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 January 31, 2003
|_| 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 March 17, 2003 the registrant had outstanding 11,982,310 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 January 31, 2003 (unaudited)
and July 31, 2002.................................................. 3
Consolidated statements of operations and comprehensive loss
for the three and six months ended January 31, 2003
(unaudited) and January 31, 2002 (unaudited)....................... 4
Consolidated statements of cash flows for the six months
ended January 31, 2003 (unaudited) and January 31, 2002
(unaudited)........................................................ 5
Notes to consolidated financial statements (unaudited)................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................ 32
Item 4. Controls and Procedures......................................... 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 32
Item 2. Changes in Securities and Use of Proceeds....................... 32
Item 3. Defaults Upon Senior Securities................................. 32
Item 4. Submission of Matters to a Vote of Security Holders............. 33
Item 5. Other Information............................................... 33
Item 6. Exhibits and Reports on Form 8-K ............................... 33
SIGNATURES............................................................... 34
CERTIFICATIONS .......................................................... 35
2
INTERNET COMMERCE CORPORATION
Consolidated Balance Sheets
January 31, July 31,
2003 2002
---------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,246,074 $ 2,087,915
Marketable securities 69,090 130,691
Accounts receivable, net of allowance for doubtful accounts
of $297,038 and $241,684, respectively 1,423,769 2,976,472
Prepaid expenses and other current assets 163,257 478,070
------------ ------------
Total current assets 2,902,190 5,673,148
Restricted cash 157,103 157,103
Property and equipment, net 828,968 1,151,864
Software development costs, net 313,436 326,588
Goodwill 2,194,067 2,194,067
Other intangible assets, net 2,629,000 3,107,000
Other assets 10,790 15,166
------------ ------------
Total assets $ 9,035,554 $ 12,624,936
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 543,232 862,090
Accrued expenses 862,005 1,407,848
Accrued dividends - preferred stock 33,884 231,695
Deferred revenue 147,279 164,451
Capital lease obligation 150,539 181,870
Other liabilities 132,100 203,454
------------ ------------
Total current liabilities 1,869,039 3,051,408
Capital lease obligation - less current portion 121,505 192,298
------------ ------------
Total liabilities 1,990,544 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 $10,033,884) 100 100
Common stock:
Class A - par value $.01 per share, 40,000,000 shares
authorized, one vote per share; 11,982,310 and 11,679,964
shares issued and outstanding, respectively 119,823 116,801
Additional paid-in capital 85,598,982 85,401,277
Accumulated deficit (78,676,709) (75,808,873)
Accumulated other comprehensive income (loss) 2,814 (328,075)
------------ ------------
Total stockholders' equity 7,045,010 9,381,230
------------ ------------
Total liabilities and stockholders' equity $ 9,035,554 $ 12,624,936
============ ============
See notes to consolidated financial statements.
3
INTERNET COMMERCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three Months Ended Six Months Ended
January 31, January 31,
------------------------------ ----------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
Revenue:
Services $ 2,837,406 $ 2,689,599 $ 5,887,182 $ 5,735,526
------------ ------------ ------------ ------------
Expenses:
Cost of services (excluding non-cash compensation of
$40,371 and $133,429 for the three and six months
ended January 31, 2002, respectively) 1,929,013 2,146,638 3,807,538 4,629,091
Impairment of software inventory 248,077 -- 248,077 --
Product development and enhancement 295,388 254,588 555,788 499,330
Selling and marketing (excluding non-cash compensation of
$6,904 and $23,109 for the three and six months ended
January 31, 2002, respectively) 822,088 924,717 1,585,617 1,900,273
General and administrative (excluding non-cash
compensation of $10,416 for the three and six months ended
January 31, 2003, and of $10,765 and $33,481 for
the three and six months ended January 31, 2002, respectively) 1,095,347 1,294,456 2,205,488 2,654,280
Non-cash charges for stock-based compensation and services 10,416 58,040 10,416 190,019
------------ ------------ ------------ ------------
4,400,329 4,678,439 8,412,924 9,872,993
------------ ------------ ------------ ------------
Operating loss (1,562,923) (1,988,840) (2,525,742) (4,137,467)
------------ ------------ ------------ ------------
Other income and (expense):
Interest and investment income 3,895 4,345 9,189 76,930
Investment loss -- -- (19,072) --
Interest expense (9,618) (25,965) (14,287) (54,979)
Impairment of marketable securities (317,924) -- (317,924) --
Other income (loss) -- (11,520) -- (11,520)
------------ ------------ ------------ ------------
(323,647) (33,140) (342,094) 10,431
------------ ------------ ------------ ------------
Net loss $ (1,886,570) $ (2,021,980) $ (2,867,836) $ (4,127,036)
Dividends on preferred stock (101,647) (102,492) (202,190) (165,538)
Loss attributable to common stockholders $ (1,988,217) $ (2,124,472) $ (3,070,026) $ (4,292,574)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.17) $ (0.19) $ (0.26) $ (0.41)
============ ============ ============ ============
Weighted average number of common shares outstanding--
basic and diluted 11,708,051 11,005,793 11,735,835 10,407,658
============ ============ ============ ============
COMPREHENSIVE LOSS:
- -------------------
Net loss $ (1,886,570) $ (2,021,980) $ (2,867,836) $ (4,127,036)
Other comprehensive loss:
Unrealized gains (losses) - marketable securities (519) 22,424 12,965 (37,138)
Reclassification for impairment of marketable securities 317,924 -- 317,924 --
------------ ------------ ------------ ------------
Comprehensive loss $ (1,569,165) $ (1,999,556) $ (2,536,947) $ (4,164,174)
============ ============ ============ ============
See notes to consolidated financial statements.
4
INTERNET COMMERCE CORPORATION
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended January 31,
--------------------------------
2003 2002
----------- -----------
Cash flows from operating activities:
Net loss $(2,867,836) $(4,127,036)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 874,062 1,113,424
Bad debt expense 67,795 126,884
Realized loss (gain) on sale of 19,072 (64,637)
marketable securities
Impairment of marketable securities 317,924 --
Non-cash charges for equity instruments
issued for compensation and services 10,416 190,019
Changes in:
Accounts receivable 1,484,908 (23,761)
Prepaid expenses and other assets 319,189 (128,180)
Accounts payable (318,858) (153,778)
Accrued expenses (553,342) (438,111)
Deferred revenue (17,172) (104,344)
Other liabilities (71,354) (23,915)
----------- -----------
Net cash used in operating
activities (735,196) (3,633,435)
----------- -----------
Cash flows from investing activities:
Capitalization of software development costs (16,333) (134,733)
Purchases of property and equipment (43,681) (36,998)
Proceeds from maturity of certificates of deposit -- 72,528
Proceeds from sales of marketable securities 55,494 246,839
----------- -----------
Net cash (used in) provided by
investing activities (4,520) 147,636
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock
and warrants, net -- 3,107,269
Proceeds from exercise of employee stock options -- 215,312
Proceeds for exercise of warrants -- 59,775
Payments of capital lease obligations (102,125) (160,138)
----------- -----------
Net cash (used in) provided by
financing activities (102,125) 3,222,218
----------- -----------
Net decrease in cash and cash equivalents (841,841) (263,581)
Cash and cash equivalents, beginning of
period 2,087,915 2,223,487
----------- -----------
Cash and cash equivalents, end of period $ 1,246,074 $ 1,959,906
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 9,528 $ 54,979
Noncash investing and financing activities:
Property acquired under capital leases -- 51,804
Issuance of common stock for dividends
on preferred stock 400,000 400,000
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 and sixth-month periods ended January 31, 2003 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
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.
6
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
2. ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)
As of January 31, 2003, ICC had cash and cash equivalents and marketable
securities of approximately $1,315,000. 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.
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 includes 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 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 be allocated among each element
of the arrangement based on the relative fair values of the elements,
which include software licenses, post contract customer support,
installation and training. Furthermore, SOP 97-2 requires that revenue be
recognized as each element is delivered with no significant performance
obligation remaining on the part of the Company. The Company's multiple
element arrangements generally consist of a software license and post
contract support. The Company allocates the aggregate revenue 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 these prices do not vary from customer to customer.
7
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
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. 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 cycle 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.
8
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
Recent Accounting Pronouncements:
In July 2001, the Financial Accounting Standard Board ("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 FASB 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. The Company adopted
SFAS 146 on January 1, 2003. The adoption of this standard did not have a
significant impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures
to be made by a guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has issued. It also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions
of Interpretation No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The Company
has provided information regarding commitments and contingencies relating
to guarantees in note 10 of the notes to the consolidated financial
statements included herein.
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 consensus will not have a
significant impact on the Company's consolidated financial position or
results of operations.
9
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
3. SIGNIFICANT ACCOUNTING POLICIES AND PROCEDURES (CONTINUED)
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123" ("SFAS 148"). SFAS 148 amends the transition and
disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") to provide alternative methods to account for
the transition from the intrinsic value method of recognition of
stock-based employee compensation in accordance with Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" to the
fair value recognition provisions under SFAS 123. SFAS 148 provides two
additional methods of transition and will no longer permit the SFAS 123
prospective method to be used for fiscal years beginning after December
15, 2003. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosure in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the pro forma effects had the fair value recognition
provisions of SFAS 123 been used for all periods presented. The Company is
required to adopt the disclosure provisions of SFAS 148 in the third
quarter of fiscal 2003. The adoption of SFAS 148 is not expected to have a
significant impact on the Company's results of operations and financial
position.
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 number and credit worthiness of its
customers. Receivables are stated at estimated net realizable value, which
approximates fair value.
For the three and six-month periods ended January 31, 2003 and 2002, no
single customer accounted for more than 10% of revenue.
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 January 31, 2003.
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.
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.
10
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
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 three and six-month
periods ended January 31, 2002 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 and six-month periods ended January 31,
2003 and 2002:
Service Professional
ICC.NET Bureau Services Total
------- ------ ------------ -----
Three Months - January 31, 2003
Revenues from external customers $ 2,043,829 $ 389,858 $ 403,719 $ 2,837,406
=========== =========== =========== ===========
Operating loss (1) $(1,117,195) $ (38,789) $ (406,939) $(1,562,923)
Other income (expense), net (319,317) -- (4,330) (323,647)
----------- ----------- ----------- -----------
Net income (loss) $(1,436,512) $ (38,789) $ (411,269) $(1,886,570)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation $ 375,806 $ 30,645 $ 27,827 $ 434,278
Non-cash charges for stock-based
compensation and services $ 10,416 $ -- $ -- $ 10,416
Six Months - January 31, 2003
Revenues from external customers $ 4,162,910 $ 855,895 $ 868,377 $ 5,887,182
=========== =========== =========== ===========
Operating loss (1) $(2,086,319) $ 44,482 $ (483,905) $(2,525,742)
Other income (expense), net (333,906) -- (8,188) (342,094)
----------- ----------- ----------- -----------
Net income (loss) $(2,420,225) $ 44,482 $ (492,093) $(2,867,836)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation 751,258 61,291 61,513 874,062
Non-cash charges for stock-based
compensation and services $ 10,416 $ -- $ -- $ 10,416
As of January 31, 2003
Property and Equipment, net $ 410,007 $ 57,960 $ 361,001 $ 828,968
Capitalized software, net -- 313,436 -- 313,436
Acquired identified intangibles, net 2,629,000 -- -- 2,629,000
Goodwill 26,132 2,167,935 -- 2,194,067
----------- ----------- ----------- -----------
Long lived assets, net $ 3,065,139 $ 2,539,331 $ 361,001 $ 5,965,471
=========== =========== =========== ===========
(1) Commencing in the second fiscal quarter of 2003, certain costs for
executive management, human resources, selling and marketing, accounting
and finance have been allocated among segments based on the level of
services performed for each segment. For cost reduction purposes, these
functions were consolidated and are now performed by ICC.NET personnel.
ICC.NET allocated $111,000 of such costs to the Service Bureau and
Professional Services segments in the amounts of $45,000 and $66,000,
respectively.
11
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
5. BUSINESS SEGMENT INFORMATION (CONTINUED)
Service Professional
ICC.NET Bureau Services Total
------- ------ ------------ -----
Three Months - January 31, 2002
Revenues from external customers $ 1,698,761 $ 378,804 $ 612,034 $ 2,689,599
=========== =========== =========== ===========
Operating loss $(1,767,307) $ (47,481) $ (174,052) $(1,988,840)
Other income (expense) , net (14,384) -- (18,756) (33,140)
----------- ----------- ----------- -----------
Net loss $(1,781,691) $ (47,481) $ (192,808) $(2,021,980)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation 475,955 19,027 55,961 550,943
Non-cash charges for stock-based
compensation and services $ -- $ -- $ 58,040 $ 58,040
Six Months - January 31, 2002
Revenues from external customers $ 3,728,892 $ 798,392 $ 1,208,243 $ 5,735,526
=========== =========== =========== ===========
Operating loss $(3,222,521) $ (61,575) $ (853,371) $(4,137,467)
Other income (expense), net 52,928 -- (42,497) 10,431
----------- ----------- ----------- -----------
Net loss $(3,169,593) $ (61,575) $ (895,868) $(4,127,036)
=========== =========== =========== ===========
Supplemental segment information:
Amortization and depreciation 957,519 40,342 115,563 1,113,424
Non-cash charges for stock-based
compensation and services $ -- $ -- $ 190,019 $ 190,019
As of January 31, 2002
Property and Equipment, net $ 802,753 $ 45,283 $ 644,652 $ 1,492,688
Capitalized software, net 118,648 322,908 -- 441,556
Acquired identified intangibles, net 3,585,000 -- -- 3,585,000
Goodwill 26,132 2,167,935 1,710,617 3,904,684
----------- ----------- ----------- -----------
Long lived assets, net $ 4,532,533 $ 2,536,126 $ 2,355,269 $ 9,423,928
=========== =========== =========== ===========
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, 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.
12
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
6. STOCKHOLDERS' EQUITY (CONTINUED)
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, 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 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.
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. IMPAIRMENT OF INVESTMENTS AND SOFTWARE INVENTORY
In January 2003, the Company recorded an impairment charge of $318,000 for
the write down of available-for-sale marketable securities due to an other
than temporary decline in value. Also, in January 2003, the Company
recorded an impairment charge of $248,000 for software inventory held by
the Professional Services segment based on historical and projected sales,
which indicated that its net carrying value was not recoverable. The
Company had previously recorded an impairment charge of $100,000 for
software inventory in July 2002. Such software inventory was classified as
other current assets in the consolidated balance sheet. The Company's
carrying value of inventory at January 31, 2003 is not significant.
13
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
9. 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 intangible assets with
indefinite useful lives no longer be amortized, but rather be tested at
least annually for impairment. 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.
At January 31, 2003 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
January 31, 2003 and July 31, 2002, respectively. Accumulated amortization
relating to mapping technology was $2,151,000 and $1,673,000 at January
31, 2003 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 January 31, 2003 and July 31, 2002. The
aggregate amortization expense for other intangible assets was $239,000
during each of the three month periods ended January 31, 2003 and 2002 and
$478,000 during each of the six month periods ended January 31, 2003 and
2002.
At January 31, 2003, 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 and
six-month periods ended January 31, 2003.
Due to a continued decline in revenue throughout the course of fiscal
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, and the Company concluded that no impairment existed at
that date.
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into contracts in
which it make representations and warranties regarding the
performance of IDC software. Historically, there have been no significant
losses related to such representations and warranties.
14
INTERNET COMMERCE CORPORATION
Notes to consolidated financial statements (unaudited)
11. 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.
15
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 (the "SEC") under the Securities Act and the
Exchange Act.
Although we believe that our expectations are reasonable, we cannot assure
you that our expectations will prove to be correct. 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.
Until 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
16
INTERNET COMMERCE CORPORATION
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 revenue throughout the course of fiscal
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 are connected to 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 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.
17
INTERNET COMMERCE CORPORATION
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 be allocated among each element of the
arrangement based on the relative fair values of the elements, which include
software licenses, post contract customer support, installation and training.
Furthermore, SOP 97-2 requires that revenue be recognized as each element is
delivered with no significant remaining performance obligations remaining on the
part of the Company. The Company's multiple element arrangements generally
consist of a software license and post contract support. The Company allocates
the aggregate revenue 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 these 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 cycle 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 is 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.
18
INTERNET COMMERCE CORPORATION
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
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 future operating cash flows expected 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 sufficiently profitable in the future, 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 three and six month periods ended January 31, 2003 and 2002 or as of
January 31, 2003 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 revenue 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-
19
INTERNET COMMERCE CORPORATION
pricing model requires management to make certain estimates for values of
variables used by the model. Management estimated the values for stock price
volatility, the expected life of the 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 January 31, 2003 Compared with Three Months Ended January
31, 2002.
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
January 31,
-----------------------------
Consolidated loss before income taxes: 2003 2002
------------- -------------
ICC.NET $ (1,436,512) $ (1,781,691)
Service Bureau (38,789) (47,481)
Professional Services (411,269) (192,808)
----------- -------------
Consolidated loss before income taxes $ (1,886,570) $ (2,021,980)
============ =============
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 for the three months ended
January 31, 2003 and 2002:
Three Months Ended
January 31,
----------------------------
2003 2002 (1)
----------- -----------
Revenue:
VAN Services $ 1,885,557 $ 1,441,741
Mapping Services 158,272 245,770
Services to Triaton -- 11,250
----------- -----------
2,043,829 1,698,761
Expenses:
Cost of services 1,317,135 1,480,412
Product development and enhancement 248,602 212,862
Selling and marketing 733,154 810,754
General and administrative 851,717 962,040
Non-cash charges 10,416 --
----------- -----------
3,161,024 3,466,068
----------- -----------
Operating loss (1,117,195) $(1,767,307)
----------- -----------
Other income (expense), net (319,317) (14,384)
----------- -----------
Loss before income taxes $(1,436,512) $(1,781,691)
=========== ===========
(1) - Restated to reflect the integration of data mapping into the
ICC.NET segment.
20
INTERNET COMMERCE CORPORATION
Revenue - ICC.NET - Revenue related to our ICC.NET service was 72% of
consolidated revenue for the quarter ended January 31, 2003 ("2003 Quarter").
Total ICC.NET revenue increased $345,000 in the 2003 Quarter from the quarter
ended January 31, 2002 ("2002 Quarter"), or approximately 20%. VAN services
revenue increased $444,000, or approximately 31%, in the 2003 Quarter from the
2002 Quarter due to an increase in customers from approximately 475 at October
2001 to over 700 at January 2003, as well as to an increase in VAN traffic.
Mapping revenue decreased $87,000, or approximately 36%, in the 2003 Quarter
from the 2002 Quarter due primarily to the continued slowdown in the economy.
The 2002 Quarter included $11,000 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.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 64% of revenue derived from the ICC.NET service in the 2003 Quarter,
compared to 87% 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. The total decrease in cost of services
of $163,000 in the 2003 Quarter from the 2002 Quarter was primarily the result
of a reduction of costs relating to salary and benefits of $140,000 attributable
to product development personnel who were temporarily assigned to cost of
services in the 2002 Quarter. These personnel were used to implement alternative
connectivity solutions for the ICC.NET service when GXS and Sterling
disconnected our service from their networks during fiscal 2002. In addition,
salaries and benefits decreased $30,000 due to a reduction of personnel to 29 at
the end of the 2003 Quarter from 32 at the end of the 2002 Quarter. However,
these savings were partially offset by an increase in connectivity and
communications fees of $84,000 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 when GXS
and Sterling disconnected our service from their networks. In addition,
amortization and depreciation decreased $69,000 in the 2003 Quarter primarily
due to capitalized software costs becoming fully amortized as of July 31, 2002.
Consulting costs decreased $12,000 in the 2003 Quarter from the 2002 Quarter.
Cost of services relating to VAN services decreased to $950,000 in the 2003
Quarter from $1,039,000 in the 2002 Quarter. Cost of services relating to the
Mapping Services decreased to $367,000 in the 2003 Quarter from $441,000 in 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 $36,000 in the 2003 Quarter over the 2002
Quarter was primarily attributable to a decrease of $140,000 of salaries and
benefits of product development personnel who had been temporarily assigned to
cost of services during the 2002 Quarter. The personnel were utilized to
implement alternative connectivity solutions for the ICC.NET service when GXS
and Sterling disconnected our service from their networks during fiscal 2002.
The prior year allocation was partially offset by a decrease of $94,000 in
salaries and employee benefits as a result of reducing staffing to 8 employees
in the 2003 Quarter from 13 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, trade show costs and travel-related costs. Selling and marketing
expenses related to our ICC.NET service decreased $78,000 in the 2003 Quarter
from the 2002 Quarter. Advertising and trade show costs were reduced $52,000
because we attended fewer trade shows and placed less print advertisements.
Travel & entertainment expense increased $20,000 due to increased travel in the
2003 Quarter. For cost reduction purposes, the sales function was consolidated
and is now performed by ICC.NET personnel. Commencing in the 2003 Quarter, a
portion of the cost of our sales force was allocated to the Professional
Services segment based on the level of effort utilized in selling Professional
Services products.
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 $110,000 in
the 2003 Quarter. Salary and benefits decreased $91,000 in the 2003 Quarter from
the 2002 Quarter. For cost reduction purposes, the Company's executive
management, human resources, accounting and finance functions for all segments
of the Company were consolidated and are now performed by ICC.NET personnel.
Commencing in the 2003 Quarter, ICC.NET began allocating the cost of executive
management, human resources, accounting and finance tasks to the segments based
on the level of service provided to each segment. As a result of this
allocation, ICC.NET
21
INTERNET COMMERCE CORPORATION
salaries and benefits decreased in the 2003 Quarter. 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. Legal
and professional fees decreased $26,000 and other miscellaneous expenses
increased $60,000 in the 2003 Quarter.
Non-Cash charges - ICC.NET - Non-cash charges of $10,000 in the 2003
quarter relate to common stock to be issued to non-employee members of our board
of directors as compensation for 2003 directors' fees.
Other income (expenses) - ICC.NET - Other expense increased $305,000 in
the 2003 Quarter compared to the 2002 Quarter. We recorded an impairment charge
of $318,000 in the 2003 Quarter for the write down of available-for-sale
marketable securities due to an other than temporary decline in value.
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 for the three months ended January 31, 2003 and 2002:
Three Months Ended
January 31,
-------------------------
2003 2002
--------- ---------
Revenue:
Services $ 389,858 $ 378,804
--------- ---------
Expenses:
Cost of services 183,493 218,804
Product development and enhancement 46,787 41,726
Selling and marketing 57,131 32,106
General and administrative 141,236 133,649
--------- ---------
428,647 426,285
--------- ---------
Operating income (loss) (38,789) (47,481)
--------- ---------
Other income, net -- --
--------- ---------
Income (loss) before income taxes $ (38,789) $ (47,481)
========= =========
Revenue - Service Bureau - Revenue related to our service bureau was 14%
of our consolidated revenue in the 2003 and 2002 Quarters. The service bureau's
revenue was primarily generated from services performed, customer support and
licensing fees. The increase in revenue of $11,000 or 3% was primarily the
result of new customer acquisitions in the Service Bureau's core translation
business.
Cost of services - Service Bureau - Cost of services relating to our
service bureau was 47% of revenue derived from the service bureau in the 2003
Quarter, compared to 58% of revenue derived from the service bureau in the 2002
Quarter. Cost of services related to our service bureau consists primarily of
salaries and employee benefits and rent. Cost of services relating to our
service bureau decreased $35,000 in the 2003 Quarter from the 2002 Quarter. This
decrease consists primarily of a decrease in salaries and employee benefits of
$14,000 due to a reduction in personnel to 14 at the end of the 2003 Quarter
from 17 at the end of the 2002 Quarter, and a decrease of $12,000 in consulting
fees relating to a decrease in the use of consultants for customer
service/support and data entry services in the 2003 Quarter compared to the 2002
Quarter.
Product development and enhancement - Service Bureau - Product development
and enhancement costs consist primarily of salaries and employee benefits.
22
INTERNET COMMERCE CORPORATION
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits. This increase of $25,000 in the 2003 Quarter from the 2002 Quarter was
primarily due to an increase in staffing of one person and commissions.
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. The
increase of $8,000 in the 2003 Quarter from the 2002 Quarter is primarily
attributable to an increase of $45,000 in general and administrative support
staff salary and benefits allocated by ICC.NET to the Service Bureau segment in
the 2003 Quarter. See "General and administrative - ICC.NET" above for a
discussion of the allocation of general and administrative expenses among
segments. This was offset by a decrease in Service Bureau salaries and employee
benefits of $35,000 due to a reduction in personnel to 3 at the end of the 2003
Quarter from 5 at the end of the 2002 Quarter.
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 for the three months ended January 31, 2003 and 2002:
Three Months Ended
January 31,
--------------------------
2003 2002 (1)
--------- ---------
Revenue:
Services $ 403,719 $ 612,034
--------- ---------
Expenses:
Cost of services - recurring 428,384 447,417
Impairment of software inventory 248,077 --
--------- ---------
Total cost of services 676,461 447,417
Selling and marketing 31,803 81,857
General and administrative 102,394 198,772
Non-cash charges for stock-based
compensation and services -- 58,040
--------- ---------
810,658 786,086
--------- ---------
Operating loss (406,939) (174,052)
Other expense, net (4,330) (18,756)
--------- ---------
Loss before income taxes $(411,269) $(192,808)
========= =========
(1) Restated to reflect the integration of data mapping into the ICC.NET
segment.
Revenue - Professional Services - Revenue related to professional services
was 14% of the 2003 Quarter consolidated revenue. Revenue generated from
professional services consists of consulting and educational services. As a
result of the continued slowdown in the economy, which has resulted in a
decrease in capital expenditures for information technology and related
services, revenue from all of our professional services decreased $208,000 in
2003 from 2002.
Cost of services - Professional Services - Total cost of services relating
to professional services was 168% of revenue derived from professional services
in the 2003 Quarter, compared to 73% of revenue in the 2002 Quarter. Cost of
services related to our professional services consists primarily of salaries and
employee benefits and contract labor. Recurring cost of services related to
professional services decreased $19,000 in 2003. Salaries and employee benefits
relating to our professional services decreased $61,000 in the 2003 Quarter from
the 2002 Quarter due to a reduction in the workforce to 10 employees in the 2003
Quarter from 15 employees in the 2002 Quarter. Consulting costs decreased
$50,000 directly resulting from a the decline in revenues in the 2003 Quarter
from the 2002 Quarter. The impairment of software inventory of $248,000 in the
2003 Quarter represents an impairment for
23
INTERNET COMMERCE CORPORATION
software inventory held by Professional Services due to insufficient historical
and projected revenue from these products to support the recoverability of its
carrying value.
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 $50,000 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 $25,000 in the 2003 Quarter. See "Selling
and marketing - ICC.NET" above for a discussion of the allocation of selling and
marketing expenses among segments. In addition, rent, travel costs and office
expense decreased $11,000, $9,000 and $5,000, respectively, in the 2003 Quarter
due to cost cutting measures.
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 $96,000 in the 2003 Quarter from the 2002 Quarter. The
decrease was partially attributable to a decrease in salary and benefits of
$53,000 primarily due to a reduction of personnel to 6 in the 2003 Quarter from
10 in the 2002 Quarter. See "General and administrative - ICC.NET" above for a
discussion of the allocation of general and administrative expenses among
segments. Additionally, rent expense decreased $29,000 as a result of the
renegotiation of our lease and a reduction in office space in our existing
facility. In addition, depreciation and amortization decreased $6,000 and office
related expenses decreased $5,000.
Non-cash charges - Professional Services - Non-cash charges in the 2002
Quarter consisted of stock-based compensation expense related to our assumption
of unvested restricted shares issued to RTCI employees in connection with our
acquisition of RTCI.
Six Months Ended January 31, 2003 Compared with Six Months Ended January 31,
2002.
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.
Six Months Ended
January 31,
----------------------------
Consolidated loss before income taxes: 2003 2002
------------ -----------
ICC.NET (2,420,225) (3,169,593)
Service Bureau 44,482 (61,575)
Professional Services (492,093) (895,868)
------------ -----------
Consolidated loss before income taxes (2,867,836) (4,127,036)
============ ===========
24
INTERNET COMMERCE CORPORATION
Results of Operations - ICC.NET
The following table summarizes operating results for our ICC.NET service
for the six months ended January 31, 2003 and 2002:
Six Months Ended
January 31,
----------------------------
2003 2002 (1)
----------- -----------
Revenue:
VAN Services $ 3,834,517 $ 2,941,867
Mapping Services 328,393 708,150
Services to Triaton -- 78,875
----------- -----------
4,162,910 3,728,892
Expenses:
Cost of services 2,573,542 2,928,796
Product development and enhancement 478,821 412,166
Selling and marketing 1,417,466 1,621,906
General and administrative 1,768,984 1,988,545
Non-cash charges 10,416 --
----------- -----------
6,249,229 6,951,413
----------- -----------
Operating loss (2,086,319) (3,222,521)
----------- -----------
Other income (expense), net (333,906) 52,928
----------- -----------
Loss before income taxes $(2,420,225) $(3,169,593)
=========== ===========
(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 71% of
consolidated revenue for the six months ended January 31, 2003 ("2003 Six
Months"). Total ICC.NET revenue increased $434,000 in the 2003 Six Months from
the six months ended January 31, 2002 ("2002 Six Months"), or approximately 12%.
VAN services revenue increased $893,000, or approximately 30%, in the 2003 Six
Months from the 2002 Six Months due to an due to an increase in customers from
approximately 450 at July 2001 to over 700 at January 2003, as well as an
increase in VAN traffic. Mapping revenue decreased $380,000, or approximately
54%, in the 2003 Six Months from the 2002 Six Months due primarily to the
continued slowdown in the economy. The 2002 Six Months included $79,000 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 Six
Months.
Cost of services - ICC.NET - Cost of services relating to our ICC.NET
service was 62% of revenue derived from the ICC.NET service in the 2003 Six
Months, compared to 79% of revenue in the 2002 Six Months. Cost of services
related to our ICC.NET service consist primarily of salaries and employee
benefits, connectivity fees, amortization and rent. The total decrease in cost
of services of $355,000 in the 2003 Six Months from the 2002 Six Months was
primarily the result of a reduction of costs for salaries and employee benefits
of $192,000 due to a reduction of personnel to 29 at the end of the 2003 Six
Months from 35 at the end of the 2002 Six Months. In addition, there was a
reduction in costs relating to salary and benefits of $264,000 attributable to
product development personnel who were temporarily assigned to cost of services
during fiscal 2002. These personnel were used to implement alternative
connectivity solutions for the ICC.NET service when GXS and Sterling
disconnected our service from their networks during 2002. However, these savings
were partially offset by an increased cost for connectivity fees of $214,000 in
the 2003 Six Months from the 2002 Six Months. The increase in connectivity fees
was primarily due to additional fees incurred to offer our customers and their
trading partners alternative connectivity when GXS and Sterling disconnected our
service from their networks. In addition, consulting cost increased $10,000 due
to a reduction in personnel in the 2003 Six Months from the 2002 Six Months.
Amortization decreased $128,000 in the 2003 Six Months primarily due to
capitalized software costs becoming fully amortized as of July 31, 2002. Cost of
services relating to VAN services decreased to $1,865,000 in the 2003 Six Months
from $1,973,000 in the 2002 Six Months. Cost of services relating to the mapping
services decreased to $708,000 in the 2003 Six Months from $956,000 in the 2002
Six Months. Cost of services relating to Triaton was $39,000 in the 2002 Six
Months compared to no costs in the 2003 Six Months. We anticipate that our
ICC.NET cost of services
25
INTERNET COMMERCE CORPORATION
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 $67,000 in the 2003 Six Months over the
2002 Six Months was primarily attributable to a decrease of $259,000 of salaries
and benefits of product development personnel who had been temporarily assigned
to cost of services during the 2002 Quarter. The personnel were utilized to
implement alternative connectivity solutions for the ICC.NET service when GXS
and Sterling disconnected our service from their networks during fiscal 2002.
The prior year allocation was partially offset by a decrease of $187,000 in
salaries and employee benefits as a result of reducing staffing to 8 employees
in the 2003 Six Months from 12 employees in the 2002 Six Months.
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 $204,000 in the 2003 Six
Months from the 2002 Six Months. Advertising and trade show costs were reduced
$119,000 because we attended fewer trade shows and placed less print
advertisements. In addition, salary and benefits decreased $119,000 in the 2003
Six Months, partially offset by an increase in travel related costs of $44,000
due to increased marketing efforts. For cost reduction purposes, the sales
function was consolidated and is now performed by ICC.NET personnel. Commencing
in the 2003 Quarter, a portion of the cost of our sales force were allocated to
the Professional Services segment based on the level of effort utilized in
selling Professional Services products.
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 $220,000 in
the 2003 Six Months. Legal and professional fees decreased $130,000 in the 2003
Six Months primarily due to higher fees for legal advice and services in the
2002 Six Months relating to our disconnection from other VAN's, partially offset
by the reimbursement of legal fees pursuant to our success in a certain
arbitration. Also, depreciation and amortization decreased $91,000 in the 2003
Six Months primarily as a result of fewer assets being acquired and more assets
becoming fully depreciated. These decreases were partially offset by increases
in salary and employee benefits of $29,000. For cost reduction purposes, the
Company's executive management, human resources, accounting and finance
functions were consolidated and are now performed by ICC.NET personnel.
Commencing in the 2003 Quarter, ICC.NET began allocating the cost of executive
management, human resources, accounting and finance tasks to the segments based
on the level of services provided to each segment.
Non-Cash charges - ICC.NET - Non-cash charges of $10,000 in the 2003 Six
Months relate to common stock to be issued to non-employee members of our board
of directors members as compensation for 2003 directors' fees.
Other income (expenses) - ICC.NET - Other expense increased $387,000 in
the 2003 Six Months compared the 2002 Six Months. We recorded an impairment
charge of $318,000 in the 2003 Six Months for the write down of
available-for-sale marketable securities due to a other than temporary decline
in value.
26
INTERNET COMMERCE CORPORATION
Results of Operations - Service Bureau
The following table summarizes operating results for our Service Bureau
for the six months ended January 31, 2003 and 2002:
Six Months Ended
January 31,
------------------------
2003 2002
--------- ---------
Revenue:
Services $ 855,895 $ 798,392
--------- ---------
Expenses:
Cost of services 385,566 455,045
Product development and enhancement 76,967 87,163
Selling and marketing 92,325 61,266
General and administrative 256,555 256,493
--------- ---------
811,413 859,967
--------- ---------
Operating income (loss) 44,482 (61,575)
--------- ---------
Other income, net -- --
--------- ---------
Income (loss) before income taxes $ 44,482 $ (61,575)
========= =========
Revenue - Service Bureau - Revenue related to our Service Bureau was 15%
of our consolidated revenue in the 2003 Six Months compared to 14% of
consolidated revenue in the 2002 Six Months. The service bureau's revenue was
primarily generated from services performed, customer support and licensing
fees. The increase in revenue of $58,000 was primarily the result of new
customer acquisitions in the Service Bureau's core translation business.
Cost of services - Service Bureau - Cost of services relating to our
Service Bureau was 45% of revenue derived from the service bureau in the 2003
Six Months, compared to 57% of revenue derived from the service bureau in the
2002 Six Months. Cost of services related to our service bureau consists
primarily of salaries and employee benefits and rent. Cost of services decreased
$69,000 in the 2003 Six Months. This decrease in cost of services was primarily
the result of a $53,000 decrease in the use of consultants for customer service
support and data entry services, and a decrease in cost of goods sold of $16,000
relating to software sales, which decreased in the 2003 Six Months from the 2002
Months.
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 $10,000 in the 2003 Six Months from the 2002 Six Months. The decrease
was primarily attributable to a decrease in salaries and employee benefits of
$12,000 as a result of reduced staffing and a decrease in rent of $7,000 in the
2003 Six Months. This decrease in salaries and benefits was partially offset by
a $10,000 decrease in allocations to the cost of services department in the 2003
Six Months from the 2002 Six Months resulting from the temporary assignment of
certain individuals in the 2002 Six Months to cost of services functions.
Selling and marketing - Service Bureau - Selling and marketing expenses
relating to our service bureau consist primarily of salaries and employee
benefits and rent. Selling and marketing increased $31,000 in the 2003 Six
Months primarily due to an increase in salaries and employee benefits of
$29,000, and a $2,000 increase in rent in the 2003 Six Months.
27
INTERNET COMMERCE CORPORATION
General and administrative - Service Bureau - General and administrative
expenses relating to our service bureau consist primarily of salaries and
employee benefits, depreciation, rent, telephone and office expenses. Salaries
decreased $53,000 in the 2003 Six Months from the 2002 Six Months as a result of
a staff reduction to 3 employees in the 2003 Six Months from 5 employees in the
2002 Six Months. This was offset by an increase of $45,000 in general and
administrative support staff salary and benefits allocated by ICC.NET to the
Service Bureau in the 2003 Six Months. See "General and administrative -
ICC.NET" above for a discussion of the allocation of general and administrative
expenses among segments.
Results of Operations - Professional Services
The following table summarizes operating results for our professional
services for the six months ended January 31, 2003 and 2002:
Six Months Ended
January 31,
----------------------------
2003 2002 (1)
----------- -----------
Revenue:
Services $ 868,377 $ 1,208,243
----------- -----------
Expenses:
Cost of services - recurring 848,429 1,245,249
Impairment of software inventory 248,077 --
----------- -----------
Total cost of services 1,096,506 1,245,249
Selling and marketing 75,826 217,102
General and administrative 179,950 409,244
Non-cash charges for stock-based -- 190,019
compensation and services
----------- -----------
1,352,282 2,061,614
----------- -----------
Operating loss (483,905) (853,371)
Other expense, net (8,188) (42,497)
----------- -----------
Loss before income taxes $ (492,093) $ (895,868)
=========== ===========
(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 Six Months consolidated revenue as compared to 21% of
consolidated revenue in the 2002 Six Months. Revenue generated from professional
services consists of consulting and educational services. As a result of the
continued slowdown in the economy, which has resulted in a decrease in capital
expenditures for information technology and related services, revenue from our
professional services decreased $340,000 in 2003 from 2002.
Cost of services - Professional Services - Total cost of services relating
to professional services was 126% of revenue derived from professional services
in the 2003 Six Months, compared to 103% of revenue in the 2002 Six Months. Cost
of services related to our professional services consists primarily of salaries
and employee benefits, and contract labor. Recurring cost of services related to
professional services decreased $397,000 in 2003. This was primarily
attributable to a decrease in salaries and employee benefits of $107,000 due to
a reduction in the workforce to 10 employees in the 2003 Six Months from 14
employees in the 2002 Six Months and a decrease in billable consulting costs of
$235,000 in the 2003 Six Months compared to the 2002 Six Months due to a
decrease in demand for our services. Costs for rental of space for educational
seminars decreased $66,000 and other costs decreased $44,000 in the 2003 Six
Months compared to the 2002 Six Months. Further, software costs decreased
$25,000 in the 2003 Six Months due to cost reduction measures. Impairment of
software inventory of $248,000 in the 2003 Six Months represents an impairment
for software inventory held by Professional Services due to insufficient
historical and projected revenue from these products to support the
recoverability of its carrying value.
28
INTERNET COMMERCE CORPORATION
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 $141,000 in the 2003 Six Months from the 2002 Six Months.
The decrease in selling and marketing expenses was primarily attributable to a
decrease in salaries and benefits of $78,000 in the 2003 Six Months. See
"Selling and marketing - ICC.NET" above for a discussion of the allocation of
selling and marketing expenses among segments. Additionally, severance payments
decreased $21,000 in the 2003 Six Months from the 2002 Six Months. In addition,
trade shows and advertising decreased $16,000 in the 2003 Six Months from the
2002 Six Months due to cost reduction measures.
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 $229,000 in the 2003 Six Months from the 2002 Six Months. The
decrease was partially attributable to decreased rent expense of $136,000 as a
result of the renegotiation of our lease to reduce office space in our existing
facility. In addition, salary and benefits decreased $129,000 primarily due to a
reduction in personnel to 6 in the 2003 Six Months from 9 in the 2002 Six
Months. See "General and administrative - ICC.NET" above for a discussion of the
allocation of general and administrative expenses among segments.
Non-cash charges - Professional Services - Non-cash charges in the 2002
Six Months 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, decreased to $1,315,000 as of January 31,
2003 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 that we will achieve positive cash flow from operations for
our fiscal quarter ending July 31, 2003. 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 the heading "Risk Factors" in our
annual report on Form 10-K for the year ending July 31, 2002, we may not achieve
positive cash flow from operations as anticipated. Thus, we may need to
undertake additional cost reduction activities or raise additional capital.
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 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 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.
29
INTERNET COMMERCE CORPORATION
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 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 $1,033,000 at January 31, 2003
from $2,622,000 at July 31, 2002. This decrease is due to a $1,553,000 decrease
in accounts receivable, primarily attributable to the collection of $1,500,000
from Triaton, and to a decrease in prepaid expenses of $315,000, offset by a
decrease of $865,000 in accounts payable and accrued expenses as well as
continued operating losses during the 2003 Six Months. Our cash and marketable
securities decreased $903,000 at January 31, 2003 compared to July 31, 2002.
Analysis of Cash Flows
Cash used in operating activities decreased to ($735,000) in the 2003 Six
Months compared to ($3,633,000) used in operations in the 2002 Six Months. The
decrease 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. The Company believes
that its negative cash flows from operations in the quarter ending April 30,
2003 will be significantly reduced from the quarter ending January 31, 2003 and
the Company will achieve positive cash flow from operations for the quarter
ending July 31, 2003. See "Liquidity and Capital Resources."
30
INTERNET COMMERCE CORPORATION
Cash used in investing activities increased to ($5,000) in the 2003 Six
Months from $148,000 provided by investing activities in the 2002 Six Months.
The 2003 Six Months was primarily the result of $55,000 of proceeds from the
sales of marketable securities offset by purchases of property and equipment and
capitalized software. Cash provided by investing activities in the 2002 Six
Months 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 $135,000.
Cash used in financing activities was $102,000 in the 2003 Six Months
compared to cash provided by financing activities of $3,222,000 in the 2002 Six
Months. The $102,000 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.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standard Board ("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 FASB 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. The Company adopted SFAS 146 on January 1, 2003. The adoption
of this standard did not have a significant impact on the Company's consolidated
financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others" which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company has provided information
regarding commitments and contingencies relating to guarantees in note 10 of the
notes to the consolidated financial statements included herein.
31
INTERNET COMMERCE CORPORATION
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 consensus will not have a significant impact on the Company's
consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"). SFAS 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") to provide alternative methods to account
for the transition from the intrinsic value method of recognition of stock-based
employee compensation in accordance with Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" to the fair value recognition
provisions under SFAS 123. SFAS 148 provides two additional methods of
transition and will no longer permit the SFAS 123 prospective method to be used
for fiscal years beginning after December 15, 2003. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the pro forma effects had the fair value
recognition provisions of SFAS 123 been used for all periods presented. The
Company is required to adopt the disclosure provisions of SFAS 148 in the third
quarter of fiscal 2003. The adoption of SFAS 148 is not expected to have a
significant impact on the Company's results of operations and financial
position.
Item 3: Quantitative and Qualitative Disclosures About Market 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
number and credit worthiness of its customers. Under the Company's current
policies, the Company does not use interest rate derivatives instruments to
manage exposure to interest rate changes.
Item 4: Controls and Procedures
(a) Based on their evaluation of our disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) as of a date within 90 days prior to the filing of this Quarterly Report on
Form 10-Q (the "Evaluation Date"), the Chief Executive Officer and Chief
Financial Officer have concluded that such disclosure controls and procedures
are effective and ensure that all material information relating to the Company
required to be included in the Company's reports filed or submitted under the
Exchange Act is made known to them on a timely basis.
(b) Since the Evaluation Date, there were no significant changes in our
internal controls or in other factors that could significantly affect such
controls.
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None.
Item 2: Changes in Securities and Use of Proceeds
None.
Item 3: Defaults Upon Senior Securities
None.
32
Item 4: Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of the Stockholders of the Company was held on
January 13, 2003. For more information on the following proposals, reference is
made to the Company's proxy statement dated December 6, 2002. The following
items were voted upon and passed:
Election of Director. The stockholders elected the following Class I
director for a term of three years expiring at the third succeeding annual
meeting of stockholders in 2005:
Number of Shares
Name For Against
---- --- -------
Richard J. Berman 9,826,911 353,564
Ratification and Appointment of Deloitte & Touche LLP as the Company's
Independent Public Accountants. The appointment of Deloitte & Touche LLP as the
Company's independent public accountants for the fiscal year ending July 31,
2003 was ratified.
For Against Abstentions
--- ------- -----------
10,083,219 48,783 48,473
Item 5: Other Information
None.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits.
99.1 Certification of G. Michael Cassidy, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Walter M. Psztur, Chief Financial Officer, 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.
33
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: March 17, 2003
INTERNET COMMERCE CORPORATION
by: /s/ G. Michael Cassidy
----------------------------------
G. Michael Cassidy
President and Chief Executive Officer
by: /s/ Walter M. Psztur
----------------------------------
Walter M. Psztur
Chief Financial Officer
34
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: March 17, 2003
By: /s/ G. Michael Cassidy
-----------------------------
G. Michael Cassidy
President and Chief Executive Officer
35
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, 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: March 17, 2003
By: /s/ Walter M. Psztur
------------------------
Walter M. Psztur
Chief Financial Officer
36