 shares of our Series B
Convertible Preferred Stock to Barron Partners, L.P. for a purchase price of
$500,000. While the transaction was pending we had received an advance on the
purchase price which is reflected in our balance sheet at September 30, 2005
under current liablilities as "preferred stock to be issued." With the closing
of this transaction this liability has been satisfied and the proceeds are being
used by us for general working capital.
20
ITEM 7. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
IceWEB, Inc.
We have audited the accompanying consolidated balance sheet of IceWEB, Inc. and
Subsidiaries as of September 30, 2005 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
September 30, 2005 and 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IceWEB,
Inc. and Subsidiaries, as of September 30, 2005 and the consolidated results of
their operations and their cash flows for the years ended September 30, 2005 and
2004, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 13 to
the consolidated financial statements, the Company had net losses in operations
of $903,508 and $2,035,443 respectively, for the years ended September 30, 2005
and 2004. These matters raise substantial doubt about the company's ability to
continue as a going concern. Management's plans in regards to these matters are
also described in Note 13. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
January 12, 2006
21
IceWEB, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEET
September 30, 2005
------------------
Assets
Current assets:
Cash .................................................................. $ 557,175
Accounts receivable, net of allowance for bad debt of $5,846 .......... 1,577,460
Prepaid expense ....................................................... 25,979
Advances .............................................................. 61,302
-----------
Total current assets .................................................. 2,221,916
Non-current assets:
Property and equipment, net ........................................... 259,852
Goodwill .............................................................. 41,800
Deposits .............................................................. 16,170
Customer relationships, net of accumulated amortization of $1,711,199 . 68,525
Deferred financing costs, net of accumulated amortization of $20,000 .. 180,000
------------------------------------------------------------------------------- -----------
Total Assets .................................................................. $ 2,788,263
------------------------------------------------------------------------------- -----------
Liabilities and Stockholders' equity
Current liabilities:
Note payable .......................................................... $ 461,269
Accounts payable ...................................................... 904,910
Accrued expenses ...................................................... 37,488
Deferred revenue ...................................................... 4,275
Advances from related party ........................................... 86,001
Preferred stock to be issued .......................................... 408,836
Total current liabilities ..................................................... 1,902,779
Non-current liabilities
Note payable - related party .......................................... 215,625
------------------------------------------------------------------------------- -----------
Total Liabilities ............................................................. 2,118,404
------------------------------------------------------------------------------- -----------
Stockholders' equity:
Preferred stock (par value $.001; 1,000,000 shares authorized; Series A
Convertible Preferred Stock, par value .001, 1,666,667 shares issued and
1,666,667 shares outstanding) ............................................... 1,667
Common stock (par value $.001 1,000,000,000 shares authorized) 6,492,287
issued, and 6,329,787 outstanding ............................................. 6,493
Stock subscription receivable ................................................. (143,477)
Additional paid in capital .................................................... 7,318,831
Accumulated deficit ........................................................... (6,500,655)
Treasury Stock, at cost, (162,500 shares) ..................................... (13,000)
-----------
Total Stockholders' Equity .................................................... 669,859
------------------------------------------------------------------------------- -----------
Total Liabilities and Stockholders' Equity .................................... $ 2,788,263
------------------------------------------------------------------------------- -----------
See accompanying notes to consolidated financial statements
22
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 30, 2005 and 2004
2005 2004
--------------------------------
Revenue ....................................... $ 6,809,590 $ 6,662,652
Cost of sales ................................. 4,753,276 5,015,494
--------------------------------------------------------------------------------
Gross profit .................................. 2,056,314 1,647,158
Operating expenses:
Marketing and selling .................... 56,538 125,414
Stock compensation expense ............... - 2,600
Research and development ................. - 580,053
Depreciation expense ..................... 51,096 52,716
General and administrative ............... 1,994,168 1,947,392
Amortization expense ..................... 782,764 948,435
--------------------------------------------------------------------------------
Total operating expense ....................... 2,884,566 3,656,610
Operating loss ................................ (828,252) (2,009,452)
Rental revenue ................................ 19,284 34,888
Interest expense .............................. (94,540) (60,879)
--------------------------------------------------------------------------------
Net loss ...................................... $ (903,508) $ (2,035,443)
--------------------------------------------------------------------------------
Basic and diluted loss per share .............. $ (0.15) $ (0.41)
--------------------------------------------------------------------------------
Weighted average common shares
outstanding - basic and diluted .............. 5,865,935 5,049,368
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
23
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended September 30, 2005 and 2004
Common Stock Preferred Stock Treasury Stock
------------------ ----------------- Subscription Additional Accumulated -------------------
Shares Amount Shares Amount Receivable Paid-In Deficit Share Amount Total
--------- ------ --------- ------ ------------ ---------- ----------- -------- -------- -----------
Balance at
September 30,
2003 ......... 4,512,610 $4,513 - - $ - $2,315,291 $(2,561,704) - $ - $ (241,900)
Sale of common
stock ........ 390,000 390 - - - 413,210 - - - 413,600
Common stock
issued in
acquisitions . 378,881 379 - - - 1,706,109 - - - 1,706,488
Common stock
issued for the
exercise of
common stock
options ...... 151,000 151 - - (52,000) 137,160 - - - 85,311
Common stock
issued for
settlement ... 1,250 1 - - - 2,599 - - - 2,600
Common stock
cancelled .... (3,750) (4) - - - 4 - - - -
Treasury stock - - - - - - - (162,500) (13,000) -
Net loss for
the year ..... - - - - - - (2,035,443) - - (2,035,443)
---------------------------------------------------------------------------------------------------------------------------------
Balance at
September 30,
2004 ......... 5,429,991 $5,430 - - $ (52,000) $4,574,373 $(4,597,147) (162,500) $(13,000) $ (82,344)
Preferred A
stock issued . - - 1,666,667 1,667 844,169 - - - 845,836
for cash
Preferred A
Stock Dividend - - - - - 1,000,000 (1,000,000) - - -
Common stock
issued ....... 503,129 503 - - - 469,477 - - - 469,980
Common stock
issued in
satisfaction
of liabilities 541,667 542 - - (91,477) 403,230 - - - 312,295
Common stock
issued for
exercise of
common stock
options ...... 17,500 (18) - - - 27,582 - - - 27,600
Net loss for
the year ..... - - - - - - (903,508) - - (903,508)
=================================================================================================================================
Balance at
September 30,
2005 ......... 6,492,287 $6,493 1,666,667 1,667 $(143,477) $7,318,831 $(6,500,655) (162,500) $(13,000) $ 669,859
=================================================================================================================================
See accompanying notes to consolidated financial statements
24
IceWEB, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 30, 2005 and 2004
2005 2004
----------- -----------
CASH FLOWS FROM OPERATIONS:
Net Loss ..................................... $ (903,508) $(2,035,443)
Adjustments to reconcile net loss to net cash used
in operating activities:
Common stock and options issued for settlement - 2,600
Depreciation and amortization ................ 833,860 1,001,151
Interest from stock issued for note payable .. 37,500 -
Changes in operating assets and liabilities:
(Increase) decrease in:
----------------------------------------------------
Accounts receivable .......................... (514,753) (672,934)
Prepaid expense .............................. (25,979) 8,056
Advances ..................................... (61,302) -
Deposits ..................................... - (3,505)
Increase (decrease) in:
----------------------------------------------------
Accounts payable ............................. (156,489) 856,363
Accrued expense .............................. (115,089) 43,236
Deferred revenue ............................. (14,755) 5,615
---------------------------------------------------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .............. (920,515) (794,861)
---------------------------------------------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........... (224,698) (10,183)
Cash acquired in acquisitions, net ........... - 37,637
Increase in Intangibles ...................... (8,526) -
---------------------------------------------------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (233,224) 27,454
---------------------------------------------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from line of credit ... - 334,269
Payments to related parties .................. (219,616) (43,805)
Proceeds from Preferred Stock to be issued ... 408,836 -
Proceeds from related party .................. - 65,499
Common stock issued for cash ................. 469,477 413,600
Preferred stock issued for cash .............. 845,836 -
Exercise of common stock options ............. 27,600 85,311
Purchase of treasury stock ................... - (13,000)
---------------------------------------------------- ----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .......... 1,532,133 841,874
---------------------------------------------------- ----------- ----------
NET INCREASE IN CASH ............................... 378,394 74,467
CASH - beginning of year ........................... 178,781 104,314
CASH - end of year ................................. $ 557,175 $ 178,781
Non-cash investing and financing activities:
Common stock issued for debt and interest........... $ 270,000
Common stock issued for subscription receivable..... $ 143,177
Cash paid for interest.............................. $ 28,725
See accompanying notes to consolidated financial statements
25
ICEWEB, INC and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended September 30, 2005 and 2004
NOTE 1 - ORGANIZATION
IceWEB, Inc. began trading publicly in April 2002. In June 2003, the Company
added two subsidiaries, acquiring all of the outstanding stock of Interlan
Communications Incorporated and The Seven Corporation. Interlan is a full
service provider of computer equipment and integration services. The Seven
Corporation provides network engineering services. On October 5, 2003, the
Company acquired the software ownership rights and customers of Iplicity, Inc.
of Virginia. Iplicity had developed a complete content management software
platform based on open source architecture to run in any operating environment.
On May 13, 2004, the Company, through its wholly owned subsidiary Propster,
Inc., acquired substantially all of the assets of DevElements, Inc. of Virginia.
DevElements is a professional IT consultancy firm that designs, develops and
implements web-based productivity solutions for customers. Utilizing resources
gained through acquisitions, the company has developed two applications that are
now available to the general public, IceWEB Vista which is a website portal
development and management application, and IceMAIL which is a hosted Microsoft
Exchange application service. In addition to the new application services,
IceWEB also continues to provide customers with systems integration, network
consulting, and customized software application services.
On October 13, 2004, the Company affected a 10:1 forward split of its common
stock. Additionally, the Company amended its Articles of Incorporation to
increase its authorized number of shares to 1,000,000,000. All amounts presented
in these financial statements have been retroactively restated to give effect to
the forward split of the Company's stock.
On April 27, 2005, the Company affected a 1:80 reverse split of its issued and
outstanding common stock. All amounts have been retroactively adjusted to
reflect this split.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(b) Accounts Receivable
Accounts Receivable consists of normal trade receivables. The Company recorded a
bad debt allowance of $5,846 for the year ended September 30, 2005. Management
performs ongoing evaluations of its accounts receivable and customer base.
Management believes that all remaining receivables are fully collectable. Bad
debt expense is $3,127 and $20,086 for the years ended September 30, 2005 and
2004, respectively.
(c) Revenue Recognition
Generally, revenues from sales of products are recognized when products are
shipped unless the Company has obligations remaining under sales or licensing
agreements, in which case revenue is either deferred until all obligations are
satisfied or recognized ratably over the term of the contract. Revenue from
services is recorded each month as it is earned. Commissions earned on third
party sales are recorded in the month in which contracts are awarded. Customers
are generally billed every two weeks based on the units of production for the
project. Each project has an estimated total which is based on the estimated
units of production and agreed upon billing rates.
(d) Property and Equipment
Property and equipment are stated at cost, and depreciation is provided by use
of the straight-line method over the estimated useful lives of the assets.
(e) Earnings Per Share
The Company computes earnings per share in accordance with Statement of
Accounting Standards No. 128, "Earnings per Share ("SFAS No. 128"). Under the
provisions of SFAS No. 128, basic earnings per share is computed by dividing the
net income (loss) for the period by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing the net income (loss) for the period by the weighted average number of
common and potentially dilutive common shares outstanding during the period.
26
Potentially dilutive common shares consist of the common shares issuable upon
the exercise of stock options and warrants (using the treasury stock method) and
upon the conversion of convertible preferred stock (using the if-converted
method). Potentially dilutive common shares are excluded from the calculation if
their effect is antidilutive.
(f) Stock Based Compensation
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations including FASB Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation an
interpretation of APB Opinion No. 25" issued in March 2000, to account for its
fixed plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123 and SFAS No. 148, "Accounting for
Stock-Based compensation," established accounting and disclosure requirements
using a fair value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No.
148.
(g) Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the balance sheets and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
(h) Goodwill and Intangible Assets
Goodwill represents the amount by which the purchase price of a business
acquired exceeds the fair market value of the net assets acquired under the
purchase method of accounting. The Company assesses whether its goodwill and
other intangible assets are impaired as required by SFAS No. 142, "Accounting
for the Impairment of Long-Lived Assets," based on an evaluation of undiscounted
projected cash flows through the remaining amortization period. If impairment
exists, the amount of such impairment is calculated based on the estimated fair
value of the asset. Customer relationships have been book as intangible assets
and amortized over the life of the customer contracts. The Company has amortized
these intangible assets in the amount of $762,764 and $948,435 respectively, for
the year ended September 30, 2005 and 2004. The Company has not recognized any
impairment of goodwill during the year ended September 30, 2005 and 2004.
(i) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS 153 "Exchanges of Non-Monetary Assets" -
an amendment of APB Opinion No. 29. This Statement amended APB Opinion 29 to
eliminate the exception for non-monetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of non-monetary assets
that do not have commercial substance. A non-monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The adoption of this Standard is not
expected to have any material impact on the Company's financial position,
results of operations or cash flows.
In December 2004, the FASB issued SFAS 123 (revised 2004) "Share-Based Payment".
This Statement requires that the cost resulting from all share-based
transactions be recorded in the financial statements. The Statement establishes
fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
in accounting for share-based payment transactions with employees. The Statement
also establishes fair value as the measurement objective for transactions in
which an entity acquires goods or services from non-employees in share-based
payment transactions. The Statement replaces SFAS 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting for
Stock Issued to Employees". The provisions of this Statement will be effective
for the Company beginning with its fiscal year ending in 2007. The Company is
currently evaluating the impact this new Standard will have on its financial
position, results of operations or cash flows.
(j) Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations.
27
NOTE 3 - PROPERTY AND EQUIPMENT
The major classes of property and equipment are as follows:
ESTIMATED
USEFUL LIFE 9/30/2005
----------- -----------
Computer equipment 3 years $ 223,369
Computer software 3 years 163,314
Furniture and fixtures 5 years 30,133
Vista and IceMAIL Software 3 years 154,734
Electrical generator equipment 5 years 45,000
-----------
Total property and equipment 616,550
Less: accumulated depreciation (356,698)
-----------
Property and equipment, net $ 259,852
===========
Depreciation expense for the years ended September 30, 2005 and 2004 was $51,096
and $52,716 respectively.
NOTE 4 - OPERATING LEASES
The Company leases office space in Herndon, VA. Total rental expense for the
years ended September 30, 2005 and 2004 was $152,921 and $103,037, respectively.
The Company also leases facilities for one of its subsidiaries at $2,100 per
month. This lease continues through June 30, 2006.
The Company has lease agreements with Dell Financial, for computer equipment,
and one lease with GE Capital for an office copy and fax machine. These leases
were entered into by the companies acquired during the year. The total minimum
lease obligation for the office space and equipment leases combined for the next
five fiscal years is as follows:
Fiscal Year Amount
----------- ------
2006 $ 45,488
2007 $ 45,488
2008 $ 26,535
2009 $ -
2010 $ -
----------
$ 117,511
==========
NOTE 5 - RELATED PARTY TRANSACTIONS
A Stockholder has a loan totaling $150,000 plus accrued interest of
approximately $65,625. Of this amount, $150,000 bears interest at a rate of
12.5% per annum. The Company has issued the note holder 125,000 shares of common
stock in exchange for the individual to extend the maturity date of the note by
10 years to September 30, 2014. The cost associated with these shares has been
accounted for as deferred finance charges, and are being amortized over the life
of the deferral period. The shares were valued at $200,000 the fair value at the
date of issuance. An employee has a loan totaling $61,602 payable on demand
along with 6% annual interest. This item is shown separately on the balance
sheet as employee advances. This employee is not an executive officer of the
company.
The Chief Executive Officer of the Company, from time to time, provides advances
to the Company for operating expenses. These advances are short-term in nature
and non-interest bearing.
28
NOTE 6 - NOTE PAYABLE
On July 21, 2004, the Company entered into a Loan and Security agreement with
Comerica Bank, to obtain a revolving credit line in the amount of $500,000. At
September 30, 2005, the amount outstanding was $461,269. The term of the
agreement is 364 days from the date of closing. The Company has extended the
term of the agreement through December 31, 2005. The terms of the agreement
gives Comerica Bank a first position on the Company's assets. In addition this
note is collateralized by the assets of the Company. Advances on the credit line
bear interest at a variable rate equal to one (1) percentage point above the
Prime Rate. The Prime Rate is defined as that most recently announced by
Comerica Bank as its "prime rate", whether or not such rate is the lowest
available from the Bank. The agreement includes financial covenants for a Quick
Ratio of at least 1.00 to 1.00 and Tangible Net Worth of $390,000 through
January 30, 2006. The Tangible Net Worth increases incrementally thereafter.
At September 30, 2005, the Company does meet the financial covenants for Quick
Ratio and Tangible Net Worth. The Company did not meet these covenants during
the year and on November 18, 2004, the Company executed a Forbearance and
Consent agreement with Comerica Bank, which recognizes the default and contains
certain forbearances by the Bank from enforcing rights and exercising remedies
in connection with the default. This forbearance has been extended to December
31, 2005. On December 23, 2005, the Company entered into a credit facility for
$1,000,000 with Sand Hill Finance which effectively closed the facility with
Comerica Bank.
NOTE 7 - CONCENTRATION OF CREDIT RISK
The Company maintains its cash bank deposits at various financial institutions
which, at times, may exceed federally insured limits. Accounts are guaranteed by
the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At September
30, 2005 the Company had approximately $522,204 in excess of FDIC insured
limits. The Company has not experienced any losses in such accounts.
NOTE 8 - MAJOR CUSTOMERS
Sales to two customers represented approximately 37% and 34% of total sales for
the years ended September 30, 2005 and 2004, respectively. As of September 30,
2005 approximately 53% of the Company's accounts receivable were due from these
two customers.
NOTE 9 - INCOME TAXES
As of September 30, 2005 the Company had an unused net operating loss carry
forward of approximately $4,881,102 available for use on its future corporate
federal tax returns. The Company's evaluation of the tax benefit of its net
operating loss carry forward is presented in the following table. The tax
amounts have been calculated using the Company's effective income tax rate
resulting from the use of graduated rates.
2005
----
Deferred tax asset:
Tax benefit of net operating loss carry forward $ 1,835,294
Less: valuation allowance (1,835,294)
-------------
Total deferred tax asset $ -
=============
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for fiscal 2005:
2005
----
Computed "expected" tax expense (benefit) (34.0)%
State income taxes (3.6)%
Change in valuation allowance 37.6%
Effective tax rate 0.0%
The effective tax rate is 34% Federal and 6% Virginia State reduce by 2.4%
Federal tax benefit.
Net operating loss carry forward expires between 2021 and 2025. The utilization
of the above loss carry forwards, for federal income tax purposes may be subject
to limitations resulting from changes in ownership.
29
NOTE 10 - STOCKHOLDERS' EQUITY
During the year ended September 30, 2005, the Company sold 503,129 shares of
common stock to accredited investors for $469,477 exempt from registration
pursuant to Section 4(2). The investors were sophisticated and had access to the
consolidated financial statements of the corporation. The Company issued 541,667
shares of common stock for cash and in exchange for or assumption of liabilities
in the total amount of $403,230. During the year ending September 30, 2004, the
Company sold 390,000 shares of common stock for $413,600.
During the year ended September 30, 2005, 17,500 shares of common stock were
issued in connection with the exercise of stock options.
The Company issued 470,250 stock options to employees under the Company's stock
option plan (See Note 12).
During the year ended September 30, 2004, the Company sold 390,000 shares of
common stock to accredited investors for $413,600 exempt from registration
pursuant to Section 4(2). The investors were sophisticated and had access to the
consolidated financial statements of the corporation. During the year ending
September 30, 2003, the Company sold 596,250 shares of common stock for
$422,000.
On October 4, 2003, the Company issued 191,381 shares of common stock as part of
the acquisition agreement with Iplicity, Inc (See Note 10).
On May 13, 2004, the Company issued 187,500 shares of common stock as part of
the acquisition agreement with DevElements, Inc.
The Company is authorized to issue 10,000,000 shares of Series A Preferred
Stock, par value $.001, with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. During the year ended
September 30, 2005, the Company sold 1,666,667 shares of preferred stock for
$845,836. There are currently 1,666,667 shares of Series A Preferred Stock
issued and outstanding.
NOTE 11 - STOCK OPTION PLAN
During March 2002, the Company adopted the "Management and Director Equity
Incentive and Compensation Plan." The maximum number of shares authorized and
available under the plan is 1,250,000 shares. Under the terms of the plan, the
options expire after 5 years, as long as the employees remain employed with the
Company. The following is a summary of option activity for the years ended
September 30, 2005:
A summary of the status of the Company's outstanding stock options as of
September 30, 2005 and changes during the period ending on that date is as
follows:
Weighted Average
Shares Exercise Price
-------- ----------------
Outstanding at September 30, 2003 .............. 487,750 $2.75
Granted ........................................ 847,000 1.21
Exercised ...................................... (151,000) (2.25)
Forfeited ...................................... (327,619) (2.01)
-------- -----
Outstanding at September 30, 2004 .............. 856,131 $1.99
Granted ........................................ 470,250 1.21
Exercised ...................................... - -
Forfeited ...................................... (443,902) (2.01)
-------- -----
Outstanding at September 30, 2005 ............... 882,479 $1.55
-------- -----
Options exercisable at end of period ........... 882,479 $1.55
-------- -----
Weighted-average fair value of options granted
during the period .............................. 470,250 $1.21
30
Common stock warrants
---------------------
The following information applies to all warrants outstanding at September 30,
2005:
Warrants Outstanding Warrants Exercisable
---------------------------- ---------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Life Exercise Exercise
Prices Shares (Years) Price Shares Price
-------- --------- ---------------- -------- --------- --------
$ 0.70 175,000 4.5 $ 0.70 175,000 $ 0.70
$ 2.00 2,000,000 4.5 $ 2.00 2,000,000 $ 2.00
$ 4.80 1,250,000 4.5 $ 4.80 1,250,000 $ 4.80
$ 9.60 1,250,000 4.5 $ 9.60 1,250,000 $ 9.60
$ 4.00 250,000 2.25 $ 4.00 250,000 $ 4.00
$ 8.00 250,000 4.25 $ 8.00 250,000 $ 8.00
$ 2.40 58,750 7 months $ 2.40 58,750 $ 2.40
$ 4.80 58,750 7 months $ 4.80 58,750 $ 4.80
$ 8.00 58,750 7 months $ 8.00 58,750 $ 8.00
$16.00 58,750 7 months $16.00 58,750 $16.00
$ 2.00 5,000 5.75 $ 2.00 5,000 $ 2.00
$ 4.00 37,500 2.25 $ 4.00 37,500 $ 4.00
$ 8.00 37,500 4.25 $ 8.00 37,500 $ 8.00
The employee option grants provide that the option will be canceled ninety days
after an employee leaves employment with the Company.
SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") and SFAS No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
148") requires the Company to disclose pro forma information regarding option
grants made to its employees. SFAS 123 specifies certain valuation techniques
that produce estimated compensation charges that are included in the pro forma
results below. These amounts have not been reflected in the Company's Statement
of Operations, because Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," specifies that no compensation charge arises when
the price of the employees' stock options equal the market value of the
underlying stock at the grant date, as in the case of options granted to the
Company's employees
SFAS No. 123 pro forma results are as follows for the fiscal year periods ended
September 30, 2005 and 2004:
2005 2004
---- ----
Actual net loss $ 903,508 $ 2,035,443
SFAS 123 Compensation Cost 380,479 237,198
----------- -----------
Pro forma net loss $ 1,283,987 $ 2,272,641
=========== ===========
Proforma basic and diluted 2005 net loss per share $ (0.22) $ (0.08)
=========== ===========
Under SFAS 123, the fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following weighted
average assumptions were used:
Risk free interest rate 4%
Expected dividends 0
Volatility factor 111%
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of the Company's options.
31
NOTE 12 - SIGNIFICANT CUMSTOMER INFORMATION AND SEGMENT REPORTING
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, establishes standards for the reporting by business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments with IceWEB
for making operational decisions and assessments of financial performance.
IceWEB's chief operating decision-maker is considered to be the chief executive
officer (CEO). The CEO reviews financial information presented on a consolidated
basis for purposes of making operating decisions and assessing financial
performance. The financial information reviewed by the CEO is identical to the
information presented in the accompanying consolidated statements of operations.
Therefore, IceWEB has determined that it operates in a single operating segment,
specifically, web communications services. For the periods ended September 30,
2005 and 2004 all material assets and revenues of IceWEB were in the United
States.
NOTE 13 - GOING CONCERN
The Company's auditors stated in their reports on the financial statements of
the Company for the years ended September 30, 2004 and 2003 that the Company is
dependent on outside financing and has had losses since inception that raise
substantial doubt about our ability to continue as a going concern.
For the year ended September 30, 2005, the Company incurred net annual losses of
($903,508) and used cash in operations of $920,515. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded assets, or the amounts and classification of liabilities that might
be necessary in the event the Company cannot continue in existence.
Management has established plans intended to increase the sales of the Company's
products and services. Management intends to seek new capital from new equity
securities offerings to provide funds needed to increase liquidity, fund growth
and implement its business plan; however, no assurance can be given that the
Company will be able to raise any additional capital.
NOTE 14 - CONTINGENCIES
From time to time the Company faces litigation in the ordinary course of
business. Currently, we are involved with litigation with two prior employees,
which in our opinion will not have a material adverse effect on our financial
condition. The two related lawsuits have been filed against the Company in the
Circuit Court of Fairfax County, Virginia, captioned Bonnie Edenfield vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4303; and Christopher MacDonald vs.
IceWEB, Inc., et al., Chancery No. CH 2005 4304. Both suits are brought by
former shareholders of DevElements, Inc., the assets of which were purchased by
a Company subsidiary. Edenfield and MacDonald were parties to the asset purchase
agreement between DevElements and the Company subsidiary. The plaintiffs seek
money damages from the Company for alleged breach of the asset purchase
agreement, and damages related to stock options. The Company intends to
vigorously defend this litigation. The Company believes the litigation is
without merit.
NOTE 15 - SUBSEQUENT EVENTS
On December 23, 2005, the Company entered into a credit facility for $1,000,000
with Sand Hill Finance which effectively closed the facility with Comerica Bank.
On December 28, 2005, the Company consummated the sale of 1,833,333 shares of
Series BConvertible Preferred Stock to Barron Partners, L.P.and issued the
purchaser common stock purchase warrants to purchase an aggregate of 2,250,000
shares of the Company's common stock for an aggregate purchase price of
$500,000. The purchase price was paid through the satisfaction of a liability to
Barron Parnters, L.P. for funds advanced to the Company in September 2005.
In the event the Company sells, grants or issues any shares, options, warrants,
or any instrument convertible into shares or equity in any form below $2.00 per
share the warrant exercise price shall be reduced proportionately. For example,
if the Company sells, grants or issues any shares, options, warrants, or any
instrument convertible into shares or equity in any form at $1.60 per share, or
20% below $2.00 per share, then the warrant exercise price shall be reduced by
20%. Such reduction shall be made at the time such transaction is made, and
shall be cumulative upon any other changes to the exercise of the warrant that
may already have been made.
32
No exercise of any warrant can occur if the exercise would result in the holder,
Barron Partners LP, and any of its affiliates beneficially owning more than 4.9%
of our outstanding common shares following such conversion. Barron Partners LP
may waive this provision only with the consent of all of the Series B Preferred
Stock Holders and the consent of the holders of a majority of the shares of
outstanding Common Stock of the Company who are not affiliates.
All of these five-year warrants are exercisable on a cashless basis which means
that the holders, rather than paying the exercise price in cash, may surrender a
number of warrants equal to the exercise price of the warrants being exercised.
The utilization of this cashless exercise feature will deprive us of additional
capital which might otherwise be obtained if the warrants did not contain a
cashless feature.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In November 2005 we restated our Consolidated Balance Sheet (unaudited)
at June 30, 2005 and its Consolidated Statement of Operations (unaudited) for
the three and nine months ended June 30, 2005 and Consolidated Statement of Cash
Flows (unaudited) for the nine months ended June 30, 2005 which appeared in our
Quarterly Report on Form 10-QSB for the period ended June 30, 2005 as previously
filed with the Securities and Exchange Commission. These restatements were made
to reflect a change in classification of assets relating to the acquisition of
The Seven Corporation, Iplicity, Inc. and DevElements, Inc. per SFAS 141.
Amounts previously recorded as goodwill were reclassified as intangible assets
which resulted in recording amortization expense of these intangible assets in
the period ended June 30, 2005. The restatements resulted from comments from the
staff of the Securities and Exchange Commission.
As a result of these restatements and the amortization of these
intangible assets, the amount of the Company's total assets was overstated, the
amount of its additional paid-in capital and accumulated deficit was understated
and the amount of its total stockholders' equity and total liabilities and
stockholders' equity were overstated, all as which appear on its Consolidated
Balance Sheet (unaudited) at June 30, 2005 from that as previously reported. In
addition, these changes resulted in an increase of the Company's net loss for
period ended and an increase in loss available to common stockholders both as
reflected on the Company's Consolidated Statement of Operations (unaudited)
appearing elsewhere herein. Finally, the Consolidated Statement of Cash Flows
for the nine months ended June 30, 2005 was been restated to incorporate the
foregoing changes.
Because of these accounting errors, our Chief Executive Officer
previously determined that a deficiency in internal controls existed at June 30,
2005 related to the classification of goodwill and intangible assets and that
this control deficiency constituted a material weakness. Subsequent to the
restatements our management has taken the remedial steps necessary to eliminate
the material weakness relating to financial disclosure controls that resulted in
the restatement discussed above including the hiring of a full-time Chief
Financial Officer in November 2005.
Our Chief Executive Officer, who then also served as our principal
financial and accounting officer, conducted an evaluation of the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of a
date (the "Evaluation Date") as of the end of the period covered by the report.
Based upon that evaluation, our Chief Executive Officer has concluded that the
Company's disclosure controls and procedures are effective in gathering,
analyzing and disclosing information needed to satisfy the Company's disclosure
obligations under the Exchange Act.
Other than the changes discussed above, based upon the foregoing
evaluation there have been no change in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
33
ITEM 8B. OTHER INFORMATION
On December 28, 2005, we consummated a Preferred Stock Purchase
Agreement and related agreements with Barron Partners LP. Under the terms of
these agreements we issued Barron Partners LP, an accredited investor, who had
previously acquired 1,666,667 shares of our Series A Convertible Preferred
Stock, 1,833,333 shares of our Series B Convertible Preferred Stock and also
issued Common Stock Purchase Warrants "D", "E" and "F" to purchase an aggregate
of 2,250,000 shares of our common stock at exercise prices ranging from $2.00 to
$9.60 per share for an aggregate purchase price of $ 500,000.
We received net proceeds of $475,000 after payment of expenses of
$25,000 We also issued Liberty Company LLC, a broker-dealer, a Common Stock
Purchase Warrant "G" exercisable into 25,000 shares of our common stock with an
exercise price of $1.00 per share as additional compensation for its services.
The proceeds are being used for general working capital. The transaction was
exempt from registration under the Securities Act in reliance on an exemption
provided by Section 4(2) of that act. The designations, rights and preferences
of the Series B Convertible Preferred Stock provide:
o no dividends are payable on the Series B Convertible Preferred Stock.
So long as these shares are outstanding, we cannot pay dividends on our
common stock nor can we redeem any shares of our common stock,
o the shares of Series B Convertible Preferred Stock do not have any
voting rights, except as may be provided under Delaware law,
o so long as the shares are outstanding, we cannot change the
designations of the Series B Convertible Preferred Stock, create a
class of securities that in the instance of payment of dividends or
distribution of assets upon our liquidation ranks senior to or pari
passu with the Series B Convertible Preferred Stock or increase the
number of authorized shares of Series B Convertible Preferred Stock,
o the shares carry a liquidation preference of $0.2727 per share,
o each share of Series B Convertible Preferred Stock is convertible at
the option of the holder into shares of our common stock, subject to
adjustment in the event of stock splits and stock dividends, based upon
a conversion value of $0.2727 per share, and
o so long as the shares of Series B Convertible Preferred Stock are
outstanding, we cannot sell or issue any common stock, rights to
subscribe for shares of common stock or securities which are
convertible or exercisable into shares of common stock at an effective
purchase price of less than the then conversion value of the Series B
Convertible Preferred Stock
No conversion of the Series B Convertible Preferred Stock may occur if
a conversion would result in the holder, Barron Partners LP, and any of its
affiliates beneficially owning more than 4.9% of our outstanding common shares
following such conversion. Barron Partners LP may waive this provision only with
the consent of all of the Series B Preferred Stock Holders and the consent of
the holders of a majority of the shares of outstanding Common Stock of the
Company who are not affiliates.
The warrants contain a cashless exercise provision which permits the
holder, rather than paying the exercise price in cash, to surrender a number of
warrants equal to the exercise price of the warrants being exercised. The
exercise price of the warrants and the number of shares issuable upon the
exercise of the warrants is subject to adjustment in the event of stock splits,
stock dividends and reorganizations.
34
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
Name Age Positions
---- --- ---------
John R. Signorello 39 Chairman and Chief Executive Officer
G. Anthony Munno 43 President
James M. Bond 34 Chief Information Officer
Brian E. Crooks 52 Chief Financial Officer
Harold F. Compton (1) 57 Director
Raymond Pirtle (2) 64 Director
Joseph L. Druzak (1) 53 Director
Jack Bush(1) 70 Director
_________
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
John R. Signorello. Mr. Signorello has served as Chairman of the Board
and CEO since March 2000. From 1991 until September 1997, Mr. Signorello served
as the Chief Executive Officer of STMS -"Solutions That Make Sense" - a private
technology company he founded that specialized in computer networks, systems
integration and information technology. In 1996, STMS was ranked the 17th
fastest growing technology company in America by The National Technology
Council's "The Fast Five Hundred". In September 1997, the company was acquired
by Steelcloud (Nasdaq: SCLD), and Mr. Signorello remained as Vice President of
Sales and Marketing until November 1998. From 1998 through 2000, Mr. Signorello
served as a Director for a publicly traded Internet Venture Fund. Mr. Signorello
is an accomplished musician, and serves as a principal in New York City Lights
Entertainment. Mr. Signorello received a B.B.A. in Marketing from Radford
University in 1989.
G. Anthony Munno. Mr. Munno has served as our President since October
2004. From August 2003 until being elected President, Mr. Munno served as Vice
President of Sales and Marketing. Mr. Munno was the founder, President and CEO
of Interlan Communications, Inc. a privately held Virginia based data networking
and network security company which we acquired in June 2003. From March 1990 to
August 1995 Mr. Munno was a Director of Sales for Microcom Incorporated, a
publicly traded manufacturer of modems and other wide area networking products.
From October 1988 to March 1990, Mr. Munno held the position of Major Business
Opportunities, Manager of Systems, and Tests for Government Technology Services
Inc. (GTSI), a publicly traded systems provider to government and education.
From January 1987 to October 1988, Mr. Munno was employed as a Product
Specialist for SMS Data Products Group of Virginia. Prior to starting his
civilian career, Mr. Munno was a member of the US Army for seven years where he
was awarded the Meritorious Service Medal twice while a member of the US Army
Signal Corps. Mr. Munno attended the City College of Chicago.
James M. Bond. Mr. Bond, 34, has served as our Chief Information
Officer since August 2005 and our Vice President of Program Services since June
2003. His responsibilities include management of our consulting services
practice which is focused on network infrastructure and enterprises messaging
services. Mr. Bond is also responsible for developing new services and product
offerings. From August 2000 until our acquisition of the company in June 2003,
Mr. Bond was President of The Seven Corporation, which is now our consulting
services division. Mr. Bond has over 15 years of information technology design
and implementation experience. He has been the architect of and has implemented
solutions for medium and large corporate and government organizations with some
multi-year projects exceeding $50M. Mr. Bond served as Vice President with
Steelcloud from 1997 until 2000 where he ran the Professional Services division
with over 50 consulting engineers and revenues exceeding $15M annually. Mr.
Bond's earlier work experience includes senior engineering, architecture/design,
and project management responsibilities with companies such as Electronic Data
Systems (EDS) and Computer Sciences Corporation (CSC). Mr. Bond holds a Bachelor
degree from the University of Maryland in Computer Science and is currently
pursuing a Master's Degree. He has been a certified engineer for products and
companies including Microsoft, Novell, 3Com, NetFRAME, Tricord, and currently
serves on the Microsoft Architect's Council for the Mid-Atlantic region.
35
Brian E. Crooks, C.P.A.-CFO Mr. Crooks has served as our Chief
Financial Officer since November 2005. Mr. Crooks has 29 years experience as a
public accountant. First as a partner in Hanson, Crooks & Englemann from 1980
until 1982, when he established the firm of Crooks & Seth PC. As a CPA he has
helped many companies with accounting, tax compliance, financing, tax planning,
legal support and management consulting. Mr. Crooks has also worked with
numerous clients in the areas of M & A and IPO activities. As Comptroller,
Acting CFO or CFO, Mr. Crooks has worked with most of the big four Accounting
Firms supporting audit requirements and preparation of annual audit reports.
IceWEB, Inc. hired Mr. Crooks as part time Acting CFO in December of 2002
through April of 2004 when the Company hired a full time CFO. Mr. Crooks again
became the Acting CFO in May of this year. Mr. Crooks holds a Bachelor of
Science degree in accounting from Clarion University, Clarion, Pa (GPA in
Accounting 4.00), a CPA license in the State of Virginia, a Real Estate License
in the State of Virginia and a Title Insurance license in the State of Virginia.
Harold F. Compton. Mr. Compton has been a member of our Board of
Directors since May 2005. Mr. Compton has been a retailer for more than 30
years. Mr. Compton joined CompUSA Inc. in 1994 as Executive Vice
President-Operations, becoming Executive Vice President and Chief Operating
Officer in 1995, President of CompUSA Stores in 1996 and Chief Executive Officer
of CompUSA Inc. in 2000, a position he held until his retirement in 2004. Prior
to joining CompUSA, Inc., from 1993 until 1994 he served as President and COO of
Central Electric Inc., Executive Vice President Operations and Human Resources,
and Director of Stores for HomeBase (1989 to 1993), Senior Vice President
Operations and Director of Stores for Roses Discount Department Stores (1986 to
1989), and held various management positions including Store Manager, District
Manager, Regional Vice President and Zone Vice President for Zayre Corporation
from 1965 to 1986. Since 1998 Mr. Compton has been a member of the Board of
Directors of Linens `N Things, Inc., and is a member of its Compensation
Committee and Corporate Governance and Nominating Committee of the Board of
Directors of that company.
Raymond Pirtle, Jr. Mr. Pirtle has been a member of our Board of
Directors since June 2005. Mr. Pirtle is a veteran of the financial services
industry, having spent the past three decades in a variety of senior roles in
corporate finance, institutional sales, investment banking, and equity research.
From 1966 until 1989 he was employed by J.C. Bradford & Co., a large regional
investment banking and brokerage, departing as a general partner. From 1989
until 2001 he was a Director and co-head of institutional sales of Equitable
Securities Corp., a banking and institutional brokerage firm later known as
SunTrust Equitable. In 2001 he was one of the founding partners of Avondale
Partners, LLC, an institutional equity research and investment banking firm
focusing on small companies generally with a market cap in the range of $200
million to $2 billion. Mr. Pirtle presently serves as a member of Avondale
Partners' Advisory Board Committee. In March 2005 Mr. Pirtle founded Clairidge
Company, LLC., a consulting firm that represents micro-cap to small-cap
companies with a public equity valuation under $200 million or larger companies
that are seeking to attract broad attention from institutional portfolio
managers, research analysts or investment bankers. Since 1985 Mr. Pirtle has
been serving on the board of both public and private companies. He currently
serves on the board of Premier Global Services, Inc. (NYSE: PGI), a provider of
business communications services and business process solutions that enable
enterprise customers to automate and simplify components of their critical
business processes and to communicate more effectively with their constituents,
and eNucleus, Inc. (OTCBB: ENUI), a provider of supply chain software
applications.
Joseph L. Druzak. Mr. Druzak has been a member of our Board of
Directors since June 2005. After first joining the company more than 20 years
ago, since 1985 Mr. Druzak has served President and CEO of Kreher Steel Company,
LLC., a large, privately-held specialty steel distribution company serving such
diverse markets as automotive, rail, construction, oil and gas, aerospace and
defense.
Jack Bush. Mr. Bush has been a member of our Board of Directors since
August 2005. Mr. Bush has served as the President of Raintree Partners, Inc., a
management consulting company, since September 1995. He is also currently
Chairman and Director of IdeaForest.com (Joann.com), Vice Chairman and Director
of FPE Corporation (Framed Picture Enterprises) and Co-Chairman of Country
Sampler stores. From 1995 to 1999 he served as Chairman of Aaron Brothers
Holding Company and of Carolina Art & Frame Co. He was a founder, Chief Concept
Officer and Director of Artistree Art, Frame & Design Company. During this time
36
he was also a Director of Cyberplay, New York Coffee & Bagels, Bradlees Stores,
Stage Stores, Telequip and Jumbo Sports Company. He served on the board of
Bradlees during a successful reorganization and served as special assistant to
the board of Stage Stores during a successful reorganization. From 1997 to 1999
he served as Chairman, CEO and President of Jumbo Sports Co. From 1991 to August
1995, he was President and Director of Michaels Stores, Inc. and was Chairman of
Michaels of Canada. The company grew from 136 to 530 stores and became the
largest arts and crafts retailer in the world. Upon leaving the Nasdaq-quoted
company, sales reached $1.5 billion and had 22,000 associates. From 1990 to 1991
he served as Executive Vice President, Director of Operations and Stores for
Ames Department Stores. From 1985 to 1990 Mr. Bush was President and Director of
Roses stores, a Nasdaq-quoted company. During his tenure the company grew to 226
stores with $1.6 billion in sales and 25,000 associates. From 1980 to 1985 He
served as Vice President of Zayre Corporation, an NYSE-listed company
responsible for 105 stores and $750 million in sales. From 1958 to 1980 He
served in a variety of potions with J.C. Penney Company, an NYSE-listed company.
Mr. Bush was a U.S. Air Force Reserve officer and holds a Bachelor of Science
from the University of Missouri.
There are no family relationship between any of the executive officers
and directors. Directors are elected at our annual meeting of stockholders and
hold office for one year or until his or her successor is elected and qualified.
KEY EMPLOYEE
John Younts. Mr. Younts, 38, has served as Vice President Integrated
Power Solutions since August 2003. His responsibilities include promotion and
local support of mission critical computer room equipment as a manufacturer's
representative to local companies with computers, as well as offering
maintenance agreements for legacy and new customers. Mr. Younts has 17 years of
experience in hardware support equipment business. From 1988 until 2003 Mr.
Younts was a Senior Sales Associates with Lee Associates, a provider of
infrastructure products and solutions. He was responsible for a nationwide roll
out requiring mission critical support equipment for customers including Nextel
and Qwest. He was also responsible for building long lasting relationships with
his customers as well as the vendors. Mr. Younts' primary focus was on the
design, sale and implementation of these critical support systems for MEP firms,
end users, electric and general contractors in the Mid-Atlantic Region. Mr.
Younts holds a Bachelor degree from Radford University.
Committees of the Board of Directors
Our Board of Directors has created both an Audit Committee and a
Compensation Committee.
Audit Committee. The Audit Committee of our Board of Directors was
formed to assist the Board of Directors in fulfilling its oversight
responsibilities for the integrity of our consolidated financial statements,
compliance with legal and regulatory requirements, the independent registered
public accounting firm's qualifications and independence, and the performance of
our internal audit function and independent auditors. The Audit Committee will
also prepare the report that SEC rules require be included in our annual proxy
statement. The Audit Committee has adopted a charter which sets forth the
parameters of its authority. The Audit Committee Charter provides that the Audit
Committee is empowered to:
o Appoint, compensate, and oversee the work of the independent
registered public accounting firm employed by our company to conduct
the annual audit. This firm will report directly to the audit
committee;
o Resolve any disagreements between management and the auditor
regarding financial reporting;
o Pre-approve all auditing and permitted non-audit services performed
by our external audit firm;
o Retain independent counsel, accountants, or others to advise the
committee or assist in the conduct of an investigation;
o Seek any information it requires from employees - all of whom are
directed to cooperate with the committee's requests - or external
parties;
37
o Meet with our officers, external auditors, or outside counsel, as
necessary; and
o The committee may delegate authority to subcommittees, including the
authority to pre-approve all auditing and permitted non-audit
services, provided that such decisions are presented to the full
committee at its next scheduled meeting.
Each Audit Committee member is required to:
o satisfy the independence requirements of Section 10A(m)(3) of the
Securities Exchange Act of 1934, and all rules and regulations
promulgated by the SEC as well as the rules imposed by the stock
exchange or other marketplace on which our securities may be listed
from time to time, and
o meet the definitions of "non-employee director" for purposes of SEC
Rule 16b-3 and "outside director" for purposes of Section 162(m) of
the Internal Revenue Code.
Each committee member is required to be financially literate and at
least one member is to be designated as the "financial expert," as defined by
applicable legislation and regulation. No committee member is permitted to
simultaneously serve on the audit committees of more than two other public
companies. Mr. Pirtle is presently the sole member of our Audit Committee. As we
expand our Board of Directors with additional independent directors the number
of directors serving on the Audit Committee will also increase.
Compensation Committee. The Compensation Committee was appointed by the
Board to discharge the Board's responsibilities relating to:
o compensation of our executives,
o equity-based compensation plans, including, without limitation,
stock option and restricted stock plans, in which officers or
employees may participate, and
o arrangements with executive officers relating to their employment
relationships with our company, including employment agreements,
severance agreements, supplemental pension or savings arrangements,
change in control agreements and restrictive covenants.
The Compensation Committee charter provides that the Compensation
Committee has overall responsibility for approving and evaluating executive
officer compensation plans, policies and programs of our company, as well as all
equity-based compensation plans and policies. In addition, the Compensation
Committee oversees, reviews and approves all of our ERISA and other employee
benefit plans which we may establish from time to time. The Compensation
Committee is also responsible for producing an annual report on executive
compensation for inclusion in our proxy statement and assisting in the
preparation of certain information to be included in other periodic reports
filed with the SEC.
Each Compensation Committee member is required to:
o satisfy the independence requirements of Section 10A(m)(3) of the
Securities Exchange Act of 1934, and all rules and regulations
promulgated by the SEC as well as the rules imposed by the stock
exchange or other marketplace on which our securities may be listed
from time to time, and
o meet the definitions of "non-employee director" for purposes of SEC
Rule 16b-3 and "outside director" for purposes of Section 162(m) of
the Internal Revenue Code.
No committee member is permitted to simultaneously serve on the audit
committees of more than two other public companies. Messrs. Compton, Druzak and
Bush are the members of our Compensation Committee. As we expand our Board of
Directors with additional independent directors the number of directors serving
on the Compensation Committee will also increase.
Code of Ethics
In May 2005, we adopted a Code of Business Conduct and Ethics
applicable to our Chief Executive Officer, principal financial and accounting
officers and persons performing similar functions. A Code of Business Conduct
and Ethics is a written standard designed to deter wrongdoing and to promote:
38
o honest and ethical conduct,
o full, fair, accurate, timely and understandable disclosure in
regulatory filings and public statements,
o compliance with applicable laws, rules and regulations,
o the prompt reporting violation of the code, and
o accountability for adherence to the Code.
A copy of our Code of Business Conduct and Ethics is filed as an
exhibit to this annual report, and we will provide a copy, without charge, to
any person desiring a copy of the Code of Business Conduct and Ethics, by
written request to us at our principal offices.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934, as
amended, during the fiscal year ended September 30, 2005 and Forms 5 and
amendments thereto furnished to us with respect to the fiscal year ended
September 30, 2005, as well as any written representation from a reporting
person that no Form 5 is required, we are aware that the above Board members
failed to file on a timely basis, as disclosed in the aforementioned Forms,
reports required by Section 16(a) of the Securities Exchange Act of 1934 during
the fiscal year ended September 30, 2005.
ITEM 10. Executive Compensation
Cash Compensation
The following table summarizes all compensation recorded by us in each
of the last three fiscal years for our Chief Executive Officer and each other
executive officers serving as such whose annual compensation exceeded $100,000.
Annual Compensation Long-Term Compensation
-----------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
-----------------------------------------------------------------------------------------------------------
John R. Signorello 2003 $ 5,000 $ -0- $ -0- $ -0- 75,000 -0-
Chief Executive 2004 $ 80,000 $ -0- $ -0- $ -0- -0- -0-
Officer (1) 2005 $120,000 $ -0- $ -0- $ -0- -0- -0-
_________
(1) In fiscal year 2003, Mr. Signorello was granted options to purchase 75,000
shares at $3.20 per share, expiring in September 2008.
STOCK OPTION PLAN
In August 2000, our Board of Directors adopted our 2000 Management and
Director Equity Incentive and Compensation Plan (the "Plan"). The Plan was
approved by our stockholders in August 2001. As amended, we have reserved an
aggregate of 1,250,000 shares of common stock for issuance under the Plan. At
December 31, 2005 we have granted options to purchase 1,002,479 shares of our
common stock under the Plan. Our Board of Directors (or at their discretion a
committee of our Board members) administers the Plan including, without
limitation, the selection of recipients of awards under the Plan, the granting
of stock options, restricted share or performance shares, the determination of
the terms and conditions of any such awards, the interpretation of the Plan and
any other action they deem appropriate in connection with the administration of
the Plan.
The purpose of the Plan is to advance our interests and those of our
stockholders by providing a means of attracting and retaining key employees,
directors and consultants. In order to serve this purpose, we believe the Plan
encourages and enables key employees, directors and consultants to participate
in our future prosperity and growth by providing them with incentives and
compensation based on our performance, development and financial success.
Participants in the Plan may include our officers, directors, other key
employees and consultants who have responsibilities affecting our management,
development or financial success.
39
Awards may be made under the Plan in the form of Plan options, shares
of our common stock subject to a vesting schedule based upon certain performance
objectives ("performance shares") and shares subject to a vesting schedule based
on the recipient's continued employment ("restricted shares"). Plan options may
either be options qualifying as incentive stock options under Section 422 of the
Internal Revenue Code of 1986, as amended or options that do not so qualify. Any
incentive stock option granted under our Plan must provide for an exercise price
of not less than 100% of the fair market value of the underlying shares on the
date of such grant, but the exercise price of any incentive option granted to an
eligible employee owning more than 10% of our common stock must be at least 110%
of such fair market value as determined on the date of the grant. Only persons
who are our officers or other key employees are eligible to receive incentive
stock options and performance share grants. Any non-qualified stock option
granted under our Plan must provide for an exercise price of not less than 50%
of the fair market value of the underlying shares on the date of such grant.
The term of each Plan option and the manner in which it may be
exercised is determined by the Board of Directors, provided that no Plan option
may be exercisable more than three years after the date of its grant and, in the
case of an incentive option granted to an eligible employee owning more than 10%
of our common stock, no more than five years after the date of the grant. The
exercise price of the stock options may be paid in either:
o cash, or
o delivery of unrestricted shares of our common stock having a fair
market value on the date of delivery equal to the exercise price, or
o surrender of shares of our common stock subject to the stock option
which has a fair market value equal to the total exercise price at
the time of exercise, or
o a combination of the foregoing methods.
All Plan options are nonassignable and nontransferable, except by will
or by the laws of descent and distribution and, during the lifetime of the
optionee, may be exercised only by such optionee. At the discretion of the Board
of Directors, it may approve the irrevocable transfer, without payment, of
non-qualified options to the option holder's spouse, children, grandchildren,
nieces or nephews, or to the trustee of a trust for the principal benefit of one
or more such persons, or to a partnership whose partners are one or more of such
persons. If an optionee's employment is terminated for any reason, other than
due to his or her death, disability or termination for cause, or if an optionee
is not our employee but is a member of our Board of Directors and his or her
service as a director is terminated for any reason, other than due to his or her
death or disability, the Plan option granted may be exercised on the earlier of
the expiration date or 90 days following the date of termination. If the
optionee dies during the term of his or her employment, the Plan option granted
to him or her shall lapse to the extent unexercised on the earlier of the
expiration date of the Plan option or the date one year following the date of
the optionee's death. If the optionee's employment, membership on the Board of
Directors or engagement as a consultant terminates by reason of the optionee's
retirement, then the Plan option granted may be exercised until the earlier of
90 days following the date of termination or the expiration date. If the
optionee is permanently and totally disabled within the meaning of Section
22(c)(3) of the Internal Revenue Code, the Plan option granted to him or her
lapses to the extent unexercised on the earlier of the expiration date of the
option or one year following the date of such disability.
At the time of the restricted share grant, the Board of Directors may
determine the vesting schedule of such shares and that after vesting, such
shares may be further restricted as to transferability or be subject to
repurchase by us or forfeiture upon the occurrence of certain events. Awards of
restricted shares must be accepted by the participant within 30 days of the
grant.
At the time of the award of performance shares, the Board of Directors
shall establish a range of performance goals to be achieved during the
performance period, including, without limitation, earnings, return on capital,
or any performance goal approved by our stockholders in accordance with Section
162(m) of the Internal Revenue Code. Attainment of the highest performance goal
for the performance period will earn 100% of the performance shares awarded for
the performance period; failure to attain the lowest performance goal will
result in the participant earning no performance shares. Attainment of the
performance goals will be calculated from our financial statements, excluding
changes in federal income tax rates and the effect of non-recurring and
extraordinary items. The performance goals may vary for different performance
periods and need not be the same for each participant receiving an award during
a performance period.
40
If the participant's employment by us, membership on our Board of
Directors, or engagement by us as a consultant is terminated before the end of
any performance period, or upon the participant's death, retirement or
disability, the Board of Directors, taking into consideration the performance of
such participant and our performance over the performance period, may authorize
the issuance to the participant or his or her legal representative or designated
beneficiary all or a portion of the performance shares which would have been
issued to him or her had the participant's employment, Board membership or
consulting engagement continued to the end of the performance period. If the
participant's employment, Board membership or consulting engagement terminates
before the end of the performance period for any other reason, all performance
shares are forfeited.
Notwithstanding the foregoing, but subject to any stockholder approval
or other requirements of Section 162(m) of the Internal Revenue Code, the Board
of Directors in its discretion and as determined at the time of award of the
performance shares, may provide the participant with the option of receiving
cash in lieu of the performance shares in an amount determined at the time of
award including, without limitation, by one or more of the following methods:
o the fair market value of the number of shares subject to the
performance shares agreement on the date of award, or
o part or all of any increase in the fair market value since such
date, or
o part or all of any dividends paid or payable on the number of shares
subject to the performance share agreement, or
o any other amounts which in the Board's sole discretion are
reasonably related to the achievement of the applicable performance
goals, or
o any combination of the foregoing.
The purchase price for restricted shares or performance shares granted
under the Plan shall be set by the Board of Directors but may not be less than
par value. Payment of the purchase price for the restricted shares or
performance share may be made in either,
o cash, or
o by delivery of unrestricted shares of our common stock having a fair
market value on the date of such delivery equal to the total
purchase price, or
o a combination of either of these methods.
The restricted stock awards, performance stock awards and stock options
are subject to accelerated vesting in the event of our change of control. We
may, at our option, terminate all unexercised stock options 30 days after a
change in control and pay to the participant holding these unexercised options
cash in an amount equal to the difference between fair market value and the
exercise price of the stock option. If the fair market value is less than the
exercise price, we may terminate the options without payment to the holder. The
per share purchase price of shares subject to Plan options granted under the
Plan or related to performance share awards or restricted share awards may be
adjusted in the event of certain changes in our capitalization, but any such
adjustment shall not change the total purchase price payable upon the exercise
in full of such option or award. No participant in our Plan has any rights as a
stockholder until the shares subject to the Plan options or stock awards have
been duly issued and delivered to him or her.
We have an option to purchase any shares of our common stock which have
been issued to Plan participants pursuant to restricted stock awards,
performance stock awards or stock options if the participant ceases to be our
employee, a member of our Board of Directors or a consultant to us for any
reason. We must exercise our repurchase right at the time of termination. The
purchase price for any shares we repurchase will be equal to the fair market
value of the our total stockholders' equity divided by the total outstanding
shares of our common stock on the last day of that calendar month, calculated on
a fully-diluted basis. If we exercise our repurchase right, we much close the
transaction within 20 days from the termination date. At closing, we are
entitled to delivery a one-year promissory note as payment for the purchase
price or, at our option, we may pay same in cash at closing.
We also have a right of first refusal to meet the offer if the holder
of any shares of our common stock awarded or issued pursuant to our Plan desires
to sell such shares to a third party.
41
The Board of Directors may amend, suspend or terminate our Plan at any
time, except that no amendment shall be made which:
o increases the total number of shares subject to the Plan or changes
the minimum purchase price therefore (except in either case in the
event of adjustments due to changes in our capitalization), or
o affects outstanding Plan options or any exercise right there under,
or
o extends the term of any Plan option beyond 10 years, or
o extends the termination date of the Plan.
Unless the Plan shall be earlier suspended or terminated, the Plan
shall terminate 10 years from the date of the Plan's adoption by our
stockholders. Any such termination of our Plan shall not affect the validity of
any Plan options previously granted there under.
Stock Option Information
The following table sets forth certain information with respect to
stock options granted in fiscal 2005 to the Named Executive Officers.
Option Grants in Year Ended September 30, 2005
(individual grants)
NO. OF SECURITIES % OF TOTAL OPTIONS/SARs
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME SARs GRANTED IN FISCAL YEAR PRICE DATE
---- ------------------ ----------------------- -------- ----------
John R. Signorello 0 n/a n/a n/a
The following table sets forth certain information regarding stock
options held as of September 30, 2005 by the Named Executive Officers.
Aggregate Option Exercises in Year Ended September 30, 2005
and Year-End Option Values
NO. OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE SEPTEMBER 30, 2005 SEPTEMBER 30, 2005(1)
ON REALIZED --------------------------- ---------------------------
NAME EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
John R. Signorello 25,000 0 125,000 0 125,000 n/a
Brian E. Crooks 0 0 10,000 115,000 1,500 17,250
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
At December 31, 2005, there were 6,329,787 shares of our common stock
issued and outstanding. Our common stock is the only outstanding class of our
voting securities. The following table sets forth, as of December 31, 2005,
information known to us relating to the beneficial ownership of these shares by:
o each person who is the beneficial owner of more than 5% of the
outstanding shares of common stock;
o each director;
o each executive officer; and
o all executive officers and directors as a group.
Unless otherwise indicated, the address of each beneficial owner in the
table set forth below is care of 205 Van Buren, Suite 150, Herndon, Virginia
20170.
We believe that all persons named in the table have sole voting and
investment power with respect to all shares of beneficially owned by them. Under
securities laws, a person is considered to be the beneficial owner of securities
he owns and that can be acquired by him within 60 days from November 30, 2005
upon the exercise of options, warrants, convertible securities or other
understandings. We determine a beneficial owner's percentage ownership by
assuming that options, warrants or convertible securities that are held by him,
but not those held by any other person and which are exercisable within 60 days
of December 31, 2005, have been exercised or converted. Unless otherwise noted,
the address of each of these principal stockholders is our principal executive
offices.
42
Name of Amount and Nature of Percentage
Beneficial Owner Beneficial Ownership of Class
---------------- -------------------- ----------
John R. Signorello (1) ........... 2,321,164 34.9%
G. Anthony Munno (2) ............. 91,275 *
Brian E. Crooks (6) .............. 23,300 *
Hal Compton ...................... 0 n/a
Raymond Pirtle ................... 0 n/a
Joseph L. Druzak (3) ............. 203,126 3.1%
Jack Bush ........................ 0 n/a
All executive officers and
as a group (seven persons) ....... 2,563,265 37.8%
Robert Druzak (4) ................ 591,667 9.0%
Nite Capital L.P. (5) ............ 375,000 5.5%
_________
* represents less than 1%
(1) The number of shares beneficially owned by Mr. Signorello includes options
to purchase 50,000 shares of our common stock at an exercise price of $1.60 per
share and options to purchase 75,000 shares of our common stock at an exercise
price of $3.20 per share.
(2) The number of shares beneficially owned by Mr. Munno includes options to
purchase 56,250 shares of our common stock at an exercise price of $2.16 per
share and options to purchase 12,525 shares of our common stock at an exercise
price of $2.24 per share.
(3) The number of shares beneficially owned by Mr. Druzak includes Series H
Common Stock Purchase Warrants exercisable into 50,000 shares of our common
stock at an exercise price of $4.00 per share and Series I Common Stock Purchase
Warrants exercisable into 50,000 shares of our common stock at an exercise price
of $8.00 per share.
(4) Mr. Robert Druzak is the brother of Mr. Joseph Druzak.
(5) The number of shares beneficially owned by Nite Capital L.P. includes
125,000 shares of our common stock presently outstanding and 250,000 shares of
our common stock issuable upon the exercise of common stock purchase warrants
with exercise prices ranging from $4.00 to $8.00 per share. Mr. Keith Goodman
exercises investment and voting rights over the securities held by Nite Capital
LP.
(6) The number of shars beneficially owned by Mr. Croooks includes options to
purchase 20,000 shares of our common stock at an exercise price of $0.60 per
share, but excludes options to purchase an additional 100,000 shares of our
common stock at an exercise price of $0.60 per share which have not yet vested.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time we have borrowed funds from Mr. Signorello, our
Chairman and CEO, for working capital. In April 2002 we issued Mr. Signorello a
demand promissory note in the principal amount of $150,000. This note bears
interest at 12.5% per annum. At March 31, 2005 we owed Mr. Signorello $93,177.
Under the terms of the Preferred Stock Purchase Agreement with Barron Partners,
L.P. which closed on March 30, 2005 Mr. Signorello was required to convert the
principal and interest due under this note into shares of our common stock. In
April 2005, Mr. Signorello sold this note to Mr. Robert Druzak, a principal
stockholder of our company. In April 2005 we issued 416,667 shares of our common
stock in exchange for a $50,000 subscription receivable to our company and the
satisfaction of a note payable. The shares of common stock issued to Mr. Druzak
remain restricted until such time as the subscription receivable has been
satisfied. At September 30, 2005 this receivable remains outstanding.
Subsequent to this note conversion, from time to time Mr. Signorello
has continued to provide funds to us for operating expenses. At September 30,
2005 we owed Mr. Signorello $86,001, net of repayment of $86,001 made subsequent
to the April 2005 note conversion described above. These advances are short-term
and non-interest bearing. We will repay Mr. Signorello this amount as working
capital is available to us.
Immediately prior to the closing of the Preferred Stock Purchase
Agreement with Barron Partners, L.P. we had other stockholders/employees loans
payable totaling $227,186 plus accrued interest of approximately $62,400.
Included in this amount was approximately $77,000 due to Mr. James Bond, one of
our key employees, which represented the remaining portion of the cash
consideration due him under the terms of our purchase of the stock of The Seven
Corporation as described earlier in this annual report. This amount was
converted by Mr. Bond into 125,000 shares of our common stock in April 2005 in
accordance with the terms of the Preferred Stock Purchase Agreement with Barron
Partners, L.P.
43
Also included in this total at March 31, 2005 was a $150,000 principal
amount promissory note bearing interest at the rate of 12.5% per annum due on
demand to a stockholder of our company. In May 2005 we issued this stockholder
125,000 shares of common stock as consideration for the extension of the
maturity date of the note by 10 years. The shares were valued at $200,000 the
fair value at the date of issuance. The note remains outstanding and at
September 30, 2005 we owed the stockholder the $150,000 principal plus accrued
interest of approximately $65,625.
In 2002, we borrowed $100,000 from three stockholders. During the
fiscal year ended September 30, 2003, these notes were converted to equity at
$0.10 per share, resulting in the issuance of 12,500 shares.
ITEM 13. EXHIBITS
2.1 Agreement and Plan of Reorganization and Stock Purchase Agreement with
Disease S.I. Inc.(4)
2.2 Agreement and Plan of Merger with IceWEB Communications, Inc. (8)
2.3 Agreement and Plan of Merger with Seven Corporation (9)
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment to Certificate of Incorporation (1)
3.3 Certificate of Amendment to Certificate of Incorporation (1)
3.4 Certificate of Amendment to Certificate of Incorporation (1)
3.5 Certificate of Amendment to Certificate of Incorporation (2)
3.6 Certificate of Amendment to Certificate of Incorporation (3)
3.7 Certificate of Amendment to Certificate of Incorporation (11)
3.8 Certificate of Designations of Series A Convertible Preferred Stock
(12)
3.9 Certificate of Amendment to Certificate of Incorporation (13)
3.10 Bylaws (1)
3.11 Certificate of Designations of Series B Convertible Preferred Stock *
4.1 Form of Common Stock Purchase Warrant "A" (12)
4.2 Form of Common Stock Purchase Warrant "B" (12)
4.3 Form of Common Stock Purchase Warrant "C" (12)
4.4 Form of Series H Common Stock Purchase Warrant (16)
4.5 Form of Series I Common Stock Purchase Warrant (16)
4.6 Form of $0.70 Common Stock Purchase Warrant "A" (16)
4.7 Form of Comerica Bank warrant (16)
4.8 Form of Common Stock Purchase Warrant "D" *
4.9 Form of Common Stock Purchase Warrant "E" *
4.10 Form of Common Stock Purchase Warrant "F" *
10.1 Acquisition Agreement with North Orlando Sports Promotions, Inc. (1)
10.2 Asset Purchase Agreement with Raymond J. Hotaling (5)
10.3 2000 Management and Director Equity Incentive and Compensation Plan (6)
10.4 Stock Purchase Agreement with Health Span Sciences, Inc. (7)
10.4 Stock Purchase Agreement with Health Span Sciences, Inc. (7)
10.5 Stock Purchase and Exchange Agreement with Interlan Communications (9)
10.6 Preferred Stock Purchase Agreement dated March 30, 2005 (12)
10.7 Registration Rights Agreement with Barron Partners LP (12)
10.8 Asset and Stock Purchase Agreement for iPlicity, Inc.(16)
10.9 Asset and Stock Purchase Agreement for DevElements, Inc. of Virginia
(15)
10.10 Form of Loan and Security Agreement with Comerica Bank (16)
10.11 Forbearance Agreement (16)
10.12 Sublease Agreement for principal executive offices (16)
14.1 Code of Business Conduct and Ethics (16)
21.1 Subsidiaries of the small business issuer (16)
31.1 Section 302 Certification of Chief Executive Officer *
31.2 Section 302 Certification of Chief Financial Officer *
32.1 Section 906 Certification of Chief Executive Officer *
32.2 Section 906 Certification of Chief Financial Officer *
44
_________
* filed herewith
(1) Incorporated by reference to the Form 10-SB, file number 000-27865,
filed with on October 28, 1999, as amended.
(2) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on June 18, 2001.
(3) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on June 26, 2001.
(4) Incorporated by reference to the Report on Form 8-K as filed on June 6,
2001.
(5) Incorporated by reference to the Report on Form 8-K as filed on July
26, 2001.
(6) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on July 23, 2001.
(7) Incorporated by reference to the Report on Form 8-K as filed on
December 4, 2001.
(8) Incorporated by reference to the Report on Form 8-K as filed on April
4, 2002.
(9) Incorporated by reference to the Report on Form 8-K as filed on August
1, 2003.
(10) Incorporated by reference to the Report on Form 8-K/A as filed on
February 20, 2004.
(11) Incorporated by reference to the definitive Information Statement on
Schedule 14C as filed on August 20, 2004.
(12) Incorporated by reference to the Report on Form 8-K as filed on April
5, 2005.
(13) Incorporated by reference to the definitive Information Statement on
Schedule14C as filed on April 4, 2005.
(14) Incorporated by reference to Amendment No. 1 to the Report on Form
8-K/A as filed on February 20, 2004. (15) Incorporated by reference to
the Report on Form 8-K as filed on July 23, 2004. (16) Incorporated by
reference to the registration statement on Form SB-2, SEC file number
333-126898, as amended.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our annual financial statements, review of
our financial statements included in our quarterly reports and other fees that
are normally provided by our accountant in connection with our audits and
reviews for the fiscal years ended September 30, 2005 and 2004 is $39,000 and
$30,000, respectively.
AUDIT-RELATED FEES
This category consists of assurance and related services by the
independent auditors that are reasonably related to the performance of the audit
or review of our financial statements and are not reported above under "Audit
Fees." The services for the fees disclosed under this category include
consultation regarding our correspondence with the SEC and other accounting
consulting. Our audit-related and review fees for the fiscal years ended
September 30, 2005 and 2004 were $39,000 and $30,000.
TAX FEES
The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advices and tax planning for the
fiscal years ended September 30, 2005 and 2004 is $1,500 and $1,200
respectively.
ALL OTHER FEES
There were no other fees billed by our principal accountant for the
fiscal years ended September 30, 2005 and 2004, except as provided above.
Our Board of Directors has adopted a procedure for pre-approval of all
fees charged by our independent auditors. Under the procedure, the Board
approves the engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Board, or, in the period between
meetings, by a designated member of Board. Any such approval by the designated
member is disclosed to the entire Board at the next meeting. The audit and tax
fees paid to the auditors with respect to fiscal year 2005 were pre-approved by
the entire Board of Directors.
45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ICEWEB, INC.
January 13, 2006 By: /s/ John R. Signorello
----------------------
John R. Signorello, CEO
Principal executive office
January 13, 2006 By: /s/ Brian E. Crooks
-------------------
Brian E. Crooks, CFO
Principal financial officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John R. Signorello CEO and director January 13, 2006
----------------------
John R. Signorello
/s/ Hal Compton Director January 13, 2006
---------------
Hal Compton
/s/ Raymond J. Pirtle, Jr. Director January 13, 2006
--------------------------
Raymond J. Pirtle, Jr.
/s/ Joseph Druzak Director January 13, 2006
-----------------
Joseph Druzak
/s/ Jack Bush Director January 13, 2006
-------------
Jack Bush
46