U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-------------
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 31, 2002
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission File No. 000-24996
INTERNET COMMERCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3645702
(State of incorporation) (I.R.S. Employer Identification Number)
805 Third Avenue, 9th Floor
New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 271-7640 (Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of December 12, 2002 the registrant had outstanding 11,679,964 shares
of Class A Common Stock.
INTERNET COMMERCE CORPORATION
INDEX TO FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of October 31, 2002
(unaudited) and July 31, 2002.......................................... 3
Consolidated statements of operations and comprehensive loss
for the three months ended October 31, 2002 (unaudited)
and October 31, 2001 (unaudited)....................................... 4
Consolidated statements of cash flows for the three months
ended October 31, 2002 (unaudited) and October 31, 2001
(unaudited)............................................................ 5
Notes to the consolidated financial statements........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 25
Item 4. Controls and Procedures........................................ 28
PART II. OTHER INFORMATION
Item 5. Changes in Securities and Use of Proceeds...................... 26
Item 6. Exhibits and Reports on Form 8-K .............................. 26
SIGNATURES.............................................................. 27
CERTIFICATIONS.......................................................... 28
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
October 31, July 31,
2002 2002
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,512,774 $ 2,087,915
Marketable securities 69,609 130,691
Accounts receivable, net of allowance for doubtful accounts
of $269,321 and $241,684, respectively 1,620,355 2,976,472
Prepaid expenses and other current assets 466,224 478,070
------------ ------------
Total current assets 4,668,962 5,673,148
Restricted cash 157,103 157,103
Property and equipment, net 970,522 1,151,864
Software development costs, net 328,179 326,588
Goodwill 2,194,067 2,194,067
Other intangible assets, net 2,868,000 3,107,000
Other assets 15,167 15,166
------------ ------------
Total assets $ 11,202,000 $ 12,624,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 936,733 $ 862,090
Accrued expenses 1,009,539 1,407,848
Accrued dividends - preferred stock 332,238 231,695
Deferred revenue 166,246 164,451
Capital lease obligation 156,809 181,870
Other liabilities 129,062 203,454
------------ ------------
Total current liabilities 2,730,627 3,051,408
Capital lease obligation - less current portion 157,374 192,298
------------ ------------
Total liabilities 2,888,001 3,243,706
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock - 5,000,000 shares authorized, including 10,000
shares of series A, 10,000 shares of series C and 175 shares
of series S: -- --
Series C preferred stock - par value $.01 per share,
44.76 votes per share; 10,000 shares issued and
outstanding (liquidation value of $10,332,238) 100 100
Common stock:
Class A - par value $.01 per share, 40,000,000 shares
authorized, one vote per share; 11,679,964 shares
issued and outstanding 116,801 116,801
Additional paid-in capital 85,301,828 85,401,277
Accumulated deficit (76,790,139) (75,808,873)
Accumulated other comprehensive loss (314,591) (328,075)
------------ ------------
Total stockholders' equity 8,313,999 9,381,230
------------ ------------
Total liabilities and stockholders' equity $ 11,202,000 $ 12,624,936
============ ============
See notes to consolidated financial statements.
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended
October 31,
-----------------------------------
2002 2001
------------ ------------
Revenue:
Services $ 3,049,776 $ 3,045,927
------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of $93,058 in 2002) 1,878,525 2,482,453
Product development and enhancement 260,400 244,742
Selling and marketing (excluding non-cash compensation of
$16,205 in 2002) 763,529 975,556
General and administrative (excluding non-cash compensation
of $22,716 in 2002) 1,110,141 1,359,824
Non-cash charges for stock-based compensation and services -- 131,979
------------ ------------
4,012,595 5,194,554
------------ ------------
(962,819) (2,148,627)
------------ ------------
Interest and investment income 5,294 72,585
Investment loss (19,072) --
Interest expense (4,669) (29,014)
------------ ------------
(18,447) 43,571
------------ ------------
Net loss (981,266) (2,105,056)
Dividends on preferred stock (100,543) (63,046)
------------ ------------
Loss attributable to common stockholders $ (1,081,809) $ (2,168,102)
============ ============
Basic and diluted loss per common share $ (0.09) $ (0.22)
============ ============
Weighted average number of common shares outstanding--
basic and diluted 11,679,964 9,813,593
============ ============
COMPREHENSIVE LOSS:
Net loss $ (981,266) $ (2,105,056)
Other comprehensive loss:
Unrealized gains (losses) - marketable securities 13,484 (59,562)
------------ ------------
Comprehensive loss $ (967,782) $ (2,164,618)
============ ============
See notes to consolidated financial statements.
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended October 31,
---------------------------------
2002 2001
------------ -------------
Cash flows from operating activities:
Net loss $ (981,266) $(2,105,056)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 439,784 562,481
Bad debt expense 34,756 53,877
(Gain) loss on sale of marketable securities 19,072 (64,637)
Non-cash charges for equity instruments issued for
compensation and services -- 131,979
Changes in:
Accounts receivable 1,321,361 (266,412)
Prepaid expenses and other assets 11,845 (65,468)
Accounts payable 74,643 (45,201)
Accrued expenses (397,215) (139,414)
Deferred revenue 1,795 (51,031)
Other liabilities (74,392) (16,281)
----------- -----------
Net cash provided by (used in) operating activities 450,383 (2,005,163)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs (16,333) (95,264)
Purchases of property and equipment (4,700) (1,429)
Proceeds from sales of marketable securities 55,494 246,839
----------- -----------
Net cash provided by investing activities 34,461 150,146
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net -- 3,189,219
Proceeds from exercise of employee stock options -- 23,249
Payments of capital lease obligations (59,985) (75,093)
----------- -----------
Net cash (used in) provided by financing activities (59,985) 3,137,375
----------- -----------
Net increase in cash and cash equivalents 424,859 1,282,358
Cash and cash equivalents, beginning of period 2,087,915 2,223,487
----------- -----------
Cash and cash equivalents, end of period $ 2,512,774 $ 3,505,845
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 4,669 $ 29,014
Noncash investing and financing activities:
Issuance of common stock for services performed -- 77,400
Property acquired under capital leases -- 51,804
See notes to consolidated financial statements.
5
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Internet
Commerce Corporation (the "Company" or "ICC") have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information. In the
opinion of management, such statements include all adjustments (consisting
only of normal recurring adjustments) necessary for the fair presentation
of the Company's financial position, results of operations and cash flows
at the dates and for the periods indicated. Pursuant to the requirements
of the Securities and Exchange Commission applicable to Quarterly Reports
on Form 10-Q, the accompanying financial statements do not include all the
disclosures required by GAAP for annual financial statements. While the
Company believes that the disclosures presented are adequate to make the
information not misleading, these interim consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes included in the Company's Annual
Report on Form 10-K for the year ended July 31, 2002. Operating results
for the three month period ended October 31, 2002 are not necessarily
indicative of the results that may be expected for the fiscal year ending
July 31, 2003.
Certain 2002 items have been reclassified to conform to their 2003
presentation.
2. ORGANIZATION AND NATURE OF BUSINESS
The Company was incorporated under the name Infosafe Systems, Inc. in
November 1991 in the State of Delaware.
ICC provides Internet-based services for the e-commerce
business-to-business communication services market. ICC.NET, our global
Internet-based value added network, or VAN, provides supply chain
connectivity solutions for electronic data interchange, or EDI, and
e-commerce and offers users a vehicle to securely send and receive files
of any format and size.
The ICC.NET system uses the Internet and proprietary technology to deliver
the Company's customers' documents and data files to members of their
trading communities, many of which have incompatible systems, by
translating the documents and data files into any format required by the
receiver. The system can be accessed using a standard Web browser or
virtually any other communications protocol.
Through the acquisition of Intercoastal Data Corporation ("IDC") on August
3, 2000, ICC expanded its capabilities to include an EDI service bureau,
which provides EDI services to small and mid-sized companies. IDC's
services include the conversion of electronic forms into hard copies and
the conversion of hard copies to an EDI format. IDC also provides
Universal Product Code ("UPC") services and maintains UPC catalogs for its
customers.
The acquisition of Research Triangle Commerce, Inc. ("RTCI") on November
6, 2000, provided the Company with the capability to facilitate the
development and operations of comprehensive business-to-business
electronic commerce solutions. RTCI specializes in electronic commerce
solutions involving EDI and EAI (Enterprise Application Integration) by
providing mission critical electronic commerce consulting, electronic
commerce software, outsourced electronic commerce services and technical
resource management.
As of October 31, 2002, ICC had cash and cash equivalents and marketable
securities of approximately $2,582,000. These resources and the commitment
by certain existing investors to provide up to a maximum of $1,000,000 in
additional funding to the Company, if required, should provide the Company
with sufficient liquidity to continue in operation through July 31, 2003.
However, if our expenses increase more than anticipated, or our revenue
does not increase as anticipated because of competitive or other reasons,
our cash resources may not be sufficient, and we will require additional
financing. There can be no assurances that any financing will be available
or that the terms will be acceptable to us, or that any financing will be
consummated.
6
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES
Principles of consolidation:
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany transactions
have been eliminated in consolidation.
Revenue recognition:
The Company derives revenue from subscriptions to its ICC.NET service,
which include transaction, mailbox and fax transmission fees. The
subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the
services are rendered. The Company also derives revenue through
implementation fees, interconnection fees and by providing data mapping
services to its customers. Implementation fees are recognized over the
life of the subscription period. Interconnection fees are fees charged to
connect to another VAN service and are recognized when the data is
transmitted to the connected service. Revenues from data mapping services
is recognized when the map has been completed and delivered to the
customer.
The Company also derives revenue from its service bureau. Service bureau
revenue is comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI,
UPC services, including UPC number generation, UPC catalog maintenance and
UPC label printing. The service bureau also derives revenue from software
licensing and provides software maintenance and support. Revenue from the
EDI services and UPC services is recognized when the services are
provided. The Company accounts for its EDI software license sales in
accordance with the American Institute of Certified Public Accountants'
Statement of Position 97-2, "Software Revenue Recognition", as amended.
Revenue from software licenses is recognized when all of the following
conditions are met: (1) a non-cancelable non-contingent license agreement
has been signed; (2) the software product has been delivered; (3) there
are no material uncertainties regarding customer acceptance; and (4)
collection of the resulting receivable is probable. Revenue from software
maintenance and support contracts is recognized ratably over the life of
the contract. The service bureau's software license revenue was not
significant in any of the periods presented.
In addition, SOP 97-2 generally requires revenue from software
arrangements involving multiple elements to be allocated to each element
of the arrangement based on the relative fair values of the elements, such
as software licenses, post contract customer support, installation or
training and recognized as the element is delivered and the Company has no
significant remaining performance obligations. The Company's multiple
element arrangements generally consist of a software license and post
contract support. The Company allocates the aggregate revenues from
multiple element arrangements to each element based on vendor specific
objective evidence. The Company has established vendor specific objective
evidence for each of the elements as it sells both the software and post
contract customer support independent of multiple element agreements.
Customers are charged standard prices for the software and post contract
customer support and theses prices do not vary from customer to customer.
If the Company enters into a multiple element agreement where vendor
specific objective evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred
until all elements of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education
and training at seminars hosted by leading universities around the United
States. Revenue from EDI and electronic commerce consulting and education
and training are recognized when the services are provided. Revenues from
fixed fee professional service contracts is recognized using the
percentage-of-completion method of accounting, as prescribed by SOP 81-1
"Accounting for Performance of Construction-Type and Certain
Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in
the
7
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in
which the underlying factors requiring such revisions become known. If
such revisions indicate a loss on a contract, the entire loss is recorded
at such time. Amounts billed in advance of services being performed are
recorded as deferred revenue. Certain fixed-fee contracts may have
substantive customer acceptance provisions. The acceptance terms generally
include a single review and revision cycle for each deliverable to
incorporate the customer's suggested or required modifications.
Deliverables are considered accepted upon completion of the review and
revision and revenue is recognized upon that acceptance.
Deferred revenue:
Deferred revenue is comprised of deferrals for subscription fees,
professional services, license fees and maintenance associated with
contracts for which amounts have been received in advance of services to
be performed or prior to the shipment of software.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and reported amounts of revenue
and expense during the reporting period. Actual results could differ from
those estimates. Significant accounting estimates used in the preparation
of the Company's consolidated financial statements include the fair value
of acquired assets, purchase price allocations, the fair value of equity
securities underlying stock based compensation, the realizability of
deferred tax assets, the carrying value of goodwill and intangible assets,
and depreciation and amortization.
Recent Accounting Pronouncements:
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of
the related long-lived asset is correspondingly increased. Over time, the
liability is accreted to its present value and the related capitalized
charge is depreciated over the useful life of the asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. Management
adopted this standard on August 1, 2002. The adoption of this standard did
not have a significant impact on the Company's consolidated financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). "SFAS 144"
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144
retains the requirements of SFAS 121 to recognize an impairment loss only
if the carrying value of a long-lived asset is not recoverable from its
estimated undiscounted cash flows and to measure an impairment loss as the
difference between the carrying value and fair value of the asset, but it
establishes new standards for long-lived assets to be disposed of. The
provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. The Company adopted SFAS 144 on August 1, 2002. The
adoption of this standard did not have a significant impact on the
Company's consolidated financial position or results of operations.
8
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities
("SFAS 146"). SFAS 146 will supersede Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that costs associated with an exit or
disposal plan be recognized when incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS 146 is to be applied
prospectively to exit or disposal activities initiated after December 31,
2002. Management believes that the adoption of this standard will not have
a significant impact on the Company's consolidated financial position or
results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization
of Reimbursements Received for `Out-of-Pocket' Expenses Incurred." A
consensus was reached that reimbursements received for out-of-pocket
expenses incurred should be characterized as revenue in the income
statement. The Company adopted EITF 01-14 effective February 1, 2002.
Reimbursement of out-of-pocket expenses were not significant in any of
the periods presented.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses
certain aspects of the accounting by a vendor for arrangements under which
the vendor will perform multiple revenue generating activities. The EITF
will be effective for fiscal years beginning after June 15, 2003.
Management believes that the adoption of this EITF will not have a
significant impact on the Company's consolidated financial position or
results of operations.
4. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk primarily consist of cash and accounts
receivable. The Company places its excess cash in money-market instruments
with institutions of high credit-quality. All accounts receivable are
unsecured. The Company believes that any credit risk associated with
receivables is minimal due to the volume and credit worthiness of its
customers. Receivables are stated at estimated net realizable value, which
approximates fair value.
No single customer accounted for more than 10% of revenue in the quarters
ended October 31, 2002 and 2001.
The Company had one customer that accounted for approximately 52% of
accounts receivable at July 31, 2002. During October 2002, the full amount
of this receivable was collected. No single customer accounted for more
than 10% of accounts receivable at October 31, 2002.
5. BUSINESS SEGMENT INFORMATION
As a result of the acquisitions of IDC and RTCI in fiscal 2001, the
Company has three operating segments. Prior to these acquisitions the
Company had one operating segment. These three operating segments are:
o ICC.NET service - the Company's global Internet-based value added
network, or VAN, uses the Internet and proprietary technology to
deliver customers' documents and data files to members of their
trading communities, many of which may have incompatible systems, by
translating the documents and data files into any format required by
the receiver.
o Service Bureau - the service bureau manages and translates the data of
small and mid-sized companies that exchange EDI data with large
companies and provides various EDI and UPC (universal product code)
services. The service bureau also licenses EDI software.
9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
o Professional Services - this segment facilitates the development and
operation of comprehensive business-to-business e-commerce solutions.
This segment also conducts a series of product-independent, one-day
EDI seminars for e-commerce users.
During the fourth quarter of fiscal 2002, the Company integrated its data
mapping and XML services into the ICC.NET business segment. These products
and services had previously been part of the Company's Professional
Services segment. These products and services are primarily utilized to
support customers of the ICC.NET VAN service. The reorganization was
undertaken to more closely align these data transfer services with the
customers they serve. The segment information for the quarter ended
October 31, 2001 has been restated to reflect this reorganization as if
it had occurred on August 1, 2001.
The table below summarizes information about operations and long-lived
assets as of and for the three months ended October 31, 2002 and 2001:
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - October 31, 2002
Revenues from external customers $ 2,119,080 $ 466,037 $ 464,659 $ 3,049,776
=========== =========== =========== ===========
Operating loss $ (969,124) $ 83,271 $ (76,966) $ (962,819)
Other income, net (14,589) -- (3,858) (18,447)
----------- ----------- ----------- -----------
Net income / (loss) $ (983,713) $ 83,271 $ (80,824) $ (981,266)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 346,761 $ 30,646 $ 62,377 $ 439,784
As of October 31, 2002
Property and Equipment, net $ 493,300 $ 72,424 $ 404,798 $ 970,522
Capitalized software, net -- 328,179 -- 328,179
Acquired identified intangibles, net 2,868,000 -- -- 2,868,000
Goodwill 26,132 2,167,935 -- 2,194,067
----------- ----------- ----------- -----------
Long lived assets, net $ 3,387,432 $ 2,568,538 $ 404,798 $ 6,360,768
=========== =========== =========== ===========
Service Professional
ICC.NET Bureau Services Total
------- ------ -------- -----
Three Months - October 31, 2001 (Restated)
Revenues from external customers $ 2,030,129 $ 419,588 $ 596,209 $ 3,045,927
=========== =========== =========== ===========
Operating loss $(1,455,214) $ (14,094) $ (679,319) $(2,148,627)
Other income, net 67,312 -- (23,741) 43,571
----------- ----------- ----------- -----------
Net loss $ (1,387,902) $ (14,094) $ (703,060) $(2,105,056)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 443,633 $ 21,315 $ 97,533 $ 562,481
Non-cash charges for stock-based
compensation and services -- -- 131,979 131,979
As of October 31, 2001
Property and Equipment, net $ 917,680 $ 59,122 $ 735,081 $ 1,711,883
Capitalized software, net 177,972 283,438 -- 461,410
Acquired identified intangibles, net 3,824,000 -- -- 3,824,000
Goodwill 26,132 2,167,935 1,710,617 3,904,684
----------- ----------- ----------- -----------
Long lived assets, net $ 4,945,784 $ 2,510,495 $ 2,445,698 $ 9,901,977
=========== =========== =========== ===========
10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
6. STOCKHOLDERS' EQUITY
Private Placement of Common Stock:
On October 29, 2001, the Company sold 1,159,716 shares of class A common
stock and warrants to purchase 347,915 shares of class A common stock for
gross proceeds of $3,189,219. The warrants are immediately exercisable and
have an exercise price of $3.58 per share. The warrants are exercisable
for a five-year period. The Company may redeem the warrants, at its
option, at any time beginning 180-calendar days after the sale, if the
closing bid price of the class A common stock exceeds 200% of the exercise
price for a period of 30 consecutive trading days. The redemption price is
ten cents per warrant.
In connection with the private placement, the Company incurred fees of
$152,511, of which $35,000 was paid in cash and $117,511 was paid by
issuing warrants to purchase 50,000 shares of class A common stock. The
warrants have substantially the same terms and conditions as the warrants
issued in the private placement.
Approximately 20%, or $635,000, of the gross proceeds were received from
directors and officers and entities with which the Company's directors are
affiliated.
Warrant Exchange Offer:
On April 23, 2002, the Company commenced a warrant exchange offer. The
offer was made to investors who participated in the Company's private
placement on October 29, 2001 and to holders of warrants issued as fees in
connection with that private placement. The warrant exchange offer reduced
the exercise price of the warrants issued in the private placement from
$3.58 per share to $2.50 per share of class A common stock for investors
that agreed to exercise those warrants by the expiration date of the
warrant exchange offer.
In addition, for each share of class A common stock purchased pursuant to
a warrant exercise, a new warrant (the "New Warrants") to purchase an
equivalent number of shares of class A common stock was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for
five years. The Company may redeem the warrants, at its option, at any
time beginning 180 calendar days after the issuance of the New Warrants,
if the closing bid price of the class A common stock exceeds 200% of the
exercise price for a period of thirty consecutive days. The redemption
price is ten cents per warrant. The warrant exchange offer had an initial
expiration date of April 30, 2002, but was extended until May 31, 2002.
The Company received $659,288 in gross proceeds and issued a total of
263,715 shares of class A common stock and warrants to purchase an
equivalent number of shares of class A common stock as a result of the
warrant exchange offer. The Company recorded a deemed dividend in the
amount of $461,084 during the third quarter of fiscal 2002 in connection
with the warrant exchange offer, representing the aggregate fair value of
the repriced warrants exercised in the warrant exchange offer and the fair
value of the New Warrants.
In connection with the Warrant Exchange Offer, the Company incurred fees
of approximately $19,000 which were paid in cash.
7. JOINT SERVICES AGREEMENT AND TECHNOLOGY LICENSE
In July 2002, the Company and Triaton GmbH ("Triaton") terminated the
joint services agreement previously entered into by the parties in July
2000, and amended in July of 2001. The Company and Triaton entered into a
new agreement that provides Triaton a non-exclusive five-year license to
use the
11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
Company's electronic data interchange system in Europe. The agreement also
provides that Triaton may purchase sales support and customer support
services based on ICC's standard terms and conditions. Beginning in
January 2003, Triaton may also purchase software maintenance and support
on an annual basis. The sale price for the license was $3,000,000 which
was recognized as revenue in the period ended July 31, 2002. Under the
terms of the agreement, Triaton paid $1,500,000 in July 2002 and
$1,500,000 in October 2002.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
On August 1, 2001, the Company adopted the provisions of SFAS No. 141,
"Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other
Intangible Assets ("SFAS 142"). SFAS 141 requires that the fair value of
an assembled workforce acquired be included in the amount initially
recorded as goodwill. Upon adoption of SFAS 141, the Company reclassified
$1,710,617 into goodwill which was initially recorded as other intangible
assets related to the value of the assembled workforce of RTCI as required
by this statement. SFAS 142 requires that upon adoption, amortization of
goodwill will cease; and instead, the carrying value of goodwill will be
evaluated for impairment on at least an annual basis. The Company
evaluated goodwill for impairment at August 1, 2001 and determined no
impairment existed at that date. The Company's reporting units utilized
for evaluating the recoverability of goodwill are the same as its
operating segments.
There was no goodwill recorded by the Company during the three months
ended October 31, 2002 and 2001, respectively. At October 31, 2002 and
July 31, 2002, Other Intangible assets included the proprietary data
mapping technology acquired in the acquisition of RTCI. The gross carrying
value of the mapping technology was $4,780,000 at October 31, 2002 and
July 31, 2002, respectively. Accumulated amortization relating to mapping
technology was $1,912,000 and $1,673,000 at October 31, 2002 and July 31,
2002, respectively. The data mapping technology is being amortized over
five years and amortization expense has been recorded in cost of services.
The Company did not have any indefinite lived intangible assets that were
not subject to amortization as of October 31, 2002 and July 31, 2002. The
aggregate amortization expense for other intangible assets was $239,000
during each of the three months ended October 31, 2002 and 2001.
At October 31, 2002, estimated amortization expense for other intangible
assets is as follows:
Year Estimated Amortization Expense
---- ------------------------------
2003 $956,000
2004 $956,000
2005 $956,000
2006 $239,000
There was no change in the carrying amount of goodwill for the three
months ended October 31, 2002.
Due to a continued decline in it revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted
future operating profits, the Professional Services segment was tested for
impairment during the fourth quarter of fiscal 2002. An impairment loss of
$1,710,617 was recognized as a result of this evaluation. The fair value
of the Professional Services segment unit was estimated using the net
present value of expected future cash flows.
As of August 1, 2002, the Company performed its annual test for impairment
on the carrying value of goodwill of its ICC.NET and Service Bureau
reporting units, the Company concluded that no impairment existed at that
date.
12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
9. CONTINGENCIES
In October 2000, Thomas Lipscomb, a former President and Chief Executive
Officer of the Company, commenced an action against Alan Alpern, a former
officer of the Company, and against Arthur Medici, a former officer and a
current director of the Company, in the Supreme Court of the State of New
York, County of New York. In the action, Mr. Lipscomb claimed that Messrs.
Alpern and Medici tortuously interfered with his employment agreement with
the Company. Mr. Lipscomb sought compensatory damages of $672,000 and
punitive damages of $1 million.
Subsequently, by Demand for Arbitration dated November 30, 2001, Mr.
Lipscomb commenced an arbitration against the Company arising out of the
same alleged breach of his employment agreement that formed the underlying
basis for his suit against Messrs. Alpern and Medici. In the arbitration,
Mr. Lipscomb sought recovery of $614,000 before interest, costs and
attorneys' fees. The panel in the Lipscomb arbitration dismissed two of
Mr. Lipscomb's three claims. By Interim Award of Arbitrator dated August
23, 2002, the Arbitrator dismissed Mr. Lipscomb's remaining claim, and
decided that ICC was entitled to recover its attorneys' fees and
arbitration costs. ICC has since settled with Mr. Lipscomb in exchange for
a payment from Mr. Lipscomb concerning those fees and costs. As part of
the settlement, ICC and Mr. Lipscomb exchanged general releases.
10. FUNDING COMMITMENTS
In October 2002, the Company obtained commitments from certain existing
investors to provide an aggregate of up to $1,000,000 of additional
capital, if required, for the Company to continue as a going concern. Such
additional capital may be in the form of long-term debt, common stock,
preferred stock or other equity instruments or a combination of the
foregoing and shall be on arms length terms negotiated by the parties. The
commitments expire upon the earliest to occur of (a) July 31, 2003, (b)
the sale, transfer or other disposition of all or substantially all the
assets of the Company, (c) a change in control, or (d) the date the
Company raises debt or equity capital, or a combination of debt and
equity, capital in an amount equal to or greater than $1,000,000
subsequent to the date of the commitment.
13
INTERNET COMMERCE CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains a number of "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in this Quarterly Report regarding
our financial position, business strategy and plans and objectives of management
for future operations are forward-looking statements. These forward-looking
statements are based on the beliefs of management, as well as assumptions made
by and information currently available to management. When used in this report,
the words "anticipate," "believe," "estimate," "expect," "may," "will,"
"continue" and "intend," and words or phrases of similar import, as they relate
to our financial position, business strategy and plans, or objectives of
management, are intended to identify forward-looking statements. These
"cautionary statements" reflect our current view with respect to future events
and are subject to risks, uncertainties and assumptions related to various
factors including, without limitation, those listed below the heading "Overview"
and in our registration statements and periodic reports filed with the
Securities and Exchange Commission under the Securities Act and the Exchange
Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. Based upon changing
conditions, should any one or more of these risks or uncertainties materialize,
or should any underlying assumptions prove incorrect, actual results may vary
materially from those described in this Quarterly Report as anticipated,
believed, estimated, expected or intended.
In this Item 2, references to the "Company", "we", or "us" means Internet
Commerce Corporation.
Overview
We are a leader in the e-commerce, business-to-business communication
services market that provides complete e-commerce infrastructure solutions. Our
business operates in three segments: namely, our ICC.NET service, our service
bureau and our professional services.
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. We believe that our ICC.NET
service has significant advantages over traditional VANs, and email-based and
other Internet-based systems, because our service is provided at lower cost,
with greater transmission speed and offers more features. Our service bureau
manages and translates the data of small and mid-sized companies that exchange
EDI data with large companies. Our professional services segment facilitates the
development and operations of comprehensive business-to-business e-commerce
solutions.
Through July 2000, our business was entirely focused on our ICC.NET
service. During fiscal 2001, we made two acquisitions that enable us to offer a
more complete range of services to allow our customers to expand their
e-commerce trading communities and bridge their legacy systems to the Internet.
In August 2000, we acquired IDC, an EDI service bureau. IDC delivers
business-to-business EDI standards-based documents for companies that do not
have EDI departments.
In November 2000, we acquired RTCI, expanding our professional services
capability. RTCI was an e-commerce infrastructure solutions company serving the
business-to-business e-commerce market. RTCI assists its clients to conduct
business electronically through a continuum of services, including eConsulting
and data transformation mapping (EDI, EAI, XML). RTCI developed a business model
that offered remote service delivery, fixed and value-based pricing and reusable
solutions. Subsequent to the acquisition in fiscal 2001, due to a reduction of
the workforce of RTCI, a steep decline in value of companies similar to RTCI,
continued operating losses and a significant reduction in the forecasted future
operating profits of our professional services segment, management determined
that triggering events had occurred related to certain intangible assets.
Projected cash flow analysis related to those assets determined that the assets
had been impaired. These intangible
14
assets were written down to fair value during the fourth quarter of fiscal 2001
based on the related discounted expected future cash flows.
Due to a continued decline in its revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted future
operating profits, the Professional Services segment was tested for impairment
during the fourth quarter of fiscal 2002. An impairment loss of $1,710,617 was
recognized as a result of this evaluation. The fair value of the Professional
Services segment unit was estimated using the net present value of expected
future cash flows. During the fourth quarter of fiscal 2002, the Company
integrated its data mapping and XML services and personnel into the ICC.NET
business segment. These products and services had previously been part of the
Company's Professional Services segment. These products and services are
primarily utilized to support customers of the ICC.NET VAN service. The
reorganization was undertaken to more closely align these data transfer services
with the customers they serve.
We rely on many of our competitors to interconnect, at reasonable cost,
with our service. We have interconnection arrangements with more than 50
business-to-business networks for the benefit of our customers. Two of the
largest, Global Exchange Services ("GXS") and Sterling Commerce, networks which
we believe to account for approximately 60% of the estimated EDI users, chose to
discontinue their interconnect arrangements with the Company. GXS discontinued
its interconnection with our service in September 2001 and Sterling Commerce
discontinued its interconnection with our service in April 2002. We entered into
arrangements with Inovis, Inc. (formerly a division of Peregrine Systems, Inc.,
and now an independent company) and IBM Corporation so our customers can
continue to communicate through us with their trading communities. As a result
of these new interconnection arrangements, we will incur additional costs and
may lose existing customers if the arrangements we have provided are inadequate
for their business purposes. We believe, however, that the arrangements we have
made satisfy our existing customers and that our business and financial
condition will not be materially or adversely affected as a result of these new
arrangements.
Critical Accounting Policies and Significant Use of Estimates in Financial
Statements
In December 2001, the Securities and Exchange Commission ("SEC") issued
disclosure guidance for "critical accounting policies." The SEC defines
"critical accounting policies" as those that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The following list of critical accounting policies is not intended to be a
comprehensive list of all of our accounting policies. Our significant accounting
policies are more fully described in Note 2 of the notes to the consolidated
financial statements included in our annual report on Form 10-K for the year
ended July 31, 2002. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
with no need for management's judgment in their application. There are also
areas in which management's judgment in selecting any available alternative
would not produce a materially different result. We have identified the
following to be critical accounting policies of the Company:
Revenue Recognition: The Company derives revenue from subscriptions to its
ICC.NET service, which include transaction, mailbox and fax transmission fees.
The subscription fees are comprised of both fixed and usage-based fees. Fixed
subscription fees are recognized on a pro-rata basis over the subscription
period, generally one year. Usage fees are recognized in the period the services
are rendered. The Company also derives revenue through implementation fees,
interconnection fees and by providing data mapping services to its customers.
Implementation fees are recognized over the life of the subscription period.
Interconnection fees are fees charged to connect to another VAN service and are
recognized when the data is transmitted to the connected service. Revenue from
data mapping services is recognized when the map has been completed and
delivered to the customer.
The Company also derives revenue from its service bureau. Service bureau
revenue is comprised of EDI services, including data translation services,
purchase order and invoice processing from EDI-to-print and print-to-EDI, UPC
services, including UPC number generation, UPC catalog maintenance and UPC label
printing. The service bureau also derives revenue from software licensing and
provides software maintenance and support. Revenue from the EDI services and UPC
services is recognized when the services are provided. The Company
15
accounts for its EDI software license sales in accordance with the American
Institute of Certified Public Accountants' Statement of Position 97-2, "Software
Revenue Recognition", as amended. Revenue from software licenses is recognized
when all of the following conditions are met: (1) a non-cancelable
non-contingent license agreement has been signed; (2) the software product has
been delivered; (3) there are no material uncertainties regarding customer
acceptance; and (4) collection of the resulting receivable is probable. Revenue
from software maintenance and support contracts is recognized ratably over the
life of the contract. The service bureau's software license revenue was not
significant in any of the periods presented.
In addition, SOP 97-2 generally requires revenue from software
arrangements involving multiple elements to be allocated to each element of the
arrangement based on the relative fair values of the elements, such as software
licenses, post contract customer support, installation or training and
recognized as the element is delivered and the Company has no significant
remaining performance obligations. The Company's multiple element arrangements
generally consist of a software license and post contract support. The Company
allocates the aggregate revenues from multiple element arrangements to each
element based on vendor specific objective evidence. The Company has established
vendor specific objective evidence for each of the elements as it sells both the
software and post contract customer support independent of multiple element
agreements. Customers are charged standard prices for the software and post
contract customer support and theses prices do not vary from customer to
customer.
If the Company enters into a multiple element agreement for which vendor
specific objective evidence of fair value for each element of the arrangement
does not exist, all revenue from the arrangement is deferred until all elements
of the arrangement are delivered.
Service revenue from maintenance contracts is recognized ratably over the
term of the maintenance contract, on a straight-line basis. Other service
revenue is recognized at the time the service is performed.
The Company also provides a broad range of professional services
consisting primarily of EDI, electronic commerce consulting, EDI education and
training at seminars hosted by leading universities around the United States.
Revenue from EDI and electronic commerce consulting and education and training
are recognized when the services are provided. Revenue from fixed fee
professional service contracts is recognized using the percentage-of-completion
method of accounting, as prescribed by SOP 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts."
The percentage of completion for each contract is determined based on the
ratio of direct labor hours incurred to total estimated direct labor hours
required to complete the contract. The Company may periodically encounter
changes in estimated costs and other factors that may lead to a change in the
estimated profitability of a fixed-price contract. In such circumstances,
adjustments to cost and profitability estimates are made in the period in which
the underlying factors requiring such revisions become known. If such revisions
indicate a loss on a contract, the entire loss is recorded at such time. Amounts
billed in advance of services being performed are recorded as deferred revenue.
Certain fixed-fee contracts may have substantive customer acceptance provisions.
The acceptance terms generally include a single review and revision cycle for
each deliverable to incorporate the customer's suggested or required
modifications. Deliverables are considered accepted upon completion of the
review and revision and revenue is recognized upon acceptance.
Goodwill: Goodwill consists of the excess purchase price over the fair
value of identifiable net assets of acquired businesses. The carrying value of
goodwill is evaluated for impairment on an annual basis. Management also reviews
goodwill for impairment whenever events or changes in circumstances indicate
that the carrying amount of goodwill may be impaired. If it is determined that
an impairment in value has occurred, goodwill will be written down to its
implied fair value. The Company's reporting units utilized for evaluating the
recoverability of goodwill are the same as its operating segments.
Other Intangible Assets: Other Intangible assets are carried at cost less
accumulated amortization. Other intangible assets are amortized on a
straight-line basis over their expected lives, which are estimated to be five
years. The Company did not have any indefinite lived intangible assets that were
not subject to amortization
16
Impairment of long-lived assets: Long-lived assets of the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. Management also
reevaluates the periods of amortization of long-lived assets to determine
whether events and circumstances warrant revised estimates of useful lives. The
Company evaluates the carrying value of its long-lived assets in relation to the
future undiscounted cash flows of the asset when indications of impairment are
present. If it is determined that an impairment in value has occurred, the
excess of the carrying value of the asset will be written down to the present
value of the expected future operating cash flows to be generated by the asset.
Stock-based compensation: The Company accounts for stock-based
compensation arrangements with its employees using the intrinsic value method in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions of SFAS 123, "Accounting for Stock-based Compensation." SFAS 123
established a fair-value-based method of accounting for stock-based compensation
plans. Stock-based awards to nonemployees are accounted for at fair value in
accordance with the provisions of SFAS 123.
Income Taxes: We have a history of unprofitable operations, which
generated significant state and federal tax net operating losses, or NOL
carryforward. Generally accepted accounting principles in the United States
require that we record a valuation allowance against the deferred tax asset
associated with this NOL if it is "more likely than not" that we will not be
able to utilize it to offset future taxes. Due to our history of unprofitable
operations, we have recorded a valuation allowance equal to 100% of these
deferred tax assets.
If we are profitable in the future at sufficient levels management may
conclude that it is more likely than not that we will realize all or a portion
of the NOL carryforward. Upon reaching such a conclusion, we would immediately
record the estimated net realizable value of the deferred tax asset at that time
and would then provide for income taxes at a rate equal to our combined federal
and state effective rates. Subsequent revisions to the estimated net realizable
value of the deferred tax asset could cause our provision for income taxes to
vary significantly from period to period, although our cash tax payments would
remain unaffected until the benefit of the NOL is utilized.
Use of Estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenue and expense
during the reporting period. Actual results could differ from those estimates.
The following discussion reviews items incorporated in our financial statements
during the periods ended October 31, 2002 and 2001 or as of October 31, 2002 and
July 31, 2002 that required the use of significant management estimates.
Impairment of goodwill and acquired intangibles in the amount of
$1,711,000 was recorded during the year ended July 31, 2002. During fiscal 2002,
due to a continued decline in its revenues throughout the course of 2002,
continued operating losses and a significant reduction in forecasted future
operating profits, the Professional Services segment was tested for impairment
during the fourth quarter of fiscal 2002. An impairment loss of $1,711,000 was
recognized as a result of this evaluation. The fair value of the Professional
Services segment unit was estimated using the net present value of expected
future cash flows.
In connection with a warrant exchange offer in April 2002, the Company
valued the repriced and newly issued warrants at $461,084 using the
Black-Scholes option-pricing model. This amount has been added to the Company's
net loss to increase the net loss attributable to common stockholders during
fiscal 2002.
In connection with the acquisition of RTCI on November 6, 2000, issued and
outstanding options and warrants to purchase RTCI common stock were exchanged
for options and warrants of ICC, providing the holders the right to receive,
upon exercise, an aggregate of 394,905 shares of ICC class A common stock and
$343,456 of cash. The options and warrants were valued using the Black-Scholes
option-pricing model. The fair value of the vested portion of the options was
included in the purchase price for RTCI. The use of the Black-Scholes
option-pricing model requires management to make certain estimates for values of
variables used by the model.
17
Management estimated the values for stock price volatility, the expected
life of the options and warrants and risk-free rate based on information that
was available to management at the time the Black-Scholes option-pricing
calculations were made.
Three Months Ended October 31, 2002 Compared with Three Months Ended October 31,
2001.
Results of Operations - Consolidated
The following table reflects consolidated operating data by reported segments.
All significant intersegment activity has been eliminated. Accordingly, the
segment results below exclude the effect of transactions with our subsidiary.
Three Months Ended
October 31,
-----------------------------
Consolidated loss before income taxes: 2002 2001
------------ ------------
ICC.NET $ (983,713) $(1,387,902)
Service Bureau 83,271 (14,094)
Professional Services (80,824) (703,060)
----------- -----------
Consolidated loss before income taxes $ (981,266) $(2,105,056)
=========== ===========
Results of Operations - ICC.NET
Our ICC.NET service, the Company's global Internet-based value added
network, or VAN, uses the Internet and our proprietary technology to deliver our
customers' documents and data files to members of their trading communities,
many of which may have incompatible systems, by translating the documents and
data files into any format required by the receiver. The following table
summarizes operating results for our ICC.NET service:
18
Three Months Ended
October 31,
-----------------------------
2002 2001 (1)
------------ ------------
Revenue:
VAN Services $ 1,948,959 1,500,124
Mapping Services 170,121 462,380
Services to Triaton -- 67,625
----------- -----------
2,119,080 2,030,129
Expenses:
Cost of services 1,256,407 1,448,381
Product development and enhancement 230,219 199,304
Selling and marketing 684,313 811,151
General and administrative 917,267 1,026,507
----------- -----------
3,088,206 3,485,343
----------- -----------
Operating loss (969,126) $(1,455,214)
----------- -----------
Other income (expense), net (14,589) 67,312
----------- -----------
Loss before income taxes (983,713) $(1,387,902)
=========== ===========
(1) - Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - ICC.NET - Revenue related to our ICC.NET service was 69% of
consolidated revenue for the quarter ended October 31, 2002 ("2003 Quarter").
Total revenues increased $89,000 in the 2003 Quarter from the quarter ended
October 31, 2001 ("2002 Quarter"). VAN services revenue increased $449,000, or
approximately 30%, in the 2003 Quarter from the 2002 Quarter due to an increase
in customers and traffic. Mapping revenue decreased $292,000, or approximately
63%, in the 2003 Quarter from the 2002 Quarter due primarily to a slowdown in
the economy. The 2002 Quarter included $68,000 of fees from Triaton GmbH, a
subsidiary of ThyssenKrupp Information Services GmbH, under an agreement dated
July 25, 2001. No such fees were recognized in the 2003 Quarter.
19
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 59% of revenue derived from the ICC.NET service in the 2003 Quarter,
compared to 71% of revenue in the 2002 Quarter. Cost of services related to our
ICC.NET service consists primarily of salaries and employee benefits,
connectivity fees, amortization and rent. Cost of services relating to VAN
services increased to $915,000 in the 2003 Quarter compared to $900,000 in the
2002 Quarter. Cost of services relating to the mapping services decreased to
$341,000 in the 2003 Quarter from $514,000 in the 2002 Quarter. This 34%
decrease is attributable to a reduction in mapping personnel from 12 in the 2002
Quarter to 8 in the 2003 Quarter. Cost of services relating to Triaton was
$34,000 in the 2002 Quarter compared to no costs in the 2003 Quarter. The total
decrease in cost of services of $192,000 in the 2003 Quarter from the 2002
Quarter was primarily the result of a reduction of costs relating to salaries
and benefits of $371,000 due to a reduction of VAN services personnel to 21 at
the end of the 2003 Quarter from 25 at the end of the 2002 Quarter. However,
these savings were partially offset by an increase cost for connectivity fees of
$127,000 in the 2003 Quarter from the 2002 Quarter. The increase in connectivity
fees was primarily due to additional fees incurred to offer our customers and
their trading partners alternative connectivity as a result of GXS and Sterling
disconnecting our service from their networks. In addition, consulting cost
increased $69,000 in the 2003 Quarter from the 2002 Quarter. We anticipate that
our ICC.NET cost of services will decline as a percentage of revenue in future
periods due to increased utilization of our existing communications
infrastructure as we expect the use of our ICC.NET service to increase.
Product development and enhancement - ICC.NET - Product development and
enhancement costs relating to our ICC.NET service consist primarily of salaries
and employee benefits. The increase of $31,000 in the 2003 Quarter from the 2002
Quarter was primarily the result of $119,000 of salaries and
benefits attributable to product development personnel who were temporaily
assigned to cost of services during the 2002 Quarter. The personnel were
utilized to implement alternative connectivity solutions for the ICC.NET service
as a result of GSX disconnecting our service from its network in September 2001.
The prior year allocation was partially offset by a decrease of $90,000 in
salaries and employee benefits which was realized as a result of reducing
staffing to eight employees in the 2003 Quarter from thirteen employees in the
2002 Quarter.
Selling and marketing - ICC.NET - Selling and marketing expenses relating
to our ICC.NET service consist primarily of salaries and employee benefits,
advertising and trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service were reduced $127,000 in the 2003
Quarter from the 2002 Quarter. Advertising and trade show costs were $66,000
because we attended fewer trade shows and spent less on print ads. Salaries and
employee benefits costs decreased $76,000 in the 2003 Quarter from the 2002
Quarter as a result of our cost reduction efforts. In addition, facility related
costs decreased $14,000 in the 2003 Quarter, which was partially offset by an
increase in travel related costs of $24,000.
General and administrative - ICC.NET - General and administrative expenses
supporting our ICC.NET service consist primarily of salaries and employee
benefits, facility costs, legal and professional fees and depreciation. General
and administrative costs supporting our ICC.NET service decreased $109,000 in
the 2003 Quarter. Legal and professional fees decreased $104,000 and consulting
fees decreased $95,000 in the 2003 Quarter primarily due to higher fees relating
to litigation and tax matters in the 2002 Quarter. Also, depreciation and
amortization decreased $46,000 in the 2003 Quarter primarily as a result of
fewer assets being acquired and more assets becoming fully depreciated resulting
in a lower depreciable asset base. These decreases were offset by increases in
salary and employee benefits of $41,000, office related expenses of $69,000 and
travel-related costs of $19,000.
Other income (expenses) - ICC.NET - Other income decreased $82,000 in the
2003 Quarter compared to the 2002 Quarter. We realized gains from the sale of
marketable securities in the amount of $65,000 in the 2002 Quarter compared to a
loss from the sale of marketable securities of $19,000 in the 2003 Quarter.
20
Results of Operations - Service Bureau
Our service bureau manages and translates the data of small and mid-sized
companies that exchange EDI data with large companies and provides various EDI
and UPC (universal product code) services. Our service bureau also licenses EDI
software. The following table summarizes operating results for our service
bureau:
Three Months Ended
October 31,
-------------------------
2002 2001
--------- ----------
Revenue:
Services $ 466,037 $ 419,588
--------- ---------
Expenses:
Cost of services 202,074 236,240
Product development and enhancement 30,181 45,438
Selling and marketing 35,194 29,160
General and administrative 115,317 122,844
--------- ---------
382,766 433,682
--------- ---------
Operating income (loss) 83,271 (14,094)
--------- ---------
Other income, net -- --
--------- ---------
Income (loss) before income taxes $ 83,271 $ (14,094)
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 15%
of our consolidated revenue in the 2003 Quarter. The service bureau's revenue
was primarily generated from services performed, customer support and licensing
fees. The increase in revenue of $46,000 was primarily the result of an
increased demand for barcode label printing from existing and new customers.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 43% of revenue derived from the service bureau in the 2003
Quarter, compared to 56% of revenue derived from the service bureau in the 2002
Quarter. Cost of services related to our service bureau consist primarily of
salaries and employee benefits and rent. The decrease in cost of services was
primarily the result of a decrease in the use of consultants, partially offset
by an increase in salaries and employee benefits.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
Product development and enhancement costs incurred by our service bureau
decreased $15,000 in the 2003 Quarter from the 2002 Quarter. The decrease was
primarily attributable to a decrease in salaries and employee benefits as a
result of reduced staffing in the 2003 Quarter compared to the 2002 Quarter.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent. This increase of $6,000 in the 2003 Quarter from the 2002
Quarter was primarily due to an increase in sales commissions.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent and telephone and office expenses. This
decrease of $8,000 in the 2003 Quarter from the 2002 Quarter was primarily
attributable to a decrease in salaries and employee benefits of $18,000 offset
by an increase in office expenses of $6,000 and an increase in non-capitalized
asset purchases of $3,000.
21
Results of Operations - Professional Services
Our professional services segment provides comprehensive
business-to-business electronic commerce solutions including electronic commerce
infrastructure solutions. Our professional services segment also conducts a
series of product-independent one-day EDI seminars for electronic commerce
users. The following table summarizes operating results for our professional
services:
Three Months Ended
October 31,
-----------------------------
2002 2001 (1)
----------- ------------
Revenue:
Services $ 464,658 $ 596,209
----------- -----------
Expenses:
Cost of services 420,045 797,831
Selling and marketing 44,022 135,245
General and administrative 77,557 210,473
Non-cash charges for stock-based
compensation and services -- 131,979
----------- -----------
541,624 1,275,528
----------- -----------
Operating loss (76,966) (679,319)
Other expense, net (3,858) (23,741)
----------- -----------
Loss before income taxes $ (80,824) $ (703,060)
=========== ===========
(1) - Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - Professional services - Revenue related to professional services
was 15% of the 2003 Quarter consolidated revenue. Revenue generated from
professional services consists of consulting and educational services. As a
result of the continuing economic slowdown, revenue from professional services
decreased $132,000 in 2003 from 2002.
Cost of services - Professional Services - Cost of services relating to
professional services was 90% of revenue derived from professional services in
the 2003 Quarter, compared to 134% of revenue in the 2002 Quarter. Cost of
services related to our professional services consists primarily of salaries and
employee benefits, and contract labor. Cost of services related to professional
services decreased $378,000 in 2003. Salaries and employee benefits relating to
our professional services decreased $379,000 in the 2003 Quarter compared to the
2002 Quarter due to a reduction in the workforce from sixteen employees in the
2002 Quarter to six employees in the 2003 Quarter. In addition, costs incurred
for rental of space for educational seminars decreased $51,000 in the 2003
Quarter compared to the 2002 Quarter offset by an increase of $13,000 for travel
and related expenses and an increase of $17,000 in office related expenses in
the 2003 Quarter.
Selling and marketing - Professional Services - Selling and marketing
expenses relating to our professional services consist primarily of salaries and
employee benefits. Selling and marketing expenses related to our professional
services were reduced $91,000 in the 2003 Quarter from the 2002 Quarter. The
decrease in selling and marketing expenses was primarily attributable to a
decrease in salaries and benefits of $83,000, resulting from a reduction in the
workforce. In addition, rent and travel and entertainment costs increased $9,000
and $2,000, respectively, in the 2003 Quarter from the 2002 Quarter and office
expenses decreased $16,000 due to cost cutting measures.
22
General and administrative - Professional Services - General and
administrative expenses supporting our professional services consist primarily
of salaries and employee benefits, rent, depreciation, amortization and
telephone charges. General and administrative costs supporting our professional
services decreased $133,000 in the 2003 Quarter from the 2002 Quarter. The
decrease was partially attributable to a decrease in salary and benefits of
$69,000 primarily due to a reduction in the workforce. Rent expense decreased
$59,000 as a result of the renegotiation of our lease in order to reduce office
space in our existing facility and depreciation and amortization decreased
$26,000 due to fewer assets being acquired in the 2003 Quarter and more assets
becoming fully depreciated.
Non-cash charges - Professional Services - Non-cash charges in the 2002
Quarter consisted of stock-based compensation expense related to assumed
unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI.
Liquidity and Capital Resources
Our principal sources of liquidity, which consist of cash and cash
equivalents and marketable securities, increased to $2,582,000 as of October 31,
2002 from $2,219,000 as of July 31, 2002. We believe these resources, and the
commitment by certain existing investors to provide up to a maximum of
$1,000,000 in additional funding to the Company, if required, should provide us
with sufficient liquidity to continue in operation through July 31, 2003.
We anticipate break-even operations for the year ending July 31, 2003. We
anticipate that we will achieve positive cash flow from operations for our 2003
fiscal year. However, if our revenues do not increase as anticipated or if our
expenses increase more than anticipated due to competitive or other factors
described under "Risk Factors", included in our annual report on Form 10-K for
the year ended July 31, 2002, we may not achieve break-even operations or
positive cash flow from operations as anticipated for our 2003 fiscal year.
Thus, we may need to raise additional financing. Furthermore, if our
stockholders' equity remains less than $10 million, our class A common stock may
no longer be eligible for trading on the NASDAQ National Market, and, as a
result, we may attempt to sell additional equity securities to increase our
stockholders' equity to the required level. We cannot assure you that any
additional financing would be available on reasonable terms or at all.
We have financed our operations through private placements during fiscal
1994, our initial public offering during fiscal 1995 (the "IPO"), a private
placement in March 1997, a private placement of bridge note units during fiscal
1998 and 1999, a private placement of series A preferred stock in April 1999,
private placements of our class A common stock, series C preferred stock and
warrants in November 1999, a private placement of our class A common stock and
warrants in October 2001 and a warrant exchange offer in May 2002.
In the October 2001 private placement, we sold 1,159,716 shares of class A
common stock and warrants to purchase 347,915 additional shares of class A
common stock for gross proceeds of $3,189,219. The warrants expire in October
2006 and are exercisable at $3.58 per share, subject to adjustment pursuant to
customary antidilution adjustments for stock splits, dividends and combinations.
The warrants are redeemable at our option for $0.10 per warrant commencing in
April 2003 if the closing bid price of our class A common stock is at least 200%
of the exercise price of the warrants for 30 consecutive trading days. In
connection with the private placement, the Company incurred fees of $152,511, of
which $35,000 has been paid in cash and $117,511 has been paid by issuing
warrants to purchase 50,000 shares of class A common stock. The warrants have
substantially the same terms and conditions as the warrants issued in the
private placement.
We commenced a warrant exchange offer on April 23, 2002. The offer was
extended to investors who participated in the private placement in October 2001
and to holders of warrants issued as fees in connection with this private
placement. The offer lowered the exercise price of the warrants issued in the
private placement to $2.50 per class A common share for those investors that
agreed to exercise those warrants. In addition, for each class A common share
purchased pursuant to the warrant exercise, a new warrant (the "New Warrants")
to purchase an equivalent number of class A common shares was issued. The New
Warrants have an exercise price of $3.50 per share and are exercisable for a
five-year period. The New Warrants have the same redemption terms as the
warrants issued in the private placement. The warrant exchange offer was
originally set to expire on April 30, 2002, but was
23
extended by the Company's board of directors until May 31, 2002. The Company
received $659,288 in gross proceeds and issued a total of 263,715 shares of
class A common stock and New Warrants to purchase 263,715 shares of class A
common stock.
In October 2002, we obtained commitments from certain existing investors
to provide an aggregate of up to $1,000,000 of additional capital, if required,
for us to continue as a going concern. Such additional capital may be in the
form of long term debt, common stock, preferred stock or other equity
instruments or a combination of the foregoing and shall be on arms length terms
negotiated by the parties. The commitments expire upon the earliest to occur of
(a) July 31, 2003, (b) the sale, transfer or other disposition of all or
substantially all the assets of the Company, (c) a change in control, or (d) the
date the Company raises debt or equity capital, or a combination of debt and
equity capital, in an amount equal to or greater than $1,000,000 subsequent to
the date of the commitment.
We have a net operating loss carryforward of approximately $71 million to
offset future taxable income for federal income tax purposes. The utilization of
the loss carryforward to reduce any such future income taxes will depend on our
ability to generate sufficient taxable income prior to the expiration of the net
operating loss carryforwards. The carryforward expires from 2007 to 2021. The
Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder contain provisions which limit the use of available net operating
loss carryforwards in any given year should significant changes (greater than
50%) in ownership interests occur. Due to the IPO, the net operating loss
carryover of approximately $1.9 million incurred prior to the IPO is subject to
an annual limitation of approximately $400,000 until that portion of the net
operating loss is utilized or expires. Due to the private placement of series A
preferred stock in April 1999, the net operating loss carryover of approximately
$18 million incurred prior to the private placement is subject to an annual
limitation of approximately $1 million until that portion of the net operating
loss is utilized or expires. Also, due to the 100% ownership change when we
acquired RTCI, RTCI's net operating loss of approximately $6.5 million incurred
prior to the ownership change is subject to an annual limitation of
approximately $1.4 million until that portion of the net operating loss is
utilized or expires.
Consolidated Working Capital
Consolidated working capital decreased to $1,938,000 at October 31, 2002
from $2,622,000 at July 31, 2002. This decrease is due to a $1,356,000 decrease
in accounts receivable, primarily attributable to the collection of $1,500,000
from Triaton, offset by a decrease of $398,000 in accrued expenses and continued
operating losses during the 2003 Quarter. Our cash and marketable securities
increased $364,000 at October 31, 2002 compared to July 31, 2002.
Analysis of Cash Flows
Cash provided by operating activities increased to $450,000 in the 2003
Quarter compared to ($2,005,000) used in operations in the 2002 Quarter. The
increase in 2003 is primarily the result of a decrease in accounts receivable
due to collection of $1,500,000 from Triaton in October 2002 and a decrease in
operating expenses resulting from cost reduction measures. Cash provided by
investing activities decreased to $34,000 in the 2003 Quarter from $150,000 in
the 2002 Quarter. Cash provided by investment activities in the 2003 Quarter was
primarily the result of $55,000 of proceeds from the sales of marketable
securities offset by expenditures for capitalized software. Cash provided by
investment activities in the 2002 Quarter was primarily the result of $247,000
of proceeds from the sale of marketable securities offset by investments in
capitalized software in the amount of $95,000.
Cash used by financing activities was $60,000 in the 2003 Quarter compared
to cash provided by financing activities of $3,137,000 in the 2002 Quarter. The
$60,000 expenditure in 2003 was the result of payments on capital leases. Cash
provided by financing activities in 2002 was primarily due to the net proceeds
of $3,107,000 from the October 2001 private placement.
24
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which requires the recognition of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the carrying amount of the
related long-lived asset is correspondingly increased. Over time, the liability
is accreted to its present value and the related capitalized charge is
depreciated over the useful life of the asset. SFAS 143 is effective for fiscal
years beginning after June 15, 2002. Management adopted this standard on August
1, 2002. The adoption of this standard did not have a significant impact on the
Company's consolidated financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). "SFAS 144" supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121"). SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carrying
value of a long-lived asset is not recoverable from its estimated undiscounted
cash flows and to measure an impairment loss as the difference between the
carrying value and fair value of the asset, but it establishes new standards for
long-lived assets to be disposed of. The provisions of SFAS 144 are effective
for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144
on August 1, 2002. The adoption of this standard did not have a significant
impact on the Company's consolidated financial position or results of
operations.
In July 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 will supersede Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that costs associated with an exit or disposal plan be recognized
when incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. Management believes that the adoption of this
standard will not have a significant impact on the Company's consolidated
financial position or results of operations.
In November 2001, the Emerging Issues Task Force ("EITF") of the FASB
reached a consensus on Issue No. 01-14, "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred." The consensus
was that reimbursements for out-of-pocket expenses incurred should be
characterized as revenue in the income statement. The Company adopted EITF 01-14
effective February 1, 2002. Reimbursements of out-of-pocket expenses were not
significant in any of the periods presented.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF 00-21 addresses certain
aspects of the accounting by a vendor for arrangements under which the vendor
will perform multiple revenue generating activities. The EITF will be effective
for fiscal years beginning after June 15, 2003. Management believes that the
adoption of this EITF will not have a significant impact on the Company's
consolidated financial position or results of operations.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Our class A common stock is currently trading in The Nasdaq National
Market under the symbol "ICCA." Recently revised continued listing requirements
of The Nasdaq National Market provide, among other things, that our class A
common stock may no longer be eligible for continued trading in The Nasdaq
National Market if our stockholders' equity is less than $10 million as of
October 31, 2002 or any future fiscal quarter. As of October 31, 2002, our
stockholders equity was $8.3 million.
If our class A common stock is no longer traded in The Nasdaq National
Market, it could have a material adverse effect on our investors. The resulting
lack of visibility and liquidity of our class A common stock could further
decrease the price of our class A common stock. In addition, if our class A
common stock is no longer eligible for trading in The Nasdaq National Market, it
might negatively impact our reputation and, as a consequence, our business.
25
Item 4: Controls and Procedures
Based on their evaluation of our disclosure controls and procedures as of
a date within 90 days of the filing of this Report, the Chief Executive Officer
and Chief Financial Officer have concluded that such controls and procedures are
effective.
There were no significant changes in our internal controls or in other
factors that could significantly affect such controls subsequent to the date of
their evaluation.
PART II. OTHER INFORMATION
- ---------------------------
Item 5: Changes in Securities and Use of Proceeds
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 13, 2002
INTERNET COMMERCE CORPORATION
by: /s/ G. Michael Cassidy
----------------------------------
G. Michael Cassidy
President and Chief Executive Officer
by: /s/ Walter M. Psztur
----------------------------------
Walter M. Psztur
Senior Vice President and Chief
Financial Officer
27
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, G. Michael Cassidy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
amended) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that
entity, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: December 13, 2002
By: /s/ G. Michael Cassidy
----------------------------------
G. Michael Cassidy
President, Chief Executive Officer
28
I, Walter M. Psztur, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Internet Commerce
Corporation (the "Company");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as
amended) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within that
entity, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: December 13, 2002
By: /s/ Walter M. Psztur
-----------------------------
Walter M. Psztur
Chief Financial Officer
30