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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ________ to ________.
Commission file number 000-27941
Imergent, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 87-0591719
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
754 E. Technology Avenue
Orem, Utah 84097
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(Address of Principal Executive Offices) (Zip Code)
(801) 227-0004
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(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
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 proceeding 12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in rule 12b-2 of the Exchange Act. Yes No X
------ -------
The number of shares outstanding of the registrant's common stock as of
May 14, 2003: 11,035,667
When we refer in this Form 10-Q to "Imergent," the "Company," "we,"
"our," and "us," we mean Imergent, Inc., a Delaware corporation, together with
our subsidiaries and their respective predecessors.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets at March 31, 2003 (unaudited)
and at June 30, 2002..................................................3
Unaudited Condensed Consolidated Statements of Earnings for the three months
and the nine months ended March 31, 2003 and 2002.....................4
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the
nine months ended March 31, 2003......................................5
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 2003 and 2002.........................................6
Notes to Unaudited Condensed Consolidated Financial Statements ................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General.......................................................................17
Critical Accounting Policies and Estimates....................................17
Related Party Transactions....................................................19
Results of Operation..........................................................20
Liquidity and Capital Resources...............................................26
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......29
Item 4. Controls and Procedures..........................................29
Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................................29
Item 2. Changes in Securities and Use of Proceeds........................30
Item 3. Defaults Upon Senior Securities..................................30
Item 4. Submission of Matters to a Vote of Security Holders..............30
Item 5. Other Information................................................31
..
Item 6. Exhibits and Reports on Form 8-K.................................31
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31,
2003
(Unaudited) June 30, 2002
------------------ -----------------
Assets
Current assets
Cash $ 926,121 $ 519,748
Trade receivables, net of allowance for doubtful accounts of $3,885,018 at March 31, 2003
and $1,918,673 at June 30, 2002 4,842,742 2,247,129
Inventories 37,405 23,416
Prepaid expenses 514,896 607,857
Credit card reserves, net of allowance for doubtful accounts of $376,700 at March 31, 2003
and $137,370 at June 30, 2002 550,092 1,022,701
------------------ -----------------
Total current assets 6,871,256 4,420,851
Property and equipment, net 197,807 409,460
Goodwill, net 455,177 455,177
Trade receivables, net of allowance for doubtful accounts of $1,740,912 at March 31, 2003
and $1,357,938 at June 30, 2002 2,243,574 1,673,740
Deferred tax asset 539,973 -
Other assets, net of allowance for doubtful accounts of $144,810 at March 31, 2003
and $0 at June 30, 2002 47,766 417,384
------------------ -----------------
Total Assets $ 10,355,553 $ 7,376,612
================== =================
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 1,006,154 $ 1,215,400
Accounts payable - related party 88,219 111,702
Bank overdraft - 150,336
Accrued wages and benefits 323,362 681,472
Past due payroll taxes - 26,797
Income taxes payable 990,248 -
Accrued liabilities 161,046 548,016
Current portion of capital lease obligations 22,720 80,938
Current portion of notes payable 26,429 160,671
Other current liabilities 449,630 450,523
Other current liabilities - related party 50,000 -
Deferred revenue 459,451 705,558
------------------ -----------------
Total current liabilities 3,577,259 4,131,413
Capital lease obligations, net of current portion 11,171 27,906
Notes payable, net of current portion 430,088 393,560
Other long term liabilities 5,850 -
------------------ -----------------
Total liabilities 4,024,368 4,552,879
------------------ -----------------
Commitments and contingencies - -
Minority interest - 355,159
------------------ -----------------
Stockholders' Equity
- --------------------
Capital stock, par value $.001 per share
Preferred stock - authorized 5,000,000 shares; none issued
Common stock - authorized 100,000,000 shares; issued and outstanding
11,035,667 and 10,995,774 shares, at March 31, 2003 and June 30, 2002, respectively 11,036 10,996
Additional paid-in capital 72,450,685 72,017,928
Deferred compensation (25,604) (34,987)
Accumulated other comprehensive loss (4,902) (4,902)
Accumulated deficit (66,100,030) (69,520,461)
------------------ -----------------
Total stockholders' equity 6,331,185 2,468,574
------------------ -----------------
Total Liabilities and Stockholders' Equity $ 10,355,553 $ 7,376,612
================== =================
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Earnings for the
Three Months and the Nine Months Ended March 31, 2003 and 2002
Three Months Ended Nine Months Ended
--------------------------------------- ----------------------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
------------------ ------------------ ------------------- -------------------
Revenue $ 15,786,458 $ 7,296,696 $ 37,658,988 $ 26,386,485
Cost of revenue 2,713,422 1,334,877 6,904,423 3,657,519
Cost of revenue - related party 348,807 157,437 840,263 720,930
------------------ ------------------ ------------------- -------------------
Total cost of revenue 3,062,229 1,492,314 7,744,686 4,378,449
------------------ ------------------ ------------------- -------------------
Gross profit 12,724,229 5,804,382 29,914,302 22,008,036
Operating expenses
Product development - 19,654 - 87,604
Selling and marketing 4,856,941 3,019,211 12,855,835 9,127,660
Selling and marketing - related party 160,277 85,866 349,680 353,392
General and administrative 1,197,797 968,712 3,244,830 4,600,962
Depreciation and amortization 57,018 145,131 299,974 446,542
Bad debt expense 4,611,640 1,251,021 9,816,200 3,256,152
----------------- ------------------ ------------------- -------------------
Total operating expenses 10,883,673 5,489,595 26,566,519 17,872,312
-
Earnings from operations 1,840,556 314,787 3,347,783 4,135,725
Other income (expense)
Other income 120 1,632 2,992 50,914
Interest income 218,197 96,577 549,414 265,962
Interest expense (11,657) (35,659) (29,483) (1,925,643)
------------------ ------------------ ------------------- -------------------
Total other income (expense) 206,660 62,550 522,923 (1,608,767)
------------------ ------------------ ------------------- -------------------
Earnings before income taxes 2,047,216 377,337 3,870,706 2,526,957
Provision for income taxes 450,275 - 450,275 -
------------------ ------------------ ------------------- -------------------
Net earnings $ 1,596,941 $ 377,337 $ 3,420,431 $ 2,526,957
================== ================== =================== ===================
Eanrnigs per share
Basic $ 0.14 $ 0.08 $ 0.31 $ 0.61
Diluted $ 0.14 $ 0.08 $ 0.30 $ 0.61
Weighted average shares outstanding
Basic 11,030,931 4,833,462 11,011,070 4,117,136
Diluted 11,290,240 4,833,462 11,219,115 4,135,779
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Stockholders' Equity
For the Nine Months Ended March 31, 2003
Common Stock Additional
------------------------------ Paid-in Deferred
Shares Amount Capital Compensation
--------------- ----------- -------------- ------------------
- --------------------------------------------------------------- --------------- ----------- -------------- ------------------
Balance July 1, 2002 10,995,774 $ 10,996 $ 72,017,928 $ (34,987)
Amortization of deferred compensation - - - 9,383
Private placement of common stock 5,000 5 14,995 -
Reconciliaton of common stock following reverse stock split (1,254) (1) 1 -
Common stock issued pursuant to finder's agreement 26,675 27 25,315 -
Conversion of exchangeable shares 9,472 9 355,150 -
Expense for options granted to consultants - - 37,296 -
Net earnings - - - -
- ---------------------------------------------------------------- -------------- ----------- -------------- ------------------
Balance March 31, 2003 (unaudited) 11,035,667 $ 11,036 $ 72,450,685 $ (25,604)
=============== =========== ============== ==================
See Notes to Condensed Consolidated Financial Statements
(Continued Below)
IMERGENT, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statement of Stockholders' Equity
For the Nine Months Ended March 31, 2003
(Continued From Above)
Accumulated
Other Total
Accumulated Comprehensive Stockholders'
Deficit loss Equity
------------- -------------------- -----------------
- --------------------------------------------------------------- ------------- -------------------- -----------------
Balance July 1, 2002 $ (69,520,461) $ (4,902) $ 2,468,574
Amortization of deferred compensation - - 9,383
Private placement of common stock - - 15,000
Reconciliaton of common stock following reverse stock split - - -
Common stock issued pursuant to finder's agreement - - 25,342
Conversion of exchangeable shares - - 355,159
Expense for options granted to consultants - - 37,296
Net earnings 3,420,431 - 3,420,431
- ---------------------------------------------------------------- ------------- -------------------- -----------------
Balance March 31, 2003 (unaudited) $ (66,100,030) $ (4,902) $ 6,331,185
============= ==================== =================
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended March 31, 2003 and 2002
2003 2002
--------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 3,420,431 $ 2,526,957
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Depreciation and amortization 299,974 446,542
Amortization of deferred compensation 9,383 13,017
Provision for bad debts 9,816,200 3,256,152
Common stock issued for services 25,342 199,657
Expense for options granted to independent consultants 37,296 -
Expense for loan restructuring and consultant options - 19,400
Amortization of debt issue costs - 707,385
Amortization of beneficial conversion feature and debt discount - 1,752,056
Changes in assets and liabilities:
Trade receivables (12,181,097) (5,625,391)
Inventories (13,989) 12,465
Prepaid expenses and other current assets 92,961 (39,849)
Credit card reserves (327,939) 406,925
Deferred tax asset (539,973) -
Other assets 369,618 (374,924)
Deferred revenue (246,107) (5,184,996)
Accounts payable, accrued expenses and other liabilities - related party (23,483) -
Accounts payable, accrued expenses and other liabilities (874,931) (166,221)
Income taxes payable 990,248
--------------------------------------
Net cash provided by (used in) operating activities 853,934 (2,050,825)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (98,128) (7,698)
--------------------------------------
Net cash used in investing activities (98,128) (7,698)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from common stock clearing liability - 1,212,753
Proceeds from issuance of common stock - 2,529,823
Proceeds from exercise of options and warrants - 1,727
Change in bank overdraft (150,336) (477,793)
Proceeds from short term note - 45,000
Repayment of convertible debenture - (100,000)
Repayment of note payable - bank - (97,779)
Repayment of capital lease obligations (74,953) (37,803)
Repayment of notes payable (124,144) (103,470)
--------------------------------------
Net cash provided by (used in) financing activities (349,433) 2,972,458
--------------------------------------
NET INCREASE IN CASH 406,373 913,935
CASH AT THE BEGINNING OF THE PERIOD 519,748 20,123
--------------------------------------
CASH AT THE END OF THE PERIOD $ 926,121 $ 934,059
======================================
Supplemental disclosures of non-cash transactions:
Conversion of debenture to common stock $ - $ 2,115,885
Notes payable settled on private placement of common stock - 490,000
Common stock issued for settlement agreements - 86,000
Conversion of convertible notes to common stock - 2,147,295
Common stock issued for outstanding liabilities 15,000 449,232
Conversion of loan payable to common stock 100,000
Accrued interest added to note payable 26,429 -
Conversion of exchangeable shares for minority interest 355,159
Supplemental disclosure of cash flow information:
Cash paid for interest - 1,732
See Notes to Condensed Consolidated Financial Statements
IMERGENT, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
(1) Description of Business
Imergent, Inc. (formerly known as "Netgateway, Inc.", referred to
hereinafter as Imergent or the "Company"), was incorporated as a Nevada
corporation on April 13, 1995. In November 1999, it was reincorporated under the
laws of Delaware. Effective July 3, 2002, a Certificate of Amendment was filed
to its Certificate of Incorporation to change its name to Imergent, Inc.
Imergent is an e-Services company that provides eCommerce technology, training
and a variety of web-based technology and resources to over 100,000 small
businesses and entrepreneurs annually. The Company's affordably priced
e-Services offerings leverage industry and client practices, and help increase
the predictability of success for Internet merchants. The Company's services
also help decrease the risks associated with eCommerce implementation by
providing low-cost, scalable solutions with minimal lead-time, ongoing industry
updates and support. The Company's strategic vision is to remain an eCommerce
provider tightly focused on its target market.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The unaudited condensed consolidated financial statements include the
accounts and operations of the Company and its wholly-owned subsidiaries which
include Netgateway, Galaxy Enterprises, Inc., Galaxy Mall, Inc., StoresOnline
Inc., StoresOnline, Ltd., and StoresOnline.com, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
(b) Reverse Stock Split
On June 28, 2002 the stockholders of the Company approved a one-for-ten
reverse split of the Company's outstanding common stock, which became effective
July 2, 2002. All data for common stock , options and warrants have been
adjusted to reflect the one-for-ten reverse split for all periods presented. In
addition, all common stock prices and per share data for all periods presented
have been adjusted to reflect the one-for-ten reverse stock split.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory consists mainly of products provided in conjunction with the
Internet training workshops.
(d) Property and Equipment
Property and equipment are stated at cost. Depreciation expense is
computed principally on the straight-line method in amounts sufficient to
allocate the cost of depreciable assets, including assets held under capital
leases, over their estimated useful lives ranging from 3 to 5 years. The cost of
leasehold improvements is being amortized using the straight-line method over
the shorter of the estimated useful life of the asset or the terms of the
related leases. Depreciable lives by asset group are as follows:
Computer and office equipment ......................3 to 5 years
Furniture and fixtures..............................4 years
Computer software...................................3 years
Leasehold improvements..............................term of lease
Normal maintenance and repair items are charged to costs and expenses
as incurred. The cost and accumulated depreciation of property and equipment
sold or otherwise disposed are removed from the accounts and any related gain or
loss on disposition is reflected in net earnings (loss) for the period.
(e) Goodwill
As required by Statement of Financial Accounting Standards ("SFAS")
142, beginning on July 1, 2002 goodwill is no longer amortized but is tested on
an annual basis for impairment by comparing its fair value to its carrying
value. If the carrying amount of goodwill exceeds its fair value, an impairment
loss will be recognized in an amount equal to that excess. Prior to July 1, 2002
goodwill was being amortized over a ten-year period. During the quarter ended
December 31, 2002 the Company engaged an independent consulting firm to test the
Company's goodwill for impairment. Based on the appraisal made by the
independent consulting firm management has concluded that the fair market value
of the Company's assets exceeded the carrying value at December 31, 2002 and
determined that there is no goodwill impairment as of that date. As a result, no
change to the carrying value of the goodwill is necessary as of December 31,
2002. As of March 31, 2003 management continues to believe that the fair market
value of the Company's assets exceeded the carrying value and therefore have
determined that there is no goodwill impairment as of that date.
(f) Product and Development Expenditures
Product and development costs are expensed as incurred. Costs related
to internally developed software are expensed until technological feasibility
has been achieved, after which the costs are capitalized.
(g) Impairment of Long-Lived Assets
The Company reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted operating cash flows projected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
(h) Financial Instruments
The carrying values of cash, accounts receivable, notes receivable,
accounts payable, accrued liabilities, capital lease obligations and the current
portion of notes payable approximated fair value due to either the short
maturity of the instruments or the recent date of the initial transaction.
(i) Income Taxes
The Company utilizes the liability method of accounting for income
taxes. Under the liability method, deferred income tax assets and liabilities
are provided based on the difference between the financial statement and tax
bases of assets and liabilities as measured by the currently enacted tax rates
in effect for the years in which these differences are expected to reverse.
Deferred tax expense or benefit is the result of changes in deferred tax assets
and liabilities. An allowance against deferred tax assets is recorded in whole
or in part when it is more likely than not that such tax benefits will not be
realized.
Deferred tax assets are to be recognized for temporary differences that
will result in tax-deductible amounts in future years and for tax carryforwards
if, in the opinion of management, it is more likely than not that the deferred
tax assets will be realized. Our deferred tax assets consist primarily of net
operating losses carried forward. The Company has provided a valuation allowance
against some of its net deferred tax assets at March 31, 2003 and against all of
its deferred tax assets at June 30, 2002. Fiscal year 2002 was the first
profitable year for the Company since its inception. However, differences
between accounting principals generally accepted in the United States of America
("US GAAP") and accounting for tax purposes caused the Company to have a tax
loss for the fiscal year ended June 30, 2002. For the nine-month period ended
March 31, 2003 we have taxable income of approximately $2.5 million,.
Our net operating loss carry forward ("NOL"), representing the losses
reported for tax purposes from the inception of the Company through June 30,
2002 is subject to a limitation as defined in Section 382 of the Internal
Revenue Code. Operating losses from prior years are normally available to offset
taxable income in subsequent years. However, Section 382 places a limitation on
the amount that can be used in any one year if a "change in control" as defined
in the Internal Revenue Code has occurred. Since its formation, the Company has
issued a significant number of shares and purchasers of those shares have sold
some of them, with the result that a change of control as defined by Section 382
has occurred. We currently estimate that the available NOL for the fiscal year
ended June 30, 2003 will be approximately $2.7 million.
(j) Accounting for Stock Options
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, in accounting for its
fixed plan employee stock options. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. Compensation expense related to stock options
granted to non-employees is accounted for under SFAS No. 123, "Accounting for
Stock-Based Compensation," whereby compensation expense is recognized over the
vesting period based on the fair value of the options on the date of grant.
(k) Revenue Recognition
During the fiscal year ended June 30, 2001 the Company changed its
product offering at its Internet training workshops. The date of the change was
October 1, 2000, the beginning of our second fiscal quarter of fiscal year 2001.
Prior to that time, customers were sold a service consisting of the construction
of Internet websites for their business, which service was to be provided at any
time during the 12 months following the sale. Included in the price paid for
this service was one year's hosting beginning when the website was published.
Revenue from these transactions was deferred at the time of sale and recognized
as the services were rendered or when the right to receive the services
terminated.
Beginning October 1, 2000, the Company discontinued selling the service
and in its place sold a license to use a new product called the StoresOnline
Software ("SOS"). The SOS is a web based software product that enables the
customer to develop their Internet website without additional assistance from
us. When a customer purchases a SOS license at one of our Internet workshops, he
or she receives a CD-ROM containing programs to be used with their computer and
a password and instructions that allow access to our website where all the
necessary tools are present to complete the construction of the customer's
website. When completed, the website can be hosted with us or any other provider
of such services. If they choose to host with us there is an additional setup
and hosting fee (currently $150) for publishing and 12 months of hosting. This
fee is deferred at the time it is paid and recognized during the subsequent 12
months. A separate file is available and can be used if the customer decides to
create their website on their own completely without access to our website and
host their site with another hosting service.
The revenue from the sale of the SOS license is recognized when the
product is delivered to the customer. The Company accepts cash and credit cards
as methods of payment and we offer 24-month installment contracts to customers
who prefer an extended payment term arrangement. The Company offers these
contracts to all workshop attendees not wishing to use a check or credit card
provided they complete a credit application, give us permission to independently
check their credit and are willing to make an appropriate down payment.
Installment contracts are carried on our books as a receivable and the revenue
generated by these installment contracts is recognized when the product is
delivered to the customer and the contract is signed. At that same time an
allowance for doubtful accounts is established. This procedure was in effect for
the last three quarters of fiscal year 2001, all of fiscal year 2002 and is
still in effect for the nine-month period ended March 31, 2003.
The American Institute of Certified Public Accountants Statement of
Position 97-2 ("SOP 97-2") states that revenue from the sale of software should
be recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs one of our
order forms and a receipt acknowledging receipt and acceptance of the product.
As is noted on the order and acceptance forms, all sales are final. All fees are
fixed and final. Some states require a three-day right to rescind the
transaction. Sales in these states are not recognized until the rescission
period has expired. The Company offers customers the option to pay for the SOS
license with Extended Payment Term Arrangements ("EPTAs"). The EPTAs generally
have a twenty-four month term. The Company has offered its customers the payment
option of a long-term installment contract for more than four years and has a
history of successfully collecting under the original payment terms without
making concessions. Over the past four years, the Company has collected or is
collecting approximately 70% of all EPTAs issued to customers. Not all customers
live up to their obligations under the contracts. The Company makes every effort
to collect on the EPTAs, including the engagement of professional collection
services. Despite our efforts, approximately 30 percent of all EPTAs are
determined to be uncollectible. All uncollectible EPTAs are written off against
an allowance for doubtful accounts. The allowance is established at the time of
sale based on our five-year history of extending EPTAs. As a result, revenue
from the sale of the SOS is recognized upon the delivery of the product.
(l) Business Segments and Related Information
The Company currently operates in one business segment.
(m) Foreign Currency Translation
The financial statements of the Company's Canadian subsidiary,
StoresOnline.com, Ltd. have been translated into U.S. dollars from its
functional currency in the accompanying condensed consolidated financial
statements in accordance with Statement of Financial Accounting Standards No.
52, "Foreign Currency Translation." Balance sheet accounts of StoresOnline.com,
Ltd. are translated at period-end exchange rates while income and expenses are
translated at the average of the exchange rates in effect during the period.
Translation gains or losses that related to the net assets of StoresOnline.com
Ltd. are shown as a separate component of stockholders' equity and comprehensive
income (loss). There were no gains or losses resulting from realized foreign
currency transactions (transactions denominated in a currency other than the
entities' functional currency) during the nine months ended March 31, 2003 or
2002.
(n) Per Share Data
Basic earnings per share is computed by dividing net earnings available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted net earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
(o) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance sheet date, and
the reporting of revenues and expenses during the reporting periods to prepare
these financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from those
estimates. The Company has estimated that allowances for bad debt for Trade
Receivables should be $5,625,930 and $3,276,611 as of March 31, 2003 and June
30, 2002, respectively. In addition, the Company has recorded an allowance for
doubtful accounts of $380,892 at March 31, 2003 and $137,370 at June 30, 2002
for estimated credit card chargebacks relating to the most recent 180 days of
credit card sales.
(p) Commission Expense
Commission expense relating to third-party telemarketing activity is
recognized as incurred.
(q) Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001
and permits early adoption for companies with a fiscal year beginning after
March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as
of the adoption date. Additionally, we were required to perform an impairment
test within six months as of the adoption date, annually thereafter, and
whenever events and circumstances occur that might affect the carrying value of
these assets.
SFAS 142 was applicable to the Company beginning July 1, 2002. As a
result we discontinued the amortization of goodwill and arranged for an
independent evaluation to determine if an impairment to our goodwill existed. We
hired an independent consulting firm to perform an appraisal. Based on their
report, management found that no impairment existed. We are now obligated to
make this review annually if events and circumstances occur that might affect
the carrying value of our goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under this standard, asset retirement
obligations will be recognized when incurred at their estimated fair value. In
addition, the cost of the asset retirement obligations will be capitalized as a
part of the asset's carrying value and depreciated over the asset's remaining
useful life. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The adoption of SFAS No. 143 did not have a material impact on our
financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We do not expect
the implementation of SFAS 144 to have a material effect on our financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April
2002" (SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does
not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as
well as other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS 145 are effective for transactions
occurring after May 15, 2002 while other are effective for fiscal years
beginning after May 15, 2002. We have not assessed the potential impact of SFAS
145 on our financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces 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) (EITF 94-3). SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for exit costs, as defined in EITF No. 94-3 were recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. Since we have had no Exit or Disposal activity since
December 31, 2002, we do not expect the implementation of SFAS 144 to have a
material effect on our financial condition or results of operations.
In October, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions (SFAS 147). This standard relates to acquisitions of
financial institutions and is not expected to affect the Company's financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosure" (SFAS 148). This standard
amends the disclosure and certain transition provisions of SFAS 123, Accounting
for Stock-Based Compensation. Its disclosure provisions are effective for
interim periods beginning after December 15, 2002. The Company does not expect
that adoption of SFAS 148 will have a material impact on its financial condition
or results of operations.
(3) Going Concern
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has incurred losses from its inception through the fiscal
year ended June 30, 2001. The Company was profitable during the fiscal year
ended June 30, 2002 and has been profitable for the nine-month period ended
March 31, 2003. The Company, however, has a cumulative net loss of $66,100,030
through March 31, 2003. At March 31, 2003 the Company had $926,121 cash on hand,
working capital of $3,293,997 and equity of $6,331,185. Management believes that
through future profitable operations and the raising of additional equity or
debt capital, if necessary, the Company will be able to continue operating as a
going concern. However, there can be no assurance that if additional capital is
required that it will be available. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the
inability of the Company to continue as a going concern .
(4) Selling of Trade Receivables With Recourse
The Company offers customers the option to finance, through Extended
Payment Term Arrangements (EPTAs), purchases made at the Internet training
workshops. A significant portion of these EPTAs are then sold, on a discounted
basis, to third party financial institutions for cash. EPTAs sold to third party
financial institutions are generally subject to recourse by the purchasing
finance company after an EPTA is determined to be uncollectible. For the
nine-month periods ended March 31, 2003 and 2002, the Company sold contracts
having a principal balance of $3,850,372 and $4,442,364, respectively. The
Company maintains approximately a two percent bad debt allowance for doubtful
accounts on all EPTAs that are purchased by finance companies. The Company sells
contracts to three separate finance companies and continues to seek
relationships with other potential purchasers of these EPTAs.
(5) Notes Payable
Notes payable at March 31, 2003 consist of $456,517 of principal and
capitalized interest payable to King William (see Note 6). Maturities of notes
payable are as follows:
Year ending June 30,
2003 $ 26,429
2004 -
2005 -
2006 -
2007 430,088
Thereafter -
-------------
$ 456,517
=============
(6) Convertible Debenture
In July 2000, the Company entered into a securities purchase agreement
with King William, LLC ("King William"). Under the terms of the agreement, the
Company issued to King William an 8% convertible debenture due July 31, 2003 in
the principal amount of $4.5 million. The debenture was convertible at King
William's option into the number of shares of our common stock at the lower of
$17.90 or a conversion rate of 80% of the average market price of the common
stock during any three non-consecutive trading days during the 20 trading days
prior to conversion. The purchase price for the debenture was payable in two
tranches. The first tranche of $2.5 million was paid at the closing in July
2000. The value of the beneficial conversion feature on the $2.5 million that
has been drawn down was recorded as additional paid in capital and interest
expense of $884,000 for the year ended June 30, 2001, as the convertible
debentures were immediately exercisable.
In connection with the securities purchase agreement, the Company
issued to King William a warrant to purchase 23,100 shares of the Company's
common stock. In connection with the issuance of the debenture, the Company also
issued to Roth Capital Partners, Inc., a warrant to purchase 9,000 shares of
common stock and to Carbon Mesa Partners, LLC, a warrant to purchase 1,000
shares of common stock. Each of the warrants is exercisable for five years from
the date of issue, at an exercise price of $16.25 per share and with cashless
exercise and piggyback registration rights. The fair value of the warrants has
been determined to equal $371,000 using the Black-Scholes pricing model with the
following assumptions: dividend yield of zero, expected volatility of 80%,
risk-free interest rate of 6.5% and expected life of 5 years. The $371,000 was
accounted for as additional paid in capital and debt discount and was amortized
over the life of the debt. The unamortized balance at December 31, 2002 and June
30, 2002 was $0 and $0, respectively.
Effective January 25, 2001, the Company reached an agreement with King
William to restructure the debenture (the "Restructuring Agreement"). As of the
date of the Restructuring Agreement the Company was in breach and/or violation
of the Purchase Agreement, the Debenture, the King William Warrant Agreement,
the Registration Rights Agreements and the Equity Agreement. However, pursuant
to the terms of the Restructuring Agreement the holder of the convertible
debenture has waived all of these defaults as of the date of the Restructuring
Agreement. Under the terms of the Restructuring Agreement the agreements were
terminated effective as of the date of the Restructuring Agreement and no
termination payment or additional warrants were issued in connection therewith.
Under the terms of the Restructuring and Amendment Agreement the second
tranche of the debenture was not be available to the Company. The Company agreed
to repay the full amount of the Debenture plus a 15% premium ($375,000) with
respect to the original principal amount in ten payments. As of the date of the
Restructuring and Amendment Agreement the principal amount including accrued and
unpaid interest was $2,972,781. Additionally, the Company has allowed King
William to retain the right to convert any or all portions of the outstanding
debt to equity, but only after the stock has traded at or above $30.00 for
twenty consecutive trading days, or if the Company does not make a required
payment of principal. Warrants already earned by King William were re-priced at
$2.50 per share and King William was issued a warrant for an additional 26,900
shares of common stock at $2.50 per share. The incremental fair value of the
re-pricing of the warrants and the issuance of the new warrants, valued using
the Black-Scholes pricing model with the following assumptions: dividend yield
of zero, expected volatility of 170%, risk-free interest rate of 5% and expected
life of 5 years, was $9,008 and $129,927, respectively. These costs were
classified on the balance sheet as debt financing costs and were being amortized
over the life of the debt. The initial payment of $250,000, as called for by the
Restructuring and Amendment Agreement, was made during the first week of
February 2001. A second payment to be paid on February 28, 2001 was not made.
In May 2001 King William elected to convert $200,000 of the principal
and accrued and unpaid interest of the debenture (Conversion Amount) into 80,000
shares of Common Stock of the Company, at a conversion price of $2.50 per share.
The Conversion Amount was credited toward the payment of $250,000 due on
February 28, 2001, with the balance plus interest accrued to be paid on March
10, 2002. In addition, in May 2001, the Company entered into a Waiver Agreement
with King William, LLC to amend certain of the terms of the Restructuring
Agreement and to waive certain existing defaults under the Restructuring
Agreement. The Waiver Agreement amended the Restructuring Agreement payment
schedule to postpone the remaining April 2001 payment of $247,278 to February
2002 and the May 2001 payment of $247,278 to March 2002. As of the date of the
Waiver Agreement King William had withdrawn and waived all defaults and
violations.
Effective July 11, 2001 the Company and King William entered into a
Second Restructuring Agreement. The Company agreed to pay, and King William
agreed to accept, in full and final satisfaction of the Debenture at a closing
effective September 10, 2001, (i) a cash payment of $100,000, (ii) a $400,000
promissory note of the Company due August 2004 bearing interest at 8% per annum
and (iii) 280,000 shares of the Company's common stock. No accrued interest was
payable in connection with these payments. King William has agreed to certain
volume limitations relating to the subsequent sale of its shares of the
Company's common stock and has also agreed to forgive the promissory note if the
Company meets certain specific requirements including a minimal amount
($2,250,000) of proceeds King William receives from its sale of Company common
stock. The Final Conversion Shares insure that King William will receive
sufficient shares so that on the day of the closing King William will
beneficially own common shares equal to 9.99% of the then outstanding shares of
the Company. In September 2001 the Company issued the final conversion shares
equal to 280,000. No gain or loss on the exchange of shares for debt was
recorded in the accompanying financial statements. The Company was in default
under the Second Restructuring Agreement for failure to make interest payments
on November 10, 2001 and February 10, 2002, as called for by the agreement. King
William may have accelerated payment of the unpaid balance of the note plus
accrued interest upon written notice to the Company. No written notice of
default had been received.
Effective February 13, 2002 the Company and King William agreed to
amend certain terms of the Second Restructuring Agreement. The New Note is
amended to provide for a final maturity on July 10, 2007 and to provide that
interest shall accrue at the rate stated in the New Note and be added to the
principal balance until August 13, 2002. In addition, interest payable may be
paid in either cash or common stock of the Company, which common stock is to be
valued at an amount equal to the average closing bid price of the Company's
common stock during the five trading days prior to the date the interest payment
is made. Upon the signing of this agreement the Company issued 10,000 shares of
restricted common stock valued at $13,000. The Company is no longer required to
file a registration statement with respect to the common stock of the Company
currently held by King William or acquirable by it upon exercise of the warrants
held by it. King William has waived any default by the Company under the Second
Agreement and the New Note. Finally, the selling limitations in Section 4 of the
Second Agreement are no longer in effect and King William is only bound by the
limitations under Rule 144 relating to the resale of any securities.
(7) Convertible Long Term Notes
In January and April 2001, the Company issued long term Convertible
Promissory Notes ("Notes") in a private placement offering totaling $2,076,500.
The terms of Notes required them to be repaid on July 1, 2004 plus accrual of
interest at the rate of eight percent (8%) per annum. The Notes were convertible
prior to the Maturity Date at the option of the Holder any time after July 1,
2001, or by the Company at any time after July 1, 2001 upon certain conditions
as detailed in the Notes. The Notes were convertible into shares of common stock
of the Company by dividing the Note balance on the date of conversion by $2.50,
subject to Conversion Price Adjustments as defined in the agreement. The
relative fair value of this Beneficial Conversion Feature of the notes was
calculated to be $1,347,480 and was recorded as debt discount on the balance
sheet, and was amortized over the life of the Notes in accordance with Emerging
Issues Task Force issue 00-27 effective November 16, 2000.
In connection with the sale of the Notes, the Company issued a warrant
to purchase a share of the Company's common stock at an exercise price of $5.00
per share for every two shares of Common Stock into which the Note is originally
convertible. The Company issued a total of 366,100 warrants in connection with
the sale of the Notes, with a date of expiration not to exceed sixty calendar
days following the commencement date of the warrants. The relative fair value of
the warrants has been determined to be $512,540 and has been recorded as debt
discount on the balance sheet and is amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. None of the warrants were exercised.
The beneficial conversion feature and debt discounts of $1,347,480 and
$512,540, respectively, were netted against the $2,076,500 balance of the Notes
on the Balance Sheet were being amortized over the life of the Notes in
accordance with Emerging Issues Task Force issue 00-27 effective November 16,
2000. The unamortized balance of the beneficial conversion feature and debt
discount at March 31, 2003 and June 30, 2002 was $0 and $269,634, respectively.
On July 15, 2001 the Company sent a letter to all holders of the Notes
explaining their right to convert their investment into common stock. The letter
included a calculation of the interest the note holder had earned and offered to
convert both the principal balance of the Note and the accrued interest into
common stock at a conversion price of $2.50 per share.
As of December 31, 2001, all Note holders, holding $2,147,295 of
aggregate principal and accrued interest, had exercised their right to convert
both principal and accrued interest into 859,279 shares of common stock.
(8) Stockholders' Equity
Nine months ended March 31, 2003
In July 2002, the Company issued 5,000 shares of common stock at a
price of $3.00 a share relating to the private placement of common stock which
closed during November 2001 for which all necessary paperwork had not previously
been received. The Company had held these funds as a current liability pending
the receipt of all proper paperwork.
On December 6, 2002, the Company issued 26,675 shares of common stock
in settlement of a finder's fee earned in connection with our private placement
of common stock that closed in May 2002.
On February 14, 2003 we issued 9,472 shares of our common stock in
exchange for 9,472 Exchangeable Shares of StoresOnline.com, Ltd. held by a
former employee. The shares of our common stock were issued pursuant to the
provisions of a Stock Purchase Agreement dated November 1, 1998 which was
entered into in connection with our acquisition of StoresOnline.com Ltd.
(9) Related Entity Transactions
Effective October 1, 2002 John J. Poelman, Chief Executive Officer and
a director and stockholder of the Company, sold his interest in Electronic
Commerce International, Inc. ("ECI") to an unrelated third party. The Company
utilizes the services of ECI, a Utah corporation, to provide a credit card
merchant account solution to our customers and, formerly, to provide a leasing
opportunity to customers who purchased our products at the Internet training
workshops. The Company buys a product from ECI that provides on-line, real-time
processing of credit card transactions and resells it to its customers. John J.
Poelman, was the sole owner of ECI during the three months ended September 30,
2002 and the nine months ended March 31, 2002. Total revenue generated by the
Company from the sale of ECI merchant account solutions, while owned by Mr.
Poelman, was $1,453,612 and $3,363,486 for the nine months ended March 31, 2003
and 2002, respectively. The cost to the Company for these products and services
totaled $223,716 for the quarter ended September 30, 2002 and $720,930 for the
nine months ended March 31, 2002. During the nine months ended March 31, 2003
and 2002 the Company processed leasing transactions for its customers through
ECI, while owned by Mr. Poelman, in the amounts of $0 and $1,090,520,
respectively. In addition, the Company had $0 and $26,702 as of March 31, 2003
and June 30, 2002, respectively, recorded in accounts payable relating to the
amounts owed to ECI for the purchase of the merchant account software while
owned by Mr. Poelman.
The Company offers its customers at its Internet training workshops,
and through telemarketing sales following the workshop certain products intended
to assist the customer in being successful with their business. These products
include a live chat capability for the customer's own website and web traffic
building services. The Company utilizes Electronic Marketing Services, LLC.
("EMS") to fulfill these services to the Company's customers. In addition, EMS
provides telemarketing services, selling some of the Company's products and
services. Ryan Poelman, who owns EMS, is the son of John J. Poelman. The
Company's revenues generated from the above products and services were
$5,609,553 and $3,196,348 for the nine months ended March 31, 2003 and 2002,
respectively. The Company paid EMS $692,845 and $353,392 to fulfill these
services during the nine months ended March 31, 2003 and 2002, respectively. In
addition, the Company had $76,165 and $53,023 as of March 31, 2003 and June 30,
2002, respectively, recorded in accounts payable relating to the amounts owed to
EMS for product and services.
The Company sends complimentary gift packages to its customers who
register to attend the Company's Workshop training sessions. An additional gift
is sent to Workshop attendees who purchase our products at the conclusion of the
Workshop. The Company utilizes Simply Splendid, LLC ("Simply Splendid"), which
offered the lowest price compared to several alternatives, to provide these gift
packages to the Company's customers. Aftyn Morrison, who owns Simply Splendid,
is the daughter of John J. Poelman, Chief Executive Officer, a director and a
stockholder of the Company. The Company paid Simply Splendid $273,382 and $0 to
fulfill these services during the nine months ended March 31, 2003 and 2002,
respectively. In addition, the Company had $12,054 and $0 as of March 31, 2003
and June 30, 2002, respectively, recorded in accounts payable relating to the
amounts owed to Simply Splendid for services.
(10) Earnings Per Share
Unexercised stock options to purchase 900,903 shares of the Company's
common stock and unexercised warrants to purchase 484,708 shares of the
Company's common stock were outstanding as of March 31,2003, of which 595,000
stock options and 269,640 warrants were included in the diluted per share
computation. Unexercised stock options to purchase 595,000 shares of the
Company's common stock and unexercised warrants to purchase 269,640 shares of
the Company's common stock were included in the computation of diluted loss per
share for the quarter ending March 31,2003 and for the nine month period ending
March 31, 2003.
The following data was used in computing earnings per share:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
March 31, March 31, March 31, March 31,
2003 2002 2003 2002
-------------- -------------- ------------- --------------
Net Earnings available to common shareholders $ 1,596,941 $ 377,337 $ 3,420,431 $ 2,526,957
Basic EPS
- -----------------------------------------------------------------------------------------------------------
Common shares outstanding entire period 11,026,195 4,657,073 10,995,774 2,446,019
Weighted average common shares:
Issued during period 4,736 176,389 15,296 1,671,117
Canceled during period _ - - -
-------------- -------------- ------------- --------------
Weighted average common shares outstanding
during period 11,030,931 4,833,462 11,011,070 4,117,136
-------------- -------------- ------------- --------------
Earnings per common share - basic $ 0.14 $ 0.08 $ 0.31 $ 0.61
============== ============== ============= ==============
Diluted EPS
- -----------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding
during period - basic 11,030,931 4,833,462 11,011,070 4,117,136
Dilutive effect of common stock equivalents 259,309 - 208,045 18,643
-------------- -------------- ------------- --------------
Weighted average common shares outstanding
during period - diluted 11,290,240 4,833,462 11,219,115 4,135,779
-------------- -------------- ------------- --------------
Earnings per common share - diluted $ 0.14 $ 0.08 $ 0.30 $ 0.61
============== ============== ============= ==============
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This management's discussion and analysis of financial condition and
results of operations and other portions of this Quarterly Report on Form 10-Q
contain forward-looking information that involves risks and uncertainties. Our
actual results could differ materially from those anticipated by this
forward-looking information. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed or referred to in
the Annual Report on Form 10-K for the year ended June 30, 2002, filed on
October 15, 2002, under the heading Information Regarding Forward-Looking
Statements and elsewhere. Investors should review this quarterly report on Form
10-Q in combination with our Annual Report on Form 10-K in order to have a more
complete understanding of the principal risks associated with an investment in
our common stock. This management's discussion and analysis of financial
condition and results of operations should be read in conjunction with our
unaudited condensed consolidated financial statements and related notes included
elsewhere in this document.
GENERAL
Reverse Stock Split
On June 28, 2002, our stockholders approved amendments to our
Certificate of Incorporation to change our corporate name to "Imergent, Inc."
and to effect a one-for-ten reverse split of the issued and outstanding shares
of our common stock and reduce the authorized number of shares of common stock
from 250,000,000 to 100,000,000. These changes were effective July 2, 2002. As a
result of the reverse stock split, every ten shares of our existing common stock
was converted into one share of our new common stock under our new name,
Imergent, Inc. Fractional shares resulting from the reverse stock split were
settled by cash payment. Throughout this discussion references to numbers of
shares and prices of shares have been adjusted to reflect the reverse stock
split.
Review by the Securities and Exchange Commission
On March 6, 2002, the Securities and Exchange Commission ("SEC")
notified us that they reviewed our annual report filed on Form 10-K for the
fiscal year ended June 30, 2001 and our quarterly report on Form 10-Q for the
quarter ended September 30, 2001. They sent a letter of comments pointing out
areas of concern and requesting we answer their questions and provide additional
information. We exchanged correspondence with members of the SEC staff and
provided them with additional information. On September 24, 2002 in a telephone
conference call with the SEC staff, we resolved certain of the more material
issues. On October 31, 2002 we responded to other comments from the staff in
their letter dated August 5, 2002. On November 6, 2002 in a telephone
conversation with the SEC staff we resolved the remaining issues without any
change in our accounting policies or previously reported financial statements.
Fluctuations in Quarterly Results and Seasonality
In view of the rapidly evolving nature of our business and the market
we serve, we believe that period to period comparisons of our operating results,
including our gross profit and operating expenses as a percentage of revenues
and cash flow, are not necessarily meaningful and should not be relied upon as
in indication of future performance. We experience seasonality in our business.
Our fiscal year ends each June 30. Revenues from our core business during the
first and second fiscal quarters tend to be lower than revenues in our third and
fourth quarters. We believe this to be attributable to summer vacations and the
Thanksgiving and December holiday seasons that occur during our first and second
quarters.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
and form the basis for the following discussion and analysis on critical
accounting policies and estimates. The preparation of these financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On a regular basis we evaluate our estimates
and assumptions. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Senior management has discussed the development, selection and
disclosure of these estimates with the Board of Directors. There are currently
four members on the Board of Directors and they together function as the Audit
Committee of Imergent, Inc. Actual results may differ from these estimates under
different assumptions or conditions.
A summary of our significant accounting policies is set out in Note 2
to our Consolidated Financial Statements in our Form 10-K for the fiscal year
ended June 30, 2002. We believe the critical accounting policies described below
reflect our more significant estimates and assumptions used in the preparation
of these unaudited condensed consolidated financial statements. The impact and
any associated risks on our business that are related to these policies are also
discussed throughout this Management's Discussion and Analysis of Financial
Condition and Results of Operations where such policies affect reported and
expected financial results.
Valuation of Long-Lived Assets Including Goodwill and Purchased Assets
We review property, equipment, goodwill and purchased intangible assets
for impairment whenever events or changes in circumstances indicate the carrying
value of an asset may not be recoverable. This review is conducted as of
December 31st of each year or more frequently if necessary. Our asset impairment
review assesses the fair value of the assets based on the future cash flows the
assets are expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from the disposition of the asset (if any) are less than
the carrying value of the asset. This approach uses our estimates of future
market growth, forecasted revenue and costs, expected period the assets will be
utilized and appropriate discount rates. When an impairment is identified, the
carrying amount of the asset is reduced to its estimated fair value.
Revenue Recognition
During the fiscal year ended June 30, 2001 the Company changed its
product offering at its Internet training workshops. The date of the change was
October 1, 2000, the beginning of our second fiscal quarter of fiscal year 2001.
Prior to that time, customers were sold a service consisting of the custom
construction of Internet websites for their business, which service was to be
provided at any time during the 12 months following the sale. Included in the
price paid for this service was one year's hosting beginning when the website
was published. Revenue from these transactions was deferred at the time of sale
and recognized as the services were rendered or when the right to receive the
services terminated.
Beginning October 1, 2000, we discontinued selling the service and in
its place sold a license to use a new product called the StoresOnline Software
("SOS"). The SOS is a web-based software product that enables the customer to
develop their Internet website without additional assistance from us. When a
customer purchases a SOS license at one of our Internet workshops, he or she
receives a CD-ROM containing programs to be used with their computer and a
password and instructions that allow access to our website where all the
necessary tools are present to complete the construction of the customer's
website. If they choose to host with us there is an additional setup and hosting
fee (currently $150) for publishing and 12 months of hosting. This fee is
deferred at the time it is paid and recognized during the subsequent 12 months.
A separate computer file is provided to the purchaser at the time of purchase
and can be used if the customer decides to create their website on their own
completely without access to our website and host their site with another
hosting service.
The revenue from the sale of the SOS license is recognized when the
product is delivered to the customer. We accept cash and credit cards as methods
of payment and we offer 24-month installment contracts to customers who prefer
an extended payment term arrangement. We offer these contracts to all workshop
attendees not wishing to use a check or credit card provided they complete a
credit application, give us permission to independently check their credit and
are willing to make an appropriate down payment. Installment contracts are
carried on our books as a receivable and the revenue generated by these
installment contracts is recognized when the product is delivered to the
customer and the contract is signed. At that same time an allowance for doubtful
accounts is established. This procedure was in effect for all of fiscal year
2002 and is still in effect for the nine-month period ended March 31, 2003.
The American Institute of Certified Public Accountants Statement of
Position 97-2 ("SOP 97-2") states that revenue from the sale of software should
be recognized when the following four specific criteria are met: 1) persuasive
evidence of an arrangement exists, 2) delivery has occurred, 3) the fee is fixed
and determinable and 4) collectibility is probable. All of these criteria are
met when a customer purchases the SOS product. The customer signs one of our
order forms and a receipt acknowledging receipt and acceptance of the product.
As is noted on the order and acceptance forms, all sales are final. All fees are
fixed and final. Some states require a three-day right to rescind the
transaction. Sales in these states are not recognized until the rescission
period has expired. We offer customers the option to pay for the SOS license
with Extended Payment Term Arrangements ("EPTAs"). The EPTAs generally have a
twenty-four month term. We have offered our customers the payment option of a
long-term installment contract for more than five years and have a history of
successfully collecting under the original payment terms without making
concessions. Over the past five years, we have collected or are collecting
approximately 70% of all EPTAs issued to customers. Not all customers live up to
their obligations under the contracts. We make every effort to collect on the
EPTAs, including the engagement of professional collection services. Despite our
efforts, approximately 30 percent of all EPTAs are determined to be
uncollectible. All uncollectible EPTAs are written off against an allowance for
doubtful accounts. The allowance is established at the time of sale based on our
four-year history of extending EPTAs. As a result, revenue from the sale of the
SOS is recognized upon the delivery of the product.
Allowance for Doubtful Accounts
We record an allowance for doubtful accounts and disclose the
associated expense as a separate line item in operating expenses. The allowance,
which is netted against our current and long-term trade accounts receivable
balances on our condensed consolidated balance sheets, totaled approximately
$5.6 million as of March 31, 2003 compared to approximately $3.3 million as of
June 30, 2002. The amounts represent estimated losses resulting from the
inability of our customers to make required payments. The estimates are based on
historical bad debt write-offs, specific identification of probable bad debts
based on collection efforts, aging of accounts receivable and other known
factors. If the financial condition of our customers deteriorates, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Income Taxes
In preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax liabilities together with
assessing temporary differences resulting from differing treatment of items for
tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities. Our deferred tax assets consist primarily of net
operating losses carried forward. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future market growth, forecasted earnings, future taxable
income, the mix of earnings in the jurisdictions in which we operate and prudent
and feasible tax planning strategies in determining the need for a valuation
allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to earnings in the period such
determination is made. Likewise, if we later determine that it is more likely
than not that the net deferred tax assets would be realized, the previously
provided valuation allowance would be reversed.
Our net operating loss carry forward ("NOL"), representing the losses
reported for tax purposes from the inception of the Company through June 30,
2002 is subject to a limitation as defined in Section 382 of the Internal
Revenue Code. Operating losses from prior years are normally available to offset
taxable income in subsequent years. However, Section 382 places a limitation on
the amount that can be used in any one year if a "change in control" as defined
in the Internal Revenue Code has occurred. Since its formation, the Company has
issued a significant number of shares and purchasers of those shares have sold
some of them, with the result that a change of control as defined by Section 382
has occurred. We currently estimate that the available NOL for the fiscal year
ended June 30, 2003 will be approximately $2.7 million, but we have not
concluded our analysis.
RELATED PARTY TRANSACTIONS
Effective October 1, 2002 John J. Poelman, Chief Executive Officer and
a director and stockholder of the Company, sold his interest in Electronic
Commerce International, Inc. ("ECI") to an unrelated third party. The Company
utilizes the services of ECI, a Utah corporation, to provide a credit card
merchant account solution to our customers and, formerly, to provide a leasing
opportunity to customers who purchased our products at the Internet training
workshops. The Company buys a product from ECI that provides on-line, real-time
processing of credit card transactions and resells it to its customers. John J.
Poelman, was the sole owner of ECI during the three months ended September 30,
2002 and the nine months ended March 31, 2002. Total revenue generated by the
Company from the sale of ECI merchant account solutions, while owned by Mr.
Poelman, was $1,453,612 and $3,363,486 for the nine months ended March 31, 2003
and 2002, respectively. The cost to the Company for these products and services
totaled $223,716 for the quarter ended September 30, 2002 and $720,930 for the
nine months ended March 31, 2002. During the nine months ended March 31, 2003
and 2002 the Company processed leasing transactions for its customers through
ECI, while owned by Mr. Poelman, in the amounts of $0 and $1,090,520,
respectively. In addition, the Company had $0 and $26,702 as of March 31, 2003
and June 30, 2002, respectively, recorded in accounts payable relating to the
amounts owed to ECI for the purchase of the merchant account software while
owned by Mr. Poelman.
The Company offers its customers at its Internet training workshops,
and through telemarketing sales following the workshop certain products intended
to assist the customer in being successful with their business. These products
include a live chat capability for the customer's own website and web traffic
building services. The Company utilizes Electronic Marketing Services, LLC.
("EMS") to fulfill these services to the Company's customers. In addition, EMS
provides telemarketing services, selling some of the Company's products and
services. Ryan Poelman, who owns EMS, is the son of John J. Poelman. The
Company's revenues generated from the above products and services were
$5,609,553 and $3,196,348 for the nine months ended March 31, 2003 and 2002,
respectively. The Company paid EMS $692,845 and $353,392 to fulfill these
services during the nine months ended March 31, 2003 and 2002, respectively. In
addition, the Company had $76,165 and $53,023 as of March 31, 2003 and June 30,
2002, respectively, recorded in accounts payable relating to the amounts owed to
EMS for product and services.
The Company sends complimentary gift packages to its customers who
register for the Company's Workshop training sessions. An additional gift is
sent to Workshop attendees who purchase our products at the conclusion of the
Workshop. The Company utilizes Simply Splendid, LLC ("Simply Splendid") to
provide these gift packages to the Company's customers. Aftyn Morrison, who owns
Simply Splendid, is the daughter of John J. Poelman, Chief Executive Officer, a
director and a stockholder of the Company. The Company paid Simply Splendid
$273,382 and $0 to fulfill these services during the nine months ended March 31,
2003 and 2002, respectively. In addition, the Company had $12,054 and $0 as of
March 31, 2003 and June 30, 2002, respectively, recorded in accounts payable
relating to the amounts owed to Simply Splendid for services.
In each of the above-described transactions and business relationships,
we believe that the terms under which business is transacted with all related
parties are at least as favorable to us as would be available from an
independent third party providing the same goods or services.
RESULTS OF OPERATIONS
Nine-month period ended March 31, 2003 compared to the nine-month
period ended March 31, 2002
Revenue
Our fiscal year ends on June 30 of each year. Revenues for the
nine-month period ended March 31, 2003 increased to $37,658,988 from $26,386,485
in the nine-month period ended March 31, 2002, an increase of 43%. Revenues
generated at our Internet training workshops for the periods in both fiscal
years were from the sale of the SOS product as described in Critical Accounting
Policies and Estimates above. Revenues also include fees charged to attend the
workshop, web traffic building products, mentoring, consulting services, access
to credit card transaction processing interfaces and sales of banner
advertising. We expect future operating revenues to be generated principally
following a business model similar to the one used in fiscal year 2002. The
Internet environment continues to evolve, and we intend to offer future
customers new products as they are developed. We anticipate that our offering of
products and services will evolve as some products are dropped and are replaced
by new and sometimes innovative products intended to assist our customers
achieve success with their Internet-related businesses.
The increase in revenues from the nine-month period ended March 31,
2003 compared to the nine-month period ended March 31, 2002 can be attributed to
various factors. First, there was an increase in the number of Internet training
workshops conducted during the current fiscal year to date. The number increased
to 233, including 11 that were held outside the United States of America, for
the current fiscal year from 187 in the nine-month period ended March 31, 2002,
nine of which were held outside the United States. In addition, the average
number of persons attending each workshop increased and the average number of
"buying units" in attendance at our workshops during the period increased to 91,
compared to 76 in the comparable period of the prior fiscal year. Persons who
pay an enrollment fee to attend our workshops are allowed to bring a guest at no
additional charge, and an individual and his/her guest constitute one buying
unit. If the person attends alone that single person also counts as one buying
unit. Approximately 31% of the buying units made a purchase at the workshop in
the current fiscal period compared to 29% in the comparable period of fiscal
year 2002. The average revenue per workshop purchase also increased in the
nine-month period of the fiscal year ended March 31, 2003 to approximately
$4,500 compared to approximately $4,200 in the nine-month period ended March 31,
2002. We will seek to continue to hold workshops with a larger number of
attendees in future quarters. We will seek to increase the number of these
larger workshops during the balance of fiscal year 2003.
Revenue during the nine-month period ended March 31, 2003 compared to
the same nine-month period in fiscal year 2002 was higher in spite of the loss
of a benefit relating to the recognition of revenue deferred from historical
workshop sales at rates greater than the level at which revenue is required to
be deferred from the current period. During the nine-month period ended March
31, 2003, we recognized only $246,107 in net revenue from sales made in prior
periods compared to $5,184,996 recognized from sales made in prior periods
during the nine-month period ended March 31, 2002.This benefit experienced
during the nine-month period ended March 31, 2002 resulted from a change in the
business model and product offering at the workshops. This benefit has now been
fully realized and we do not expect it to reoccur. We anticipate that in future
quarters the amount of revenue recognized from earlier periods will be
approximately equal to that deferred into future periods.
Effective January 1, 2002, we began making our product offerings
through our StoresOnline subsidiary rather than our Galaxy Mall subsidiary. This
culminated an eighteen month long plan to fully incorporate the SOS throughout
the engineering and programming departments, servers and infrastructure and to
move away from a mall-based hosting environment. Our services have been used for
several years by non-mall based merchants, and we believe that principles taught
by us work equally well for stand-alone websites, as they do with sites hosted
on the mall. Although Galaxy Mall remains an active website, all new customers
are sold the SOS through our StoresOnline previews and workshops.
Gross Profit
Gross profit is calculated as revenue less the cost of revenue, which
consists of the cost to conduct Internet training workshops, to program customer
storefronts, to provide customer technical support and the cost of tangible
products sold. Gross profit for the nine-month ended March 31, 2003 increased to
$29,914,302 from $22,008,036 for the same nine-month period in the prior year.
The increase in gross profit primarily reflects the increased revenue during the
period.
Gross profit as a percent of revenue for the nine-month period ended
March 31, 2003 was 79% compared to 83% for the same nine-month period ended
March 31, 2002. The reduction in the gross margin percentage was primarily
attributable to the recognition of $5,184,996 in deferred revenue during the
nine-month period ended March 31, 2002, as compared to $246,326 in deferred
revenue that was recognized during the nine-month period ended March 31, 2003,
which deferred revenue amounts had no costs associated with them because those
costs were recognized at the time the products were delivered in the relevant
prior periods.
Cost of revenues includes related party transactions of $840,263 in the
nine-month period ended March 31, 2003 and $720,930 in the comparable period of
the prior fiscal year. These are more fully described in the notes to the
condensed consolidated financial statements as Note 9. We have determined, based
on competitive bidding and experience with independent vendors offering similar
products and services, that the terms under which business is transacted with
this related party is at least as favorable to us as would be available from an
independent third party.
Product Development
Product development expenses consist primarily of payroll and related
expenses. We had no product development expenses for the nine-month period ended
March 31, 2003. Product development expenses in the nine-month period ended
March 31, 2002 were $87,604. They consisted of work on the StoresOnline, version
4, product which is used in the StoresOnline Software sold at our Internet
training workshops.
We intend to make enhancements to our technology as new methods and
business opportunities present themselves. We will undertake additional
development projects as the needs are identified and as the funds to undertake
the work are available.
Selling and Marketing
Selling and marketing expenses consist of payroll and related expenses
for sales and marketing, the cost of advertising, promotional and public
relations expenditures and related expenses for personnel engaged in sales and
marketing activities, and commissions paid to telemarketing companies. Selling
and marketing expenses for the nine-month period ended March 31, 2003 increased
to $13,205,515 from $9,481,051 in the nine-month period ended March 31, 2002.
The increase in selling and marketing expenses is primarily attributable to the
increase in the number of workshops held during the current year including
having a greater number of attendees on average at each workshop and the
associated expenses including advertising and promotional expenses necessary to
attract the attendees. Advertising expenses for the nine-month period ended
March 31, 2003 were approximately $5.4 million compared to $3.5 million in the
nine-month period ended March 31, 2002. Selling and marketing expenses as a
percentage of sales were 35% of revenues for the 2003 fiscal year to date and
including the deferred revenue mentioned above, selling and marketing expenses
were 36% for the nine-month period ended March 31, 2002.
Selling and marketing expenses include related party transactions of
$349,680 and $353,392 in the nine-month periods ended March 31, 2003 and 2002,
respectively. These are more fully described in the notes to the condensed
consolidated financial statements as Note 9. We have determined, based on
competitive bidding and experience with independent vendors offering similar
products and services, that the terms under which business is transacted with
this related party is at least as favorable to us as would be available from an
independent third party.
General and Administrative
General and administrative expenses consist of payroll and related
expenses for executive, accounting and administrative personnel, professional
fees, finance company discounts and other general corporate expenses. We accept
twenty-four month installment contracts from our customers as one of several
methods of payment. Some of these contracts are subsequently sold to finance
companies at a discount. The discounts generally range between 15% and 20%
depending upon the credit worthiness of our customer. These discounts, which
amounted to $1,087,118 in the nine-month period ended March 31, 2003, and
$1,319,636 in the nine-month period ended March 31, 2002, are included in
general and administrative expenses.
General and administrative expenses for nine-month period ended March
31, 2003 decreased to $3,244,830 from $4,600,962 in the comparable period of the
previous fiscal year. This decrease is partially attributable to the fact that
in the period ended March 31, 2002 we incurred $555,201 in debt issuance costs
associated with a convertible debenture owned by King William, LLC. Since King
William converted the debenture into common stock, the debt issuance costs were
written off rather than being amortized over the life of the debenture. Other
items contributing to the reduction were a decrease in the 2003 nine-month
period in payroll and related expenses that resulted from reducing the size of
our workforce, elimination of certain consulting fees associated with financial
public relations firms, and a reduction in legal and other professional
expenses. Also during March 2003 we resolved a lawsuit brought by Category 5
Technologies, Inc. ("Cat 5"). In April 2002 Cat 5 had demanded that we reimburse
them for $260,000 of their expenses associated with merger negotiations between
our companies. (See "Legal Proceedings," below, for a more detailed explanation
of this matter.) As a result we accrued that amount as a contingent liability
during the quarter ended June 30, 2002. A settlement agreement was signed and
the lawsuit dismissed eliminating the contingent liability and therefore the
accrual was reversed in the period ended March 31, 2003 reducing general and
administrative expenses. Further cost reductions in general and administrative
expenses at current revenue levels are unlikely. We anticipate that general and
administrative expenses will increase in future years as our business grows.
Bad Debt Expense
Bad debt expense consists mostly of actual and anticipated losses
resulting from the extension of credit terms to our customers when they purchase
products from us. We encourage customers to pay for their purchases by check or
credit card since these are the least expensive methods of payment for our
customers, but we also offer installment contracts with payment terms up to 24
months. We offer these contracts to all workshop attendees not wishing to use a
check or credit card provided they complete a credit application, give us
permission to independently check their credit and are willing to make an
appropriate down payment. These installment contracts are sometimes sold to
various finance companies, with partial or full recourse, if our customer has a
credit history that meets the finance company's criteria. If not sold, we carry
the contract and out-source the collection activity. Our collection experience
with these 24-month contracts is satisfactory given the low marginal cost
associated with theses sales. The down payment received by us at the time the
contract is entered into exceeds the cost of the delivered products. Since all
other expenses relating to the sale, such as advertising, meeting room expense,
travel, etc. have already been incurred, we believe extending this credit on
these terms is prudent even though we incur significant bad debt expense.
Bad debt expense was $9,816,200 in the nine-month period ended March
31, 2003 compared to $3,256,152 in the prior fiscal year. The increase is due to
an increase in the number of workshops held, an increase in the number of
installment contracts carried by us and to our recent collection experience.
During the nine-month period ended March 31, 2003 workshop sales financed by
installment contracts were approximately $16.0 million compared to $9.4 million
in the comparable period of the prior fiscal year. As a percentage of workshop
sales, however, installment contracts were 56% in the nine-month period ended
March 31, 2003 compared to 59% in the nine-month period ended March 31, 2002.
During the first fiscal quarter of fiscal year 2002 there were no finance
companies willing to purchase our installment contracts. During the nine-month
period ended March 31, 2003 the contracts carried by us, before any adjustment
for an allowance for doubtful accounts, increased by approximately $5.5 million
to approximately $12.7 million. The balance carried at June 30, 2002 was
approximately $7.2 million. This required an increase in our allowance for
doubtful accounts of approximately $2.3 million. Based on our increased volume
of installment contracts, our collection history and the possible consequences
of the full recourse installment contract sales it was necessary to increase the
allowance for doubtful accounts to provide for possible future losses. The table
below shows the activity in our allowance for doubtful accounts during the
nine-month period ended March 31, 2003.
Allowance balance at the beginning of the period $3,413,981
Plus provision for doubtful accounts 9,816,200
Less accounts written off (7,490,440)
Plus collections on accounts previously written off 262,889
----------------
Allowance balance at the end of the period $6,002,630
================
Interest Income
Interest income is derived from the installment contracts carried by
the Company. Our contracts have an 18% simple interest rate and interest income
for the nine-month period ended March 31, 2003 was $549,414 compared to $265,962
in the comparable period of the prior fiscal year. In the future as our cash
position strengthens we may be able to carry more installment contracts rather
than selling them at a discount to finance companies. If we were able to carry
more of these contracts it would increase interest income and reduce
administrative expenses. The discounts are included in administrative expenses.
Interest Expense
Interest expense during the nine-month period ended March 31, 2003
decreased to $29,483 from $1,925,643 in the nine-month period ended March 31,
2002. Included in interest expense in the nine-month period ended March 31, 2002
was a one-time charge of $437,474 relating to the conversion of an 8%
convertible debenture belonging to King William, LLC into common stock and a
charge of $708,542 relating to the conversion into common stock of convertible
long term notes held by investors who participated in a private placement of the
notes in January and April 2001. Upon conversion of these items the debt
discount previously recorded was written off in the nine-month period ended
March 31, 2002 instead of being amortized over the life of the notes. We have
repaid most the various debt instruments, which created the balance of the
interest expense for the nine-month period ended March 31, 2002.
Income Taxes
Fiscal year 2002 was the first profitable year for the Company since
its inception. However, differences in generally accepted accounting principals
("GAAP") and accounting for tax purposes caused us to have a tax loss for the
fiscal year ended June 30, 2002. For the nine-month period ended March 31, 2003
we have estimated our taxable income to be approximately $2,500,000. Total
income taxes due on this amount are estimated to be approximately $1,000,000, of
which $539,973 is deferred into future periods because of temporary differences
between GAAP and tax accounting. The remaining $450,275 is the income tax
expense reported for the nine-month period ended March 31, 2003. During the
quarter ended March 31, 2003 we incurred a tax liability for the first time in
this fiscal year after the application of the net operating loss carry forward
("NOL").
Our NOL, representing the losses reported for tax purposes from the
inception of the Company through June 30, 2002, is subject to a limitation as
defined in Section 382 of the Internal Revenue Code. Operating losses from prior
years are normally available to offset taxable income in subsequent years.
However, Section 382 places a limitation on the amount that can be used in any
one year if a "change in control" as defined in the Internal Revenue Code has
occurred. Since its formation, the Company has issued a significant number of
shares and purchasers of those shares have sold some of them, with the result
that a change of control as defined by Section 382 has occurred. We have
estimated that the available NOL for the fiscal year ended June 30, 2003 will be
approximately $2.7 million. We have undertaken a study to determine the amount
of NOL that will be available to us for the balance of this fiscal year and into
the future. We anticipate that this study will be completed before the end of
our fiscal year, which is June 30, 2003.
Therefore we have estimated that approximately $1,000,000 of income
taxes will have to be paid on the net earnings for the nine-month period ended
March 31, 2003 no later than June 15, 2003, unless the study indicates that
additional NOL is available to reduce this liability.
Three-month period ended March 31, 2003 compared to the three-month
period ended March 31, 2002
Revenue
Revenues for the three-month period ended March 31, 2003, our third
fiscal quarter of fiscal year 2003, increased to $15,786,458 from $7,296,696 in
the three month period ended March 31, 2002, an increase of 116%. Revenues for
the quarter were effected by the same business model change described above in
the discussion of the nine-month period ended March 31, 2003.
The increase in revenues for the quarter ended March 31, 2003 compared
to the three-month period ended March 31, 2002 can be attributed to various
factors. There was an increase in the number of Internet training workshops
conducted during the current quarter. The number increased to 87 compared to 50
in the quarter ended March 31, 2002. Although the average number of persons
(buying units) attending each workshop during both periods remained essentially
the same, the percentage of buying units making a purchase in the period ended
March 31, 2003 was approximately 36% compared to only approximately 28% in the
quarter ended March 31, 2002. The size of the average purchase made at the
workshops in the quarter ended March 31, 2003 as approximately $4,700 compared
to $4,200 in the comparable quarter of the prior fiscal year.
Revenue during the quarter ended March 31, 2003 compared to the same
period of the prior fiscal year was higher in spite of the loss of a benefit
relating to the recognition of revenue deferred from historical workshop sales
at rates greater than the level at which revenue is deferred from the current
period. During the quarter ended March 31, 2003 we deferred revenue of $59,384
from current period sales into future periods whereas in the quarter ended March
31, 2002 we recognized revenue of $423,022 of net deferred revenue from sales
made in prior periods.
Gross Profit
Gross profit for the fiscal quarter ended March 31, 2002 increased to
$12,724,229 from $5,804,382 in the comparable period of the prior year. The
increase in gross profit primarily reflects the increased revenue. Gross profit
as a percent of revenue for the quarter ended March 31, 2003 was 81% compared to
80% for the quarter ended March 31, 2002.
Cost of revenues includes related party transactions of $348,807 in the
quarter ended March 31, 2003 and $157,437 in the comparable period of the prior
fiscal year. These are more fully described in the notes to the condensed
consolidated financial statements as Note 9. We have determined, based on
competitive bidding and experience with independent vendors offering similar
products and services, that the terms under which business is transacted with
this related party is at least as favorable to us as would be available from an
independent third party.
Product Development
We had no product development expenses for the quarter ended March 31,
2003. Product development expenses in the quarter ended March 31, 2002 were
$19,654. They consisted of work on the StoresOnline, version 4, product that is
used in the StoresOnline Software.
Selling and Marketing
Selling and marketing expenses for the quarter ended March 31, 2003
increased to $5,017,218 from $3,105,077 in the quarter ended March 31, 2002. The
increase in selling and marketing expenses is primarily attributable to the
increase in the number of workshops held during the current quarter and the
associated expenses including advertising and promotional expenses necessary to
attract the attendees. Advertising expenses for the quarter ended March 31, 2003
were approximately $2.0 million compared to $1.2 million in the quarter ended
March 31, 2002. Selling and marketing expenses as a percentage of sales were 32%
of revenues for the 2003 fiscal quarter compared to 43% for the quarter ended
March 31, 2002.
Selling and marketing expense includes related party transactions of
$160,277 and $85,866 in the quarters ended March 31, 2003 and 2002,
respectively. These are more fully described in the notes to the condensed
consolidated financial statements as Note 9. We have determined, based on
competitive bidding and experience with independent vendors offering similar
products and services, that the terms under which business is transacted with
this related party are at least as favorable to us as would be available from an
independent third party.
General and Administrative
General and administrative expenses for the quarter ended March 31,
2003 increased to $1,197,797 from $968,712 in the comparable quarter of the
previous fiscal year. This increase is attributable to payroll and related
expenses, increased accounting fees and an increase in financial discounts
associated with the installment contracts we accept as one form of payment from
our customers. (See the discussion for the nine-month period above for a
complete explanation of financial discounts.) General and administrative
expenses during the quarter ended March 31, 2003 increased in spite of the
reversal of an accrued liability of $260,000 associated with the Category 5
Technologies, Inc. settlement, which is described in detail in the discussion of
general and administrative expenses for the nine-month period ended March 31,
2003 above. We anticipate that general and administrative expenses will increase
in future quarters as our business grows.
Bad Debt Expense
Bad debt expense was $4,611,640 in the quarter ended March 31, 2003
compared to $1,251,021 in the same quarter of the prior fiscal year, an increase
of $3,360,619. The increase is due to an increase in the number of workshops
held, an increase in the number of installment contracts generated at those
workshops as a percentage of total units sold, an increase in the number of
contracts carried by us and to our recent collection experience. During the
quarter ended March 31, 2003 the contracts carried by us increased by
approximately $3.1 million. The table below shows the activity in our allowance
for doubtful accounts during the quarter ended March 31, 2003.
Allowance balance at the beginning of the quarter $4,593,880
Plus provision for doubtful accounts 4,611,640
Less accounts written off (3,259,756)
Plus collections on accounts previously written off 56,866
---------------
Allowance balance at the end of the quarter $6,002,630
===============
Interest Income
Interest income for the three-month period ended March 31, 2003 was
$218,197 compared to $96,577 in the comparable period of the prior fiscal year.
Interest income is derived from the installment contracts carried by the
Company.
Income Taxes
We have net operating loss carry forwards sufficient to reduce our
provision for income taxes for the quarter ended March 31, 2003 to $450,275,
therefore, we have established a provision for federal income taxes in that
amount in our Statement of Earnings. See the discussion above for the nine-month
period ended March 31, 2003 for a more detailed explanation of our income tax
situation.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared on the basis
that the Company will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The Company has incurred losses from its inception through the fiscal
year ended June 30, 2001. The Company was profitable during the fiscal year
ended June 30, 2002 and has been profitable for the nine-month period ended
March 31, 2003. The Company, however, has a cumulative net loss of $66,100,030
through March 31, 2003. At March 31, 2003 the Company had $926,121 cash on hand,
working capital of $3,293,997 and equity of $6,331,185. Management believes that
through future profitable operations and the raising of additional equity or
debt capital, if necessary, the Company will be able to continue operating as a
going concern. However, there can be no assurance that if additional capital is
required that it will be available. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the
inability to continue as a going concern .
Cash
At March 31, 2003, we had $926,121 of cash on hand, an increase of
$406,373 from June 30, 2002.
Net cash provided by operating activities was $853,934 for the
nine-month period ended March 31, 2003. The significant items contributing to
net cash provided by operating activities were net income of $3,420,431, a
provision for bad debts of $9,816,200, and depreciation and amortization of
$309,321, but partially offset by an increase in accounts receivable of
$12,181,097.
The increase in accounts receivable occurred because we generated
approximately $12 million in installment contracts during the nine-month period
ended March 31, 2003 that were not sold to finance companies. Because the
contracts are sold on a discounted basis, over the life of the contract we will
have a greater cash flow from collecting the monthly payments than from selling
them. The decision to sell or retain the contracts is part of our cash
management system and is governed by our cash requirements at the time.
Trade Receivables
Trade receivables, carried as a current asset, net of allowance for
doubtful accounts, were $4,842,742 at March 31, 2003 compared to $2,247,129 at
June 30, 2002. Trade receivables, carried as a long-term asset, net of allowance
for doubtful accounts, were $2,243,574 at March 31, 2003 compared to $1,673,740
at June 30, 2002. We offer our customers a 24-month installment contract as one
of several payment options. The payments that become due more than 12 months
after March 31, 2003 are carried as long-term trade receivables. A significant
portion of our revenue is derived each year from installment contract sales.
During the nine-month periods ended March 31, 2003 and 2002 the percentage of
total revenue attributable to installment contracts was approximately 42% and
36% respectively. During the nine-months ended March 31, 2003 we generated
approximately $16.0 million in installment contracts of which approximately $3.9
million were sold upon origination to finance companies with the balance being
carried by us. After the contracts carried by the Company have been successfully
collected for a period of between 3 and 6 months they become eligible for
purchase by finance companies. During October 2002, we sold some of these aged
contracts having a principal balance of approximately $405,000 and they
generated approximately $317,000 in cash for us. Additional contracts are
currently eligible for sale and may be sold from time to time as our cash
requirements dictate.
Accounts Payable
Accounts payable, including related party transactions, at March 31,
2003, totaled $1,094,373 as compared to $1,327,102 at June 30, 2002. As of March
31, 2003 our accounts payable were generally within our vendor's terms.
Deferred Revenue
Deferred revenue, to be recognized in future periods, totaled $459,451
at March 31, 2003 as compared to $705,558 at June 30, 2002. We recognize
deferred revenue as our services related thereto are rendered or when the time
period in which customers have the right to receive the services expires. The
decrease from the prior fiscal year end is the result of a change in the
products offered starting October 1, 2000 at our Internet training workshops.
Under this new model, we now recognize most of the revenue generated at our
Internet workshops at the time of the sale and delivery of the SOS product to
our customer.
Stockholders' Equity
Stockholders' equity increased to $6,331,185 at March31, 2003, as
compared to $2,468,574 at June 30, 2002. This mainly resulted from net earnings
during the current nine-month period.
Financing Arrangements
We accept payment for the sales made at our Internet training workshops
by cash, credit card, installment contract, or until December 31, 2001, by a
third party leasing option. As part of our cash flow management and in order to
generate liquidity, we have sold on a discounted basis a portion of the
installment contracts generated by us to third party financial institutions for
cash.
Impact of Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which
establishes new standards for the treatment of goodwill and other intangible
assets. SFAS 142 is effective for fiscal years beginning after December 31, 2001
and permits early adoption for companies with a fiscal year beginning after
March 15, 2001. SFAS 142 prescribes that amortization of goodwill will cease as
of the adoption date. Additionally, we were required to perform an impairment
test within six months as of the adoption date, annually thereafter, and
whenever events and circumstances occur that might affect the carrying value of
these assets.
SFAS 142 was applicable to the Company beginning July 1, 2002. As a
result we discontinued the amortization of goodwill and arranged for an
independent evaluation to determine if an impairment to our goodwill existed. We
hired an independent consulting firm to perform an appraisal as of December 31,
2002. Based on their report, management found that no impairment existed. We are
now obligated to make this review annually as of December 31 of each year or
sooner if events and circumstances occur that might affect the carrying value of
our goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). Under this standard, asset retirement
obligations will be recognized when incurred at their estimated fair value. In
addition, the cost of the asset retirement obligations will be capitalized as a
part of the asset's carrying value and depreciated over the asset's remaining
useful life. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002. The adoption of SFAS No. 143 did not have a material impact on our
financial condition or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144). This standard requires
that all long-lived assets (including discontinued operations) that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. Additionally, SFAS 144 expands the scope of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. We do not expect
the implementation of SFAS 144 to have a material effect on our financial
condition or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections as of April
2002" (SFAS 145). This standard rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that Statement, SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses associated with the
extinguishment of debt that do not meet the APB Opinion No. 30, Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB 30) criteria. Any gain or loss on extinguishment of debt that
was classified as an extraordinary item in prior periods presented that does
not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. SFAS 145 also amends SFAS 13, Accounting for Leases as
well as other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Certain provisions of SFAS 145 are effective for transactions
occurring after May 15, 2002 while other are effective for fiscal years
beginning after May 15, 2002. We have not assessed the potential impact of SFAS
145 on our financial condition or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS 146). This standard addresses
financial accounting and reporting for costs associated with exit or disposal
activities and replaces 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) (EITF 94-3). SFAS
146 requires that a liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for exit costs, as defined in EITF No. 94-3 were recognized at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. Since we have had no Exit or Disposal activity since
December 31, 2002, we do not expect the implementation of SFAS 144 to have a
material effect on our financial condition or results of operations.
In October, 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions (SFAS 147). This standard relates to acquisitions of
financial institutions and is not expected to affect the Company's financial
condition or results of operations.
In December 2002, the FASB issued SFAS No. 148 "Accounting for
Stock-Based Compensation--Transition and Disclosure" (SFAS 148). This standard
amends the disclosure and certain transition provisions of SFAS 123, Accounting
for Stock-Based Compensation. Its disclosure provisions are effective for
interim periods beginning after December 15, 2002. The Company does not expect
that adoption of SFAS 148 will have a material impact on its financial
condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We do not believe we have material market risk exposure. We do not
invest in market risk sensitive instruments for trading purposes. Our excess
cash is placed in short-term interest-bearing accounts or instruments that are
based on money market rates.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, evaluations
were carried out under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon those evaluations, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. There have been no significant changes
in our internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2002 Category 5 Technologies, Inc. ("Cat 5") filed a lawsuit
seeking reimbursement of $260,000 of their expenses associated with merger
negotiations between our companies. We have resolved this matter and entered
into a First Amendment to Termination Agreement with Cat 5 dated as of March 10,
2003 memorializing that resolution. On April 9, 2003 a STIPULATION OF SETTLEMENT
AND ORDER OF DISMISSAL, Case No. 020902991 was signed by Judge J. Dennis
Frederick dismissing the lawsuit with prejudice.
The Company previously reported that it was the subject of a nonpublic
investigation by the Federal Trade Commission. The first investigation activity
began nearly five years ago when the FTC had announced what they refer to as a
"sweep" of the industry. The Company cooperated fully with all requests for
information and details, and after over a year's investigation, no action
against the Company was taken and the case went dormant. During this same period
of time, other unrelated companies and individuals targeted by the FTC were
subject to consent agreements and injunctions and paid large financial
penalties. Some of those companies are no longer in business.
About two years ago, based on various allegations and customer
complaints, the FTC re-opened its investigation of the Company, requesting once
again complete details about the Company, its marketing, sales, customer service
policies and other matters. The FTC also obtained details regarding customer
complaints from the Better Business Bureau and various AG offices, and was fully
aware of the "wrong doings" alleged by a nationally broadcast television story.
In addition, FTC representatives attended one or more of the Company's
workshops, visited the Company's offices and were afforded an opportunity to
review the Company's customer files. After nearly two years in this most recent
investigation, the Company received written notice that the FTC investigation
has been officially closed.
In its letter the FTC's states that it "... has conducted a nonpublic
investigation to determine whether Galaxy Mall and related entities have
violated the Federal Trade Commission Act through the use of deceptive practices
in connection with the sale of electronic "storefronts" or web sites or
storefront-related products or services." and concludes in part by stating,
"Upon further review of this matter, it now appears that no further action is
warranted by the Commission at this time. Accordingly, the investigation has
been closed." The FTC letter also states that "The Commission reserves the right
to take such further action as the public interest may require."
The Company certainly regrets even one complaint, but can no more
accept responsibility for failure of a business that purchases its products and
services than the telephone company, a computer manufacturer or a business
college, can accept responsibility for the failure of a customer or student to
achieve success using, or not using, their telephone or computer or the
knowledge learned from a college course. Although the Company is constantly
looking for ways to improve its products and services, because its products and
services are used by entrepreneurs and small businesses with such a broad range
of objectives, backgrounds and skills, the Company anticipates that it will
continue to receive complaints from some of its customers who are not able to
successfully extend their business on the Internet.
Regardless, the Company remains committed to work with and assist each
of its customers by providing them information and tools necessary to help them
extend their business to the Internet.
The Company is pleased that the FTC's investigations over this long
period of time have been closed without any formal action by the agency. The
Company has long believed that it operates its business with integrity and in
compliance with applicable laws and regulations. The Company fully supports the
various federal and state agencies that it interacts with and, as in the past,
will continue to cooperate with them.
From time to time, we receive inquiries from and/or have been made
aware of investigations by government officials in many of the states in which
we operate, as well as by the Federal Trade Commission. These inquiries and
investigations generally concern compliance with various city, county, state
and/or federal regulations involving sales and marketing practices. We have and
do respond to these inquiries and have generally been successful in addressing
the concerns of these persons and entities, although there is often no formal
closing of the inquiry or investigation. The Federal Trade Commission
investigation has been resolved as indicated above. There can be no assurance
that the ultimate resolution of these or other inquiries and investigations will
not have a material adverse effect on our business or operations. We also
receive complaints and inquiries in the ordinary course of our business from
both customers and governmental and non-governmental bodies on behalf of
customers. To date we have been able to resolve these matters on a mutually
satisfactory basis.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On February 14, 2003 we issued 9,472 shares of our common stock at a
price of $1.95 per share in exchange for 9,472 Exchangeable Shares of
StoresOnline.com, Ltd. held by a former employee. The shares of our common stock
were issued pursuant to the provisions of a Stock Purchase Agreement dated
November 1, 1998 which was entered into in connection with our acquisition of
StoresOnline.com Ltd. In our opinion, the issuance of these common shares was
exempt by virtue of Section 4(2) of the Securities Act and the rules promulgated
there under.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350
99.2 Certification pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8 K
None.
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.
Imergent, Inc.
By: /s/ John J. Poelman
May 15, 2003 John J. Poelman
Chief Executive Officer
May 15, 2003 By: /s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer
CERTIFICATIONS
I, John J. Poelman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imergent, Inc.;
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 Exchange Act Rules 13a-14 and 15d-14) 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 subsidiaries, is made known to us
by others within those entities, 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.
Date: May 15, 2003
/s/ John J. Poelman
John J. Poelman
Chief Executive Officer
I, Frank C. Heyman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imergent, Inc.;
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 Exchange Act Rules 13a-14 and 15d-14) 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 subsidiaries, is made known to us
by others within those entities, 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.
Date: May 15, 2003
/s/ Frank C. Heyman
Frank C. Heyman
Chief Financial Officer