UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31,
2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 333-16031
FRONT PORCH DIGITAL INC.
------------------------
(Name of small business issuer as specified in its charter)
NEVADA 86-0793960
------ ----------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20000 Horizon Way,
Suite 120
MT. LAUREL, NEW JERSEY 08054
(Address of principal executive offices)
(856) 439-9950
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [ ] No [X]
As of May 22, 2003, 41,615,648 shares of the issuer's common stock, par value
$.001, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS -
FRONT PORCH DIGITAL, INC.
CONSOLIDATED BALANCE SHEETS
[Unaudited]
ASSETS March 31, 2003
Current assets:
Cash and cash equivalents $ 126,722
Accounts receivable - trade & other, net of allowance of $125,000:
Non-affiliates 1,184,804
Affiliates 568,794
Deferred costs 35,237
Other current assets 419,568
------------
Total current assets 2,335,125
Restricted cash 84,311
Property and equipment, net 1,000,471
Software development costs, net 273,784
Software and intellectual property, net
of accumulated amortization of $701,709 1,688,845
Excess cost over fair value of net assets acquired, net
of accumulated amortization of $949,778 4,364,439
Other assets 45,745
------------
Total assets $ 9,792,720
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ 307,500
Current lease liability 18,845
Accounts payable 1,561,817
Accrued expenses 1,094,866
Accrued expenses - employees 696,312
Deferred revenue 581,046
------------
Total current liabilities 4,260,386
Note payable, net of current portion 1,121,463
Other long-term obligations, net of current portion 438,337
Other long-term liabilities 48,082
Stockholders' equity:
Preferred stock, nonvoting, $.001 par value, 5,000,000 shares
authorized, none issued or outstanding
Common stock, $.001 par value 50,000,000 shares authorized
32,329,937 shares issued and outstanding 32,330
Additional paid in capital 23,321,361
Accumulated other comprehensive income 66,144
Common stock to be issued 750,000
Accumulated deficit (20,245,383)
------------
Total stockholders' equity 3,924,452
------------
Total liabilities and stockholders' equity $ 9,792,720
============
SEE ACCOMPANYING NOTES.
FRONT PORCH DIGITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
----------------------------
2003 2002
----------------------------
Revenues:
Products $ 869,188 $ 111,200
Services 510,529 138,986
Services - affiliate 1,048,982 -
----------- -----------
Total revenue 2,428,699 250,186
Cost of revenue:
Products 140,312 44,735
Services 471,460 60,982
----------- -----------
611,772 105,717
----------- -----------
Gross margin 1,816,927 144,469
Selling, general and administrative 1,403,364 766,234
Research and development 146,124 102,849
Depreciation 209,642 153,096
Amortization 149,492 58,929
----------- -----------
1,908,622 1,081,108
Loss from operations (91,695) (936,639)
Other income (expense):
Interest income 385 897
Interest expense (153,536) (4,500)
Other expense 1,265 -
Foreign currency transaction loss (702) -
----------- -----------
(152,588) (3,603)
----------- -----------
Net loss $ (244,283) $ (940,242)
=========== ===========
Weighted average number of common
shares outstanding - basic and diluted 32,329,937 25,959,646
Loss per common share - basic and diluted $ (0.01) $ (0.04)
----------- -----------
SEE ACCOMPANYING NOTES.
3
FRONT PORCH DIGITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended March 31,
2003 2002
------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (244,283) $ (940,242)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation & amortization 359,134 212,025
Non-cash interest expense 138,750 -
Non-cash issuance of common stock to employees and consultants - 83,774
Stock option compensation cost 9,259 68,987
Gain on sale of fixed assets (9,951) -
Changes in operating assets and liabilities:
Increase in accounts receivable (65,202) (86,655)
Decrease in deferred costs 53,290 -
Decrease (increase) in other current assets 175,065 (173,901)
Decrease in other assets 63,600 -
(Decrease) increase in accounts payable (115,944) 179,968
(Decrease) increase in accrued expenses (88,261) 7,332
Increase (decrease) in accrued expenses - employees 13,111 (13,355)
(Decrease) increase in deferred revenue (709,253) 173,177
Other changes in operating activities - 83,381
------------- -------------
Net cash used in operating activities (420,685) (405,509)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (6,451) (13,506)
Software development costs (62,180) (13,088)
Proceeds from sale of fixed assets 31,354 -
Other investing activities (7,539) -
------------- -------------
Net cash used in investing activities (44,816) (26,594)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable - 350,000
Repayment of note payable and capital leases (120,373) -
Proceeds from issuance of common stock - 50,000
------------- -------------
Net cash (used in) provided by financing activities (120,373) 400,000
------------- -------------
Effect of exchange rate fluctuations on cash and cash equivalents (2,561) -
-
Net increase (decrease) in cash and cash equivalents (588,435) (32,103)
Cash and cash equivalents (including restricted cash), beginning of period 799,468 393,439
------------- -------------
Cash and cash equivalents (including restricted cash), end of period 211,033 361,336
============= =============
SEE ACCOMPANYING NOTES.
4
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Front Porch Digital Inc. (the "Company") enables the conversion, preservation
and management of analog and digital content, including text, images, audio,
graphics, video and rich media. The Company develops proprietary software
products and performs services that convert content into digital formats for
subsequent storage and on-demand delivery in the same or other formats or
digital platforms. The software, based on proprietary and patent-pending
technology, enables a new paradigm in the way broadcasters, content owners,
education and law enforcement personnel manage their workflow - a shift from
tape-oriented warehousing to a fully-digital, instant access automated archive.
The Company's customers are located in the United States, Europe and Asia.
The consolidated financial statements of the Company have been prepared on a
going-concern basis, which contemplates the realization of assets and
liabilities in the normal course of business. Accordingly, the consolidated
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence. The Company has incurred
losses since commencement of operations in its current line of business.
Although the Company's operating results have improved in 2002 and the first
quarter of 2003, the Company has made certain progress toward financial
stability as described in Note 8 Subsequent Events, and the Company expects its
results of operations to continue to improve throughout 2003, there can be no
assurance that the Company will not continue to sustain operating losses.
Further, for the three months ended March 31, 2003, the Company incurred net
losses and negative cash flows from operating activities of $0.2 million and
$0.4 million, respectively. For the three months ended March 31, 2003, the
Company incurred a loss from operations of $92,000. In addition, at March 31,
2003, the Company had a working capital deficit of $1.9 million. These factors
create significant uncertainty about the Company's ability to continue as a
going concern.
During the first quarter of 2003, management continued implementing a
restructuring of the operations of the Company that included reorganizing the
personnel of the Company, reducing headcount, reducing non-essential operating
costs and refocusing the Company's business strategy, products and services. The
Company has also undertaken an aggressive cash management program that includes
deferral of payment of certain expenses and the accelerated collection of cash
payments on contracted revenues. Management of the Company recognizes that
additional resources will be required to continue as a going concern and, in
April 2003, secured additional capital and restructured certain liabilities as
described in Note 8 -- Subsequent Events. Management believes these actions will
enable the Company to obtain sufficient cash to continue as a going concern.
However, there can be no assurance that the additional capital and improved
liquidity will be adequate to enable the Company to continue as a going concern.
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Management of the Company believes the
disclosures are adequate to make the information presented not misleading. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included and such adjustments are of a normal and
recurring nature. For further information, refer to
5
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the financial statements and footnotes included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2002.
Operating results for the three months ended March 31, 2003 are not necessarily
indicative of the operating results expected for the year ending December 31,
2003.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Front Porch
Digital, Inc. and its wholly-owned subsidiary (the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery and acceptance has occurred, the fee is fixed or determinable,
and collection is reasonably assured.
The Company licenses software under license agreements and provides professional
services, including training, installation, consulting and maintenance. License
fee revenues are recognized when a license agreement has been signed, the
software product has been shipped, the fees are fixed and determinable,
collection is considered probable and no significant vendor obligations remain.
The Company allocates revenue to each component of the contract based on
objective evidence of its fair value, as established by management. Because
licensing of the software generally is not dependent on the professional
services portion of the contract, the software revenue is recognized upon
delivery.
Fees for maintenance agreements are recognized ratably over the term of the
agreement. Maintenance is generally billed in advance resulting in deferred
revenues.
The Company provides software-related professional services. Services are
generally provided on a time and materials basis and revenue is recognized as
the services are provided.
Revenue under service contracts is recognized when services have been performed
and accepted, or on the proportional-performance method of accounting, depending
on the nature of the project. The extent of progress toward completion under the
proportional-performance method of accounting is measured by using the number of
sites and/or units under the contract that have been completed and the progress
towards completion of batches in progress at period end.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options because the alternative fair value
accounting provided for under Financial Accounting Standards Board Statement of
Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock Based
Compensation," requires the use of option valuation models that were not
developed for use in valuing employee stock options. The effect of applying SFAS
No. 123's fair value method to the Company's stock-based award results in pro
forma net loss that is not materially different from the amounts reported for
the three months ended March 31, 2002 and 2003 and loss per share that is the
same as the amounts reported for the three months ended March 31, 2002 and 2003.
Pro forma results of operations may not be representative of the effects on
reported or pro forma results of operations for future years. For the three
months ended March 31, 2003 and 2002, $10,000 and 69,000 of compensation cost
was recorded, respectively.
6
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company accounts for equity instruments issued to non-employees in exchange
for goods or services using the fair value method and records expense based on
the values determined.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions affecting the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts and balances to
conform with the 2003 presentation.
2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB
Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company has not adopted SFAS No. 148 in its accounting for stock-based
compensation. However it has updated its disclosure to conform to the
pronouncement.
3. ACQUISITION
On July 31, 2002, the Company acquired all of the outstanding stock of
ManagedStorage International France, a French SOCIETE PAR ACTIONS SIMPLIFEE("MSI
France"), and certain assets of ManagedStorage International, Inc., a Delaware
corporation ("ManagedStorage"), pursuant to a Stock and Asset Purchase Agreement
dated as of July 31, 2002 (the "Purchase Agreement"), between the Company and
ManagedStorage. The consideration paid by the Company pursuant to the Purchase
Agreement consisted of (a) 5,000,000 shares of common stock, par value $.001 per
share, of the Company (the "Company Common Stock"), which were valued at $1.5
million; (ii) a warrant for the purchase of up to 1,750,000 shares of Company
Common Stock at a price of $2.00 per share, exercisable immediately and expiring
on July 31, 2012; and (iii) a warrant for the purchase of up to 1,750,000 shares
of Company Common Stock at a price of $4.00 per share, exercisable immediately
and expiring on July 31, 2012. In December 2002, an additional $750,000 of
consideration became payable to the seller as certain earn-out targets were
achieved. This amount was recorded as common stock to be issued at March 31,
2003 and, in April 2003, 2.5 million shares of common stock of the Company were
issued in satisfaction of this earn-out consideration.
Pursuant to the terms of the Purchase Agreement, the Company acquired from
ManagedStorage (i) all of the issued and outstanding shares of capital stock of
MSI
7
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
France and (ii) certain software and related intellectual property rights,
including DIVArchive, a software solution designed to assist media,
entertainment and medical companies in the preservation, management and
accessing of digital content consisting of large digital data files.
Pursuant to the Purchase Agreement, ManagedStorage entered into a Lock-Up
Agreement with the Company whereby, subject to certain exceptions,
ManagedStorage agreed not to sell, assign, transfer, pledge or otherwise dispose
of any Company Common Stock owned or acquired by it or any interest therein
prior to July 31, 2003, except as expressly permitted by the Lock-Up Agreement.
In connection with the transaction, ManagedStorage was granted certain demand
registration rights with respect to the shares of Company Common Stock acquired
by ManagedStorage pursuant to the terms of the Purchase Agreement.
The acquisition has been accounted for as a purchase. Results of operations for
the acquired entity are included in the consolidated statement of operations for
the three months ended March 31, 2003.
Intellectual property, which represents the DIVArchive software, is amortized
over a three-year period. Total amortization expense related to the intellectual
property acquired was $60,000 for the three months ended March 31, 2003.
The following pro forma results of operations of the Company for the three
months ended March 31, 2003 and 2002 are presented to reflect the acquisition as
if it had occurred as of the beginning of the periods presented.
PRO FORMA RESULTS OF OPERATIONS:
2003 2002
---- ----
Revenues $ 2,428,000 $ 1,000,000
Loss from continuing operations (92,000) (1,616,000)
Net loss (244,000) (1,653,000)
Basic and diluted loss per share (.01) (.05)
Weighted average shares outstanding 32,329,937 33,459,646
4. NOTES PAYABLE
At March 31, 2003, notes payable consisted of:
$150,000 unsecured note payable that bore interest at 9% per annum. In September
2002, the Company recapitalized the outstanding balance and accrued interest of
an existing unsecured note payable. The new principal amount of $246,500
included the original principal balance of $200,000 plus accrued interest of
$46,500. The note was payable in an initial payment of $45,000, and equal
monthly installments of $25,000 through
8
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 1, 2003, with a final payment of $8,647 on July 1, 2003. At March 31, 2002,
the remaining principle balance on this note was $150,000. During April 2003,
the Company restructured this note payable as described in Note 8 -- Subsequent
Events;
$744,000 of an unsecured non-interest bearing note payable to an employee. This
note is payable based on a percentage of revenue of certain operations of the
Company, ranging between 2% and 3% per year, to be payable in full no later than
December 31, 2004. In the event the Company exits the media conversion business
prior to December 31, 2004, the remaining balance of this note is payable on
demand. The Company has estimated that $170,000 will be payable in the next 12
months; and
$500,000 aggregate principal amount of convertible secured notes to two
investors that were issued on March 27, 2002. The notes contained a beneficial
conversion feature as the notes included certain anti-dilution protection and
rights, and they were convertible into common stock at a price significantly
below the then current market price. The Company allocated $500,000 of the value
received to this beneficial conversion feature, which has been recorded as a
debt discount and has been amortized to interest expense over the term of the
debt. The Company recorded non-cash interest expense related to debt discount of
$125,000 during the three months ended March 31, 2003. The notes matured on
March 27, 2003, bore interest at the rate of 7% per annum, which was payable on
a quarterly basis, and were secured by all of the assets of the Company. The
notes were convertible at any time at the option of the note holders into a
number of shares of common stock of the Company equal to 14% of the outstanding
shares of common stock, subject to certain anti-dilution adjustments. The note
holders were granted certain rights for the registration of these shares under
the Securities Act of 1933, as amended, which requires the Company to register
these shares on the earlier of April 2003, or upon the filing of certain
registration statements by the Company. The notes contained restrictions that,
among others, prohibited the Company from issuing new debt, paying creditors in
excess of specified amounts, or prepaying the notes without the consent of the
note holders. In the event the Company raised $2.5 million of equity capital,
the Company could have deposited into an escrow account an amount equal to the
outstanding principal and interest on the notes, at which time all restrictions
and liens on the assets of the Company would have been released. Upon the sale
or liquidation of substantially all of the assets of the Company, or a business
combination in which a majority of the issued and outstanding shares of common
stock of the Company is transferred, the note holders were entitled to receive
all outstanding principal and interest on the notes and a liquidation preference
equal to three times the amount of such outstanding principal and interest.
During April 2003, the Company converted and restructured these notes as
detailed in Note 8 -- Subsequent Events.
Based on the refinancing described in Note 8, at March 31, 2003, the Company
classified $307,500 of these notes payable as a current liability and $1,121,463
as a long-term liability, which included accrued interest of $35,000 and will be
due in 2004.
5. CONCENTRATION OF CREDIT RISK
The Company sells its products and services throughout the United States, Europe
and Asia. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Credit losses
have been within management's expectations. For the three months ended March 31,
2003, revenues from two customers, each exceeding 10% of total revenue,
aggregated 43% and 11%, respectively. At March 31, 2003, accounts receivable
from the largest customer was $568,794, or 37% of total trade receivables. This
customer is also a stockholder of the Company. In addition, accounts receivable
from two other customers aggregated 28% and 12% of accounts receivable at March
31, 2003. For the three months ended March 31, 2002, revenues from two
customers, each exceeding 10% of total revenue, aggregated 42%
9
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and 39%, respectively. The Company was a subcontractor for this
customer/stockholder during 2002 and 2003, which beneficially owned
approximately 13.5% of the Company's outstanding common stock as of May 22,
2003.
6. PER SHARE DATA
The Company reports its earnings (loss) per share in accordance with the SFAS
No. 128, "Accounting for Earnings Per Share". Basic loss per share is calculated
using the net loss divided by the weighted average common shares outstanding.
Shares from the assumed conversion of outstanding warrants and options are
omitted from the computations of diluted loss per share because the effect would
be antidilutive.
7. SEGMENT INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic areas
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.
The Company's operations are segregated into two lines of business: media
conversion services and software and related services. The Company operates
these lines of business across the geographic areas of the United States,
Europe, Canada and Asia-Pacific. Offices and facilities are located in Mount
Laurel, New Jersey, Houston, Texas and Toulouse, France. The Company's lines of
business are not completely integrated into all locations and therefore the
Company does not currently offer all solutions in all markets in which it is
present. Current efforts are underway to integrate products and services across
all markets served.
The media conversion business segment offers a comprehensive, integrated suite
of enterprise data media solutions ("EDMS") that can help customers ensure
information preservation, reduce cost and improve productivity without
compromising the security and integrity of their stored information. The
Company's EDMS group has performed professional services for over 600 customers
worldwide in industries that include banking and finance, power utility,
petroleum, pharmaceutical and government. All services offered by the EDMS group
are performed offline utilizing the Company's proprietary software and
stand-alone hardware devices, at either the customer site or one of the
Company's secure delivery facilities. These services can be performed for any
applicable optical and/or tape media type and format. Components of the
currently available offerings include tape copy and conversion, tape volume
management, tape data assurance, and archive generation and conversion.
The software and related services business segment offers an integrated suite of
digital media solutions that facilitate the capture, management and distribution
of digital content. Components of these offerings include a desktop encoding
system, automated video indexing and a real-time format transcoder. In addition,
the Company offers a distributed storage and archive management solution for the
entertainment industry that simplifies the process of preserving, managing and
accessing digital content.
Revenues, margins and operating expenses of the Company's lines of business are
evaluated by management. The Company does not measure assets by lines of
business as assets are generally not distinctive to a particular line of
business and they are not fundamental in assessing segment performance. Capital
expenditures are managed by segment, but only for purposes of budgeting and cash
flow management. General overhead expenses are included completely in the
software and services business segment as the media conversion segment has been
and continues to be an easily definable, separate,
10
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
stand-alone business - no allocations of such costs are made as allocated
indirect costs are not considered in the management of the business segments.
All direct and indirect costs associated with a segment are reported within that
segment. Summarized operations of each of the Company's operating segments in
the aggregate for the three months ended March 31, 2003 and 2002, are as
follows:
MEDIA CONVERSION SOFTWARE AND SERVICES
Three Months Ended March 31, Three Months Ended March 31,
2003 2002 2003 2002
Revenues $1,375,204 $ 123,536 $1,053,495 $ 126,650
Gross margin 1,138,519 35,319 678,408 109,150
Gross margin % 83% 29% 64% 86%
Income (Loss) from
continuing operations 943,891 (253,835) (1,035,586) (682,803)
8. SUBSEQUENT EVENTS
Subsequent to March 31, 2003, the following transactions were consummated:
In April 2003, the Company issued $645,000 aggregate principal amount of
unsecured convertible promissory notes that bear interest at the rate of 8% per
annum and mature on September 30, 2004. Principle and accrued interest are
payable at maturity. The convertible notes are convertible at any time at the
option of the note holders into shares of common stock of the Company at a
conversion price of $.042 per share, subject to certain anti-dilution
adjustments. The convertible notes may be prepaid by the Company at any time
without penalty. In the event of a prepayment by the Company, or upon payment of
principal and interest at maturity, the Company will be required to issue to the
holders of such notes five-year common stock purchase warrants pursuant to which
the holders of the warrants will have the right to purchase a number of shares
of common stock of the Company equal to 5,500 shares for each $1,000 of
principal balance repaid, at a purchase price of $0.10 per share, subject to
certain anti-dilution adjustments. The purchase agreement relating to the
convertible notes contains restrictions that, among others, prohibit the Company
from issuing new debt, making capital expenditures in excess of specified
amounts, paying dividends on the common stock or granting security interests in
assets without the consent of note holders owning a majority in principal amount
of the outstanding notes.
In April 2003, the holders of the $500,000 aggregate principal amount of
convertible secured notes converted $250,000 of the outstanding principle and
100% of the accrued interest into 6,785,715 shares of common stock of the
Company pursuant to the conversion terms of the convertible secured notes
discussed in Note 4. The holders of these notes also converted the remaining
$250,000 principal balance on the notes into the convertible notes described in
the preceding paragraph.
During April 2003 and in connection with the $645,000 funding and secured note
conversion above, the Company restructured certain other current liabilities
including: (i) restructuring $530,000 of current liabilities to a single vendor
to be payable over a five-year period, with interest at the rate of 5% per
annum. Principal payments under the agreement are fixed for the first year at
$100,000 per year. Remaining payments are subject to certain acceleration
clauses based upon working capital levels and capital raised. In connection with
this agreement, the Company issued warrants to purchase up to 500,000 shares of
common stock at a price per share of $0.10 to the vendor and (ii) restructuring
a $150,000 note payable and accrued interest which was due in full on June 30,
2003 into a new note that is payable over 12 months and matures on May 1, 2004.
The note is payable in equal monthly installments beginning May 1, 2003 and
carries an annual interest rate of 9% per
11
FRONT PORCH DIGITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
annum. Accrued interest is payable at maturity. In connection with this
agreement, the Company issued to the noteholder warrants to purchase up to
100,000 shares of common stock at a price per share of $0.10.
On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak") the
Company's intellectual property rights relating to the DIVArchive product
applications for the medical imaging and information management market. In
connection with such sale, Kodak paid the Company $800,000, will pay the Company
a final payment of $50,000 upon completion of certain post-closing matters, has
offered employment to substantially all of the Company's personnel associated
with the transferred assets and assumed certain software support obligations to
the Company's existing DIVArchive customers in the medical industry.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
GENERAL
When used in this discussion, the words "believes", "anticipates",
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected.
The Company's business and results of operations are affected by a wide
variety of factors that could materially and adversely affect the Company and
its actual results, including, but not limited to: (1) the availability of
additional funds to enable the Company to successfully pursue its business plan;
(2) the uncertainties related to the effectiveness of the Company's technologies
and the development of its products and services; (3) the Company's ability to
maintain, attract and integrate management personnel; (4) the ability of the
Company to complete the development and continued enhancement of its products in
a timely manner; (5) the Company's ability to effectively market and sell its
products and services to current and new customers; (6) the Company's ability to
negotiate and maintain suitable strategic partnerships and corporate
relationships; (7) the intensity of competition; and (8) general economic
conditions. As a result of these and other factors, the Company may experience
material fluctuations in future operating results on a quarterly or annual
basis, which could materially and adversely affect its business, financial
condition, operating results and stock price.
Any forward-looking statements herein speak only as of the date hereof.
The Company undertakes no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company enables the conversion, preservation and management of
analog and digital content, including text, images, audio, graphics, video and
rich media. The Company develops proprietary software products and performs
services that convert content into digital formats for subsequent storage and
on-demand delivery in the same or other formats or digital platforms. The
software, which is based on proprietary and patent-pending technology, enables a
new paradigm in the way broadcasters, content owners and education and law
enforcement personnel manage their workflow - a shift from tape-oriented
warehousing to a fully-digital, instant access automated archive. With
additional expertise in providing onsite, offline data management services for
tape and optical assets, the Company believes it is uniquely positioned to
enable clients to preserve, protect and manage information assets.
The Company's customers are located in the United States, Europe and
Asia.
The Company is in the early stages of executing its business strategy
and anticipates generating significant revenues from the sale of its data
conversion and software products during the next 12 months. This expansion is
contingent upon several factors, including the availability of adequate cash
resources, the price of its products and services relative to its competitors,
and general economic and business conditions, among other factors.
In the fourth quarter of 2002, the Company initiated a restructuring
plan in an effort to position itself to raise the necessary working capital to
capitalize on its product and service portfolio, which has been gaining
widespread acceptance in the marketplace. The restructuring plan included:
13
o Implementing cost reductions and cost control measures to limit new
spending, including reducing headcount in the United States and Europe,
reducing salaries and benefits costs, reducing consulting fees,
controlling and reducing travel and entertainment costs, reducing
facility size and costs and reducing overall general operating costs.
o Securing additional resources in executive management and operations to
develop and implement the restructuring plan.
o Reducing short-term liabilities by renegotiating with its key vendors
and other short-term creditors to settle outstanding obligations for
reduced amounts or extending payment terms, in some cases beyond one
year.
o Implementing aggressive cash flow management, including accelerating
significant cash receipts from customers in advance of due dates and
deferring vendor payables to minimize the actual cash outflows of the
business.
o Re-aligning existing personnel and operations to better match the costs
of the business with the business focus and expected results of
operations.
o Improving operational management, effectiveness and efficiency to
enable the Company to deliver on its existing customer contracts in a
timely and predictable manner.
The following discussion and analysis of financial condition and
results of operations are based upon the Company's financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. These estimates are based 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. Actual results may differ from these estimates under different
assumptions or conditions.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2003 Compared to the Three
Months Ended March 31, 2002
REVENUE. Total revenue for the three months ended March 31, 2003
increased $2.2 million, to $2.4 million compared to total revenue of $250,000
for the three months ended March 31, 2002. This increase was attributable to the
additional revenue generated in both the media conversion and software and
related services business segments. Service revenues totaled $1,560,000, or 64%
of total revenues, for the three months ended March 31, 2003 as compared to
$139,000, or 56% of total revenues, for the three months ended March 31, 2002.
For the three months ended March 31, 2003, $869,000, or 36% of total revenue,
was attributable to sales of software and related products as compared to
$111,000, or 44% of total revenue, for the three months ended March 31, 2002.
GROSS MARGIN. Total gross margin was $1,817,000, or 75% of total
revenue, for the three months ended March 31, 2003 compared to $144,000, or 58%
of total revenue, for the three months ended March 31, 2002. This increase was
attributable to increased revenue from these services and the timely delivery of
these services to customers. In addition, revenues scaled to a level whereby the
direct costs of operations can be supported, unlike in the prior year periods
during which revenue was marginally able to cover cost of sales. For the three
months ended March 31, 2003, sales of software and related products resulted in
gross margins of 83% and the provision of data and video conversion services
resulted in gross margins of 69%. For the three months ended March 31, 2002,
sales of software and related products resulted
14
in gross margins of 60% and the provision of data and video conversion services
resulted in gross margins of 56%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2003 were
$1,403,000, as compared to $766,000 for the three months ended March 31, 2002.
Selling, general and administrative expenses for the three months ended March
31, 2003 consisted primarily of $695,000 for salaries and related benefits for
employees not directly related to the production of revenue, $245,000 in
professional and consulting fees, $95,000 for travel, $131,000 of facilities
costs, and $237,000 for general office expenses. Selling, general and
administrative expenses for the three months ended March 31, 2002 consisted
primarily of $550,000 for salaries and related benefits for employees not
directly related to the production of revenue, $77,000 in professional fees,
$39,000 for travel, $59,000 of facilities costs, and $41,000 for general office
expenses. As a result of the restructuring, the Company's selling, general and
administrative expenses are expected to decrease in subsequent quarters.
RESEARCH AND DEVELOPMENT. The Company maintains a software development
staff that designs and develops the Company's new products and services. The
Company believes that by performing most of its own software development, it can
more quickly and cost-effectively introduce new and innovative technologies and
services. In addition, the Company believes it will be better equipped to
incorporate customer preferences into its development plans. The Company
continues to devote more resources to the development of software tools and
products that facilitate the conversion and migration of data from legacy media
to current technology, convert analog content to multiple digital formats,
manage and reformat digital content on demand and archiving technologies.
Research and development expenses for the three months ended March 31, 2003 were
$146,000 compared to $103,000 for the three months ended March 31, 2002.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
was $359,000 for the three months ended March 31, 2003 compared to $212,000 for
the three months ended March 31, 2002. Amortization expense primarily consisted
of amortization of intangible assets. Depreciation expense consists of
depreciation of furniture, equipment, software and improvements. The increase in
depreciation and amortization expenses is the result of the inclusion of such
expenses for MSI France, which was acquired in August 2002. The Company will
perform an ongoing annual impairment test, as required under SFAS No. 142,
"Goodwill and Other Intangible Assets" by the Financial Accounting Standards
Board, at the end of the third quarter of each year.
LOSS FROM OPERATIONS. For the three months ended March 31, 2003, the
Company reported a loss from operations of $92,000 compared to a loss from
operations of $0.9 million for the three months ended March 31, 2002.
INTEREST EXPENSE. Interest expense was $154,000 for the three months
ended March 31, 2003 compared to $5,000 for the three months ended March 31,
2002. Interest expense for the three months ended March 31, 2003 included
non-cash interest charges aggregating $139,000, including a non-cash interest
charge of $125,000 related to the amortization of debt discount on the Company's
senior secured convertible notes (which have since been retired) and non-cash
interest expense of $14,000 related to amortization of non-cash financing costs.
NET LOSS. For the three months ended March 31, 2003, the Company
reported a net loss of $0.2 million, or ($.01) per share, compared to a net loss
of $0.9 million, or ($.04) per share, for the three months ended March 31, 2002.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The Company conducts
business in various countries outside the United States in which the functional
currency of the country is not the U.S. dollar. As a result, the Company has
foreign currency exchange translation exposure as the results of these foreign
operations are translated into U.S. dollars in its consolidated financial
statements. The effect of changes in value of the U.S. dollar compared to other
currencies, primarily the euro, has been to increase reported revenues and
operating profit when the U.S. dollar
15
weakens and reduce these amounts when the dollar strengthens. While the Company
looks for opportunities to reduce its exposure to foreign currency fluctuations
against the U.S. dollar, at this point the Company has not had adequate
financial resources to pursue hedging opportunities generally. At March 31,
2003, the Company reported a cumulative translation gain of $66,144 as a
component of Comprehensive Loss. The Company is also subject to foreign exchange
transaction exposure when its subsidiaries transact business in a currency other
than its own functional currency. These transactions are infrequent and have not
had a significant effect on the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
In April 2003, the Company issued $645,000 aggregate principal amount
of unsecured convertible promissory notes that bear interest at the rate of 8%
per annum and mature on September 30, 2004. Principle and accrued interest are
payable at maturity. The convertible notes are convertible at any time at the
option of the note holders into shares of common stock of the Company at a
conversion price of $.042 per share, subject to certain anti-dilution
adjustments. The convertible notes may be prepaid by the Company at any time
without penalty. In the event of a prepayment by the Company, or upon payment of
principal and interest at maturity, the Company will be required to issue to the
holders of such notes five-year common stock purchase warrants pursuant to which
the holders of the warrants will have the right to purchase a number of shares
of common stock of the Company equal to 5,500 shares for each $1,000 of
principal balance repaid, at a purchase price of $0.10 per share, subject to
certain anti-dilution adjustments. The purchase agreement relating to the
convertible notes contains restrictions that, among others, prohibit the Company
from issuing new debt, making capital expenditures in excess of specified
amounts, paying dividends on the common stock or granting security interests in
assets without the consent of note holders owning a majority in principal amount
of the outstanding notes.
In April 2003, the holders of the $500,000 aggregate principal amount
of convertible secured notes converted $250,000 of the outstanding principle and
100% of the accrued interest into 6,785,715 shares of common stock of the
Company pursuant to the conversion terms of the convertible secured notes
discussed in Note 4. The holders of these notes also converted the remaining
$250,000 principal balance on the notes into the convertible notes described in
the preceding paragraph.
During April 2003 and in connection with the $645,000 funding and
secured note conversion above, the Company restructured certain other current
liabilities including: (i) restructuring $530,000 of current liabilities to a
single vendor to be payable over a five-year period, with interest at the rate
of 5% per annum. Principal payments under the agreement are fixed for the first
year at $100,000 per year. Remaining payments are subject to certain
acceleration clauses based upon working capital levels and capital raised. In
connection with this agreement, the Company issued warrants to purchase up to
500,000 shares of common stock at a price per share of $0.10 to the vendor and
(ii) restructuring a $150,000 note payable and accrued interest which was due in
full on June 30, 2003 into a new note that is payable over 12 months and matures
on May 1, 2004. The note is payable in equal monthly installments beginning May
1, 2003 and carries an annual interest rate of 9% per annum. Accrued interest is
payable at maturity. In connection with this agreement, the Company issued to
the noteholder warrants to purchase up to 100,000 shares of common stock at a
price per share of $0.10.
On April 23, 2003, the Company sold to Eastman Kodak Company ("Kodak")
the Company's intellectual property rights relating to the DIVArchive product
applications for the medical imaging and information management market. In
connection with such sale, Kodak paid the Company $800,000, will pay the Company
a final payment of $50,000 upon completion of the transition process and has
offered employment to substantially all of the Company's personnel associated
with the transferred assets and assumed
16
certain software support obligations to the Company's existing DIVArchive
customers in the medical industry.
As of March 31, 2003, the Company had liquid assets (unrestricted cash
and cash equivalents and accounts receivable) of $1.9 million and current assets
of $2.3 million. Current liabilities of $4.3 million at March 31, 2003 consisted
of $1.6 million of accounts payable; $1.1 million of accrued expenses; $696,000
of accrued expenses to employees; $581,000 of deferred revenue, which consisted
of progress payments received on engagements currently in progress; $308,000 of
current portion of notes payable and $19,000 of current lease liability. The
Company's working capital deficit was $1.9 million as of March 31, 2003 for the
reasons described above.
The Company used net cash of $0.4 million in operating activities
during the three months ended March 31, 2003 and used net cash of $0.4 million
in operating activities during the three months ended March 31, 2002, primarily
as a result of the net losses incurred during the periods.
During the three months ended March 31, 2003, the Company used $45,000
in investing activities, of which $6,000 was used for capital expenditures,
$62,000 was used for the development of the Company's suite of video software
solutions, and $8,000 was used in other investing activities, offset by proceeds
from the sale of fixed assets of $31,000. During the three months ended March
31, 2002, the Company used $27,000 in investing activities, of which $14,000 was
used for capital expenditures and $13,000 was used for the development of the
Company's suite of video software solutions.
The Company used $120,000 in financing activities during the three
months ended March 31, 2003, which consisted solely of principal repayments made
on notes payable and capital leases. During the three months ended March 31,
2002, financing activities provided $400,000, which consisted of $350,000 of
borrowings on notes payable and $50,000 of proceeds from the issuance of 400,000
shares of unregistered common stock to an individual investor.
The Company expects capital expenditures to be approximately $0.5
million during the next twelve months. It is expected that the Company's
principal uses of cash will be to provide working capital and to finance capital
expenditures and for other general corporate purposes, including financing its
sales and marketing strategy. The amount of spending in each respective area is
dependent upon the total capital available to the Company.
The Company expects that anticipated cash flow from operations combined
with its cash and cash equivalents at May 22, 2003 will be sufficient to operate
for at least the next 12 months. However, continued operating losses and the
early stage of the Company's business, as well as potential changes in the
business and competitive environment, continue to present a significant risk to
the Company's long-term success. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The Company's actual
financial results may differ materially from the stated plan of operations.
Factors which may cause a change from the Company's plan of operations vary, but
include, without limitation, decisions of the Company's management and board of
directors not to pursue the stated plan of operations based on its reassessment
of the plan, and general economic conditions. Additionally, there can be no
assurance that the Company's business will generate cash flows at or above
current levels. Accordingly, the Company may choose to defer capital expenditure
plans and extend vendor payments for additional cash flow flexibility.
ITEM 3. CONTROLS AND PROCEDURES
(a) Based upon an evaluation performed within 90 days of this Report,
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have
each concluded that our disclosure controls and procedures are effective to
ensure that
17
material information relating to our Company is made known to management,
including the CEO and CFO, particularly during the period when our periodic
reports are being prepared, and that our internal controls are effective to
provide reasonable assurances that our financial condition, results of
operations and cash flows are fairly presented in all material respects.
(b) The CEO and CFO each note that, since the date of his evaluation
until the date of this Report, there have been no significant changes in
internal controls or in other factors that could significantly affect internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
On or about March 21, 2003, Giancarlo Gaggero, a former employee of the Company,
and Data Strategies International, Inc., a company owned and controlled by Mr.
Gaggero, filed a suit against the Company in the District Court of Harris
County, Texas alleging breach by the Company of an asset purchase and related
agreements between Data Strategies and the Company and breach by the Company of
an employment agreement between Mr. Gaggero and the Company. Mr. Gaggero's
employment with the Company was terminated on March 5, 2003. The plaintiffs seek
monetary damages of approximately $253,000 plus interest and costs and a
declaration that they are excused from performance under the agreements from and
after January 2001. The Company responded to the complaint on April 17, 2003 and
requested that the case be moved from state court to federal court jurisdiction.
The Company believes certain of the claims are without merit, with respect to
which the Company intends to defend the action vigorously, and is considering
certain counterclaims against the plaintiffs. An outcome in this litigation that
is adverse to the Company, cost associated with defending the lawsuit and the
diversion of management's time and resources to defend the lawsuit could
seriously harm the Company's business and its financial condition.
In addition to the proceeding described above, the Company is involved in
certain other disputes that arise in the ordinary course of business. The
Company believes that no current dispute will have a material adverse effect on
its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
The following exhibits are filed herewith:
(a) Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K or 8-K/A
The Company filed a Current Report on Form 8-K dated January
8, 2003 reporting several executive officer changes. The
changes announced included the resignation of Paul McKnight as
Chief Financial Officer, the election of Matthew Richman as
Chief Financial Officer and the appointment of Michael Knaisch
as Chief Operating Officer of the Company.
The Company filed a Current Report on Form 8-K dated March 1,
2003 announcing the resignation of David Cohen as a director
of the Company.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: May 27, 2003 FRONT PORCH DIGITAL INC.
By: /s/ DONALD MAGGI
-------------------
Donald Maggi
Chief Executive Officer
(principal executive officer)
By: /s/ MATTHEW RICHMAN
-------------------
Matthew Richman
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
20
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Donald Maggi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Front Porch Digital
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 officers 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 officers 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 officers 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.
By: /s/ Donald Maggi
-------------------------
Name: Donald Maggi
Title: Chief Executive Officer
May 27, 2003
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Matthew Richman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Front Porch Digital
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 officers 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 officers 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 officers 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.
By: /s/ Matthew Richman
--------------------------------
Name: Matthew Richman Title:
Chief Financial Officer and Treasurer
May 27, 2003