**FORM 10-Q**

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**(MARK ONE)**

 
| **ý****QUARTERLY REPORT  UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**   |
|-----------------------------------------------------------------------------------------------------|
|                                                                                                |
| **FOR THE QUARTERLY  PERIOD ENDED: March 31, 2003**                                                 |
|                                                                                                |
| **OR**                                                                                              |
|                                                                                                |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**FOR THE TRANSITION PERIODFROM             TO             **

 

**COMMISSION FILE NUMBER: 0-30309**

 

**PINNACOR INC.**(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **DELAWARE**                                                                   |   | **13-4042678**                        |
|--------------------------------------------------------------------------------|--------|---------------------------------------|
| (STATE OR OTHER JURISDICTION OF  INCORPORATION OR  ORGANIZATION)               |   | (I.R.S. EMPLOYER IDENTIFICATION  NO.) |
|                                                                           |   |                                  |
| **601 WEST 26TH ST., NEW YORK, NY 10001**                                      |
| (ADDRESS  OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)                         |
|                                                                           |   |                                  |
| REGISTRANT’S  TELEPHONE NUMBER, INCLUDING AREA CODE: **(212)  691-7900**  |
|                                                                           |   |                                  |
| (FORMER  NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes ý No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2 of theExchange Act)

 

Yes o  No ý

 

As of May 13, 2003 therewere 40,648,009 shares of the Registrant’s common stock outstanding.

 

 

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**PINNACOR INC.**

 

**FORM 10-Q**

 

**QUARTER ENDED MARCH 31, 2003**

 

**TABLE OF CONTENTS**

 
| PART I.  | FINANCIAL INFORMATION                                                                                             | 3      |
|----------|-------------------------------------------------------------------------------------------------------------------|--------|
|     |                                                                                                              |   |
| Item 1.  | Consolidated  Financial Statements                                                                                | 3      |
|     |                                                                                                              |   |
|     | Consolidated Balance Sheets  – March 31, 2003 (unaudited) and December 31, 2002                              | 3      |
|     |                                                                                                              |   |
|     | Consolidated  Statements of Operations – Three months ended March 31, 2003 (unaudited) and  2002 (unaudited) | 4      |
|     |                                                                                                              |   |
|     | Consolidated  Statements of Cash Flows – Three months ended March 31, 2003 (unaudited) and  2002 (unaudited) | 5      |
|     |                                                                                                              |   |
|     | Notes  to Consolidated Financial Statements                                                                       | 6      |
|     |                                                                                                              |   |
| Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       | 14     |
|     |                                                                                                              |   |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk                                                       | 38     |
|     |                                                                                                              |   |
| Item 4.  | Controls and Procedures                                                                                           | 38     |
|     |                                                                                                              |   |
| PART II. | OTHER INFORMATION                                                                                                 | 38     |
|     |                                                                                                              |   |
| Item  1. | Legal  Proceedings                                                                                                | 38     |
|     |                                                                                                              |   |
| Item  2. | Changes  in Securities and Use of Proceeds                                                                        | 38     |
|     |                                                                                                              |   |
| Item 3.  | Defaults upon  Senior Securities                                                                                  | 39     |
|     |                                                                                                              |   |
| Item  4. | Submission  of Matters to a Vote of Security Holders                                                              | 39     |
|     |                                                                                                              |   |
| Item  5. | Other  Information                                                                                                | 40     |
|     |                                                                                                              |   |
| Item 6.  | Exhibits and  Reports on Form 8-K                                                                                 | 40     |

 

2

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**PINNACOR INC.**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                  |   | **March 31,****2003** |       | **December 31,****2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|--------------------------|--------|
|                                                                                                                                                                                  |   | **(Unaudited)**       |       |                     |   |
| ASSETS                                                                                                                                                                                |   |                  |       |                     |   |
| CURRENT ASSETS:                                                                                                                                                                       |   |                  |       |                     |   |
| Cash and cash  equivalents                                                                                                                                                            |   | $                     | 21,602,706 |                     | $      | 15,098,184 |   |
| Marketable  securities                                                                                                                                                                |   | 26,981,231            |       | 35,611,212               |   |
| Accounts receivable, net of  allowance for doubtful accounts of $600,000 and $619,762 as of March 31, 2003  and December 31, 2002, respectively                                       |   | 5,036,125             |       | 5,253,667                |   |
| Prepaid expenses                                                                                                                                                                      |   | 1,369,811             |       | 1,142,691                |   |
| Total current  assets                                                                                                                                                                 |   | 54,989,873            |       | 57,105,754               |   |
|                                                                                                                                                                                  |   |                  |       |                     |   |
| PROPERTY AND  EQUIPMENT-Net of accumulated depreciation and amortization                                                                                                              |   | 5,152,119             |       | 5,791,930                |   |
| GOODWILL                                                                                                                                                                              |   | 34,886,446            |       | 34,874,692               |   |
| OTHER INTANGIBLE  ASSETS-Net of accumulated amortization                                                                                                                              |   | 2,183,333             |       | 2,302,083                |   |
| OTHER ASSETS                                                                                                                                                                          |   | 697,829               |       | 793,866                  |   |
| TOTAL ASSETS                                                                                                                                                                          |   | $                     | 97,909,600 |                     | $      | 100,868,325 |   |
|                                                                                                                                                                                  |   |                  |       |                     |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                            |   |                  |       |                     |   |
|                                                                                                                                                                                  |   |                  |       |                     |   |
| CURRENT  LIABILITIES:                                                                                                                                                                 |   |                  |       |                     |   |
| Accounts payable  and accrued expenses                                                                                                                                                |   | $                     | 3,779,169  |                     | $      | 4,610,897 |   |
| Accrued  restructuring and other expenses                                                                                                                                             |   | 629,457               |       | 765,292                  |   |
| Deferred revenue                                                                                                                                                                      |   | 7,096,374             |       | 8,333,593                |   |
| Current portion  of capital lease obligations                                                                                                                                         |   | 1,428,072             |       | 1,576,174                |   |
| Total current  liabilities                                                                                                                                                            |   | 12,933,072            |       | 15,285,956               |   |
|                                                                                                                                                                                  |   |                  |       |                     |   |
| NONCURRENT  LIABILITIES:                                                                                                                                                              |   |                  |       |                     |   |
| Capital lease obligations,  less current portion                                                                                                                                      |   | 813,971               |       | 1,181,496                |   |
| Total  liabilities                                                                                                                                                                    |   | 13,747,043            |       | 16,467,452               |   |
|                                                                                                                                                                                  |   |                  |       |                     |   |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                           |   |                  |       |                     |   |
| Common stock, $0.01 par value,  100,000,000 shares authorized and 45,097,591 and 44,848,386 issued and  40,688,312 and 40,539,207 outstanding at March 31, 2003 and December 31, 2002 |   | 450,976               |       | 448,484                  |   |
| Additional  paid-in capital                                                                                                                                                           |   | 225,387,262           |       | 225,121,104              |   |
| Warrants                                                                                                                                                                              |   | 1,708,304             |       | 1,708,304                |   |
| Deferred  compensation                                                                                                                                                                |   | (333,635              | )          | (118,233                 | )      |
| Treasury stock, 4,409,279 and 4,309,179  shares at March 31, 2003 and December 31, 2002, respectively, at cost                                                                        |   | (4,276,335            | )          | (4,146,680               | )      |
| Accumulated  deficit                                                                                                                                                                  |   | (139,123,271          | )          | (138,962,620             | )      |
| Accumulated  other comprehensive income                                                                                                                                               |   | 349,256               |       | 350,514                  |   |
| Total  stockholders’ equity                                                                                                                                                      |   | 84,162,557            |       | 84,400,873               |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                      |   | $                     | 97,909,600 |                     | $      | 100,868,325 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**PINNACOR INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

(UNAUDITED)

 
|                                                                                                                                                                    |   | **Three months ended****March 31,** |      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                                                                                                                    |   | **2003**                            |      | **2002** |   |
| NET REVENUE                                                                                                                                                             |   | $                                   | 8,341,211 |   | $ | 9,410,995 |   |
|                                                                                                                                                                    |   |                                |      |   |   |
| OPERATING  EXPENSES:                                                                                                                                                    |   |                                |      |   |   |
| Cost of services (excluding  depreciation of $102,353 and $247,423 for the three months ended March 31,  2003 and 2002, respectively, shown below)                      |   | 2,957,610                           |      | 2,987,860 |   |
| Research and development (excluding  stock-based compensation of $2,909 and $22,760 for the three months ended  March 31, 2003 and 2002, respectively, shown below)     |   | 1,782,525                           |      | 2,128,303 |   |
| Sales and marketing (excluding  stock-based compensation of $17,760 and $(734,480) for the three months ended  March 31, 2002 and 2002, respectively, shown below)      |   | 1,557,949                           |      | 3,116,143 |   |
| General and administrative  (excluding stock-based compensation of $23,623 and $141,391 for the three  months ended March 31, 2003 and 2002, respectively, shown below) |   | 1,608,215                           |      | 2,120,091 |   |
| Depreciation and  amortization                                                                                                                                          |   | 878,650                             |      | 1,236,701 |   |
| Stock-based  compensation                                                                                                                                               |   | 44,292                              |      | (570,329 | ) |
| Total operating  expenses                                                                                                                                               |   | 8,829,241                           |      | 11,018,769 |   |
| OPERATING LOSS                                                                                                                                                          |   | (488,030                            | )         | (1,607,774 | ) |
|                                                                                                                                                                    |   |                                |      |   |   |
| OTHER INCOME  (EXPENSE):                                                                                                                                                |   |                                |      |   |   |
| Interest income                                                                                                                                                         |   | 386,448                             |      | 704,047 |   |
| Interest expense                                                                                                                                                        |   | (59,069                             | )         | (99,768 | ) |
| Total other  income, net                                                                                                                                                |   | 327,379                             |      | 604,279 |   |
|                                                                                                                                                                    |   |                                |      |   |   |
| NET LOSS                                                                                                                                                                |   | $                                   | (160,651  | ) | $ | (1,003,495 | ) |
| Basic net loss  per common share                                                                                                                                        |   | $                                   | (0.00     | ) | $ | (0.02 | ) |
| Basic  weighted-average number of shares of common stock outstanding                                                                                                    |   | 40,761,515                          |      | 42,376,521 |   |

 

See accompanying notes to consolidated financialstatements.

 

4

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**PINNACOR INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

(UNAUDITED)

 
|                                                                                               |   | **For the three  months ended March 31,** |       |
|----------------------------------------------------------------------------------------------------|--------|-------------------------------------------|------------|
|                                                                                               |   | **2003**                                  |       | **2002** |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                             |   |                                      |       |   |   |
| Net loss                                                                                           |   | $                                         | (160,651   | ) | $ | (1,003,495 | ) |
| Adjustments to  reconcile net loss to net cash and cash equivalents used in operating  activities: |   |                                      |       |   |   |
| Depreciation and  amortization                                                                     |   | 878,650                                   |       | 1,236,701 |   |
| Stock-based  compensation                                                                          |   | 44,292                                    |       | (570,329 | ) |
| Provision for  bad debts                                                                           |   | (19,762                                   | )          | (139,650 | ) |
|                                                                                               |   |                                      |       |   |   |
| Changes in  operating assets and liabilities:                                                      |   |                                      |       |   |   |
| Decrease in  accounts receivable                                                                   |   | 237,304                                   |       | 1,368,606 |   |
| (Increase)  decrease in prepaid expenses and other assets                                          |   | (131,083                                  | )          | 366,638 |   |
| (Decrease)  increase in accounts payable and accrued expenses                                      |   | (731,728                                  | )          | 10,450 |   |
| Decrease in deferred revenue                                                                       |   | (1,237,219                                | )          | (2,150,759 | ) |
| Decrease in  accrued restructuring expenses                                                        |   | (135,835                                  | )          | (489,162 | ) |
| Net cash used in  operating activities                                                             |   | (1,256,032                                | )          | (1,371,000 | ) |
|                                                                                               |   |                                      |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                             |   |                                      |       |   |   |
| Purchase of property  and equipment                                                                |   | (120,089                                  | )          | (606,641 | ) |
| Sale of  investments and marketable securities                                                     |   | 8,629,981                                 |       | 7,756,539 |   |
| Payment of  severance and other exit costs related to businesses acquired                          |   | (111,754                                  | )          | (80,859 | ) |
| Net cash  provided by investing activities                                                         |   | 8,398,138                                 |       | 7,069,039 |   |
|                                                                                               |   |                                      |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                             |   |                                      |       |   |   |
| Repayment of  capital lease obligations                                                            |   | (515,627                                  | )          | (709,393 | ) |
| Proceeds from  exercise of warrants, stock options and stock purchases                             |   | 8,956                                     |       | 57,072 |   |
| Payment for the  repurchase of treasury stock                                                      |   | (129,655                                  | )          | — |   |
| Net cash used in  financing activities                                                             |   | (636,326                                  | )          | (652,321 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                      |   | (1,258                                    | )          | 11,928 |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                         |   | 6,504,522                                 |       | 5,057,646 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                    |   | 15,098,184                                |       | 15,189,440 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                          |   | $                                         | 21,602,706 |   | $ | 20,247,086 |   |
|                                                                                               |   |                                      |       |   |   |
| SUPPLEMENTAL  CASH FLOW INFORMATION:                                                               |   |                                      |       |   |   |
| Cash paid for  interest and income taxes are as follows:                                           |   |                                      |       |   |   |
| Interest                                                                                           |   | $                                         | 59,069     |   | $ | 99,768 |   |
| Income taxes                                                                                       |   | $                                         | —     |   | $ | — |   |
| SUPPLEMENTAL SCHEDULE OF NONCASH  INVESTING AND FINANCING ACTIVITIES:                              |   |                                      |       |   |   |
| Fixed assets  acquired under capital lease arrangements                                            |   | $                                         | —     |   | $ | 79,000 |   |
| Issuance of  restricted stock grant                                                                |   | $                                         | 274,500    |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

 

5

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**PINNACOR INC.**

 

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE MONTHS ENDED MARCH 31, 2003**

(UNAUDITED)

 

1. BASIS OF PRESENTATION

 

The consolidated financialstatements of which these notes are part have been prepared pursuant to therules and regulations of the Securities and Exchange Commission (the “SEC”).Certain information and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accounting principleshave been condensed or omitted pursuant to such rules and regulations; however,in the opinion of our management, the Consolidated Financial Statements includeall adjustments, consisting only of normal recurring accruals, necessary topresent fairly the financial information for such periods. These ConsolidatedFinancial Statements should be read in conjunction with our ConsolidatedFinancial Statements and the notes thereto included in our Annual Report onForm 10-K, for the year ended December 31, 2002.

 

2. IMPACT OF RECENTLY ISSUEDACCOUNTING STANDARDS

 

In July 2001, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFASNo. 143 is effective for fiscal years beginning after June 15, 2002,and establishes an accounting standard requiring the recording of the fairvalue of liabilities associated with the retirement of long-lived assets in theperiod in which they are incurred. The Company believes that the adoption ofSFAS No. 143 will not have a material effect on its financial position andoperating results.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities”. SFAS No. 146 willsupersede EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires that costsassociated with an exit or disposal plan be recognized when incurred ratherthan at the date of a commitment to an exit or disposal plan. SFAS No. 146is to be applied prospectively to exit or disposal activities initiated afterDecember 31, 2002. The adoption of SFAS No. 146 as of January 1, 2003has not had a material effect on our financial position and operating results.

 

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness to Others” which elaborates on thedisclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees that it has issued.It also clarifies that a guarantor is required to recognize, at the inceptionof a guarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee. The initial recognition and measurement provisions ofInterpretation No. 45 are applicable on a prospective basis to guaranteesissued or modified after December 31, 2002. The disclosure requirements inthis Interpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. The adoption of FIN 45 as ofJanuary 1, 2003 has not had a material effect on our financial position andoperating results.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN46”). FIN 46 requires that companies that control another entity throughinterests other than voting interests should consolidate the controlled entity.FIN 46 applies to variable interest entities created after January 31, 2003,and to variable interest entities in which an enterprise obtains an interest inafter that date. The related disclosure requirements are effective immediately.We do not anticipate that this interpretation will have a significant impact onour consolidated financial position and results of operations.

 

In November 2002, the EITF reached a consensus on IssueNo. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITFIssue 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which the vendor will perform multiple revenue generatingactivities. The EITF will be effective for fiscal years beginning afterJune 15, 2003. The Company is currently evaluating the effects of thischange on their consolidated financial position and operating results.

 

In December 2002, the FASB issued SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure-an amendment ofFASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methodsto account for the transition from the intrinsic value method of recognition ofstock-based employee compensation in accordance with APB OpinionNo. 25, “Accounting for Stock Issued to Employees” to the fair valuerecognition provisions under SFAS No. 123. SFAS No. 148 provides twoadditional methods of transition and will no longer permit the SFASNo. 123 prospective method to be used for fiscal years beginning afterDecember 15, 2003. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the pro-forma effects had the fairvalue recognition provisions of SFAS No. 123 been used for all periodspresented. The Company has adopted the disclosure provisions of SFAS

 

6

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No. 148as of December 31, 2002 (see Note 7). The adoption of SFAS No. 148did not have a significant impact on the Company’s financial position andresults of operations.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement133 on Derivative Instruments and Hedging Activities.” This Statement amendsand clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities” and is effective for contracts entered into or modified after June30, 2003. The Company is currently evaluating the impact that this Statementmay have on its financial position and results of operations.

 

3. OTHER COMPREHENSIVE INCOME (LOSS)

 

The Company reports other comprehensive income (loss) in accordancewith  SFAS  No. 130, “Reporting Comprehensive Income” which requires thedisclosure of comprehensive income (loss). SFAS No. 130 requires that in addition to net income (loss), a Companyshould report other comprehensive income (loss) consisting of gains and lossesthat bypass the traditional income statement and are recorded directly intostockholders’ equity on the balance sheet. The components of other comprehensive income (loss) for the Companyconsist of unrealized gains and losses relating to the translation of foreigncurrency and unrealized gains and losses relating to the Company’s investmentsin marketable securities.  Comprehensiveincome (loss) was $188,000 and $(886,000) for the three months ended March 31,2003 and 2002, respectively.

 

4.ACQUISITIONS

 

On November 20, 2002, (the “Acquisition Date”) the Company’swholly-owned subsidiary, Broad Acquisition Corp. completed theacquisition of the operating assets of Inlumen, Inc., (“Inlumen”) aDelaware corporation. The Company has accounted for the combination withInlumen as a purchase business combination in accordance with SFASNo. 141. Inlumen is a provider of online financial applications,investment analysis tools and market information.

 

The results of Inlumen’s operations have been included in the Company’sconsolidated statement of operations since the Acquisition Date.

 

The total purchase price was approximately $2.6 million whichconsisted of approximately $2.4 million cash paid, net of cash received ofapproximately $66,000 and $188,000 in acquisition expenses. Included in the$2.6 million of cash paid and pursuant to the purchase agreement,approximately $500,000 was placed in escrow for possible future purchase priceadjustments. The Company funded the acquisition through the use of its cash andcash equivalents.

 

The Company is in the process of obtaining an independent valuation ofthe assets and liabilities it has acquired as well as identifying theintangible assets it has acquired in order to finalize its allocation of thepurchase price of the transaction. The Company will finalize its valuation assoon as possible or within one year of the acquisition date. The Company’spreliminary allocation of the purchase price is subject to refinement based onthe final determination of fair value. The following table summarizesmanagement’s preliminary estimated fair values of the assets acquired andliabilities assumed at the Acquisition Date.

 
| Current assets                       |   | $         | 473,711    |   |
|--------------------------------------|--------|-----------|------------|--------|
| Property and equipment               |   | 414,087   |       |
| Goodwill and other intangible assets |   | 2,264,946 |       |
| Total assets acquired                |   | 3,152,744 |       |
| Liabilities assumed                  |   | (537,667  | )          |
| Total purchase price                 |   | $         | (2,615,077 | )      |

 

7

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The unaudited proforma information below represents the consolidated results of operations as ifthe acquisition of Inlumen occurred on January 1, 2002. The unaudited proforma information has been included for comparative purposes and is notindicative of the results of operations of the consolidated Company had theacquisition of Inlumen occurred as of January 1, 2002, nor is itnecessarily indicative of future results.

 
|                                                           |   | **Three Months****Ended March 31,** |   |
|----------------------------------------------------------------|--------|-------------------------------------|--------|
|                                                           |   | **2002**                            |   |
|                                                           |   | **(000’s)**                    |   |
|                                                           |   |                                |   |
| Net revenue                                                    |   | $                                   | 10,784 |   |
|                                                           |   |                                |   |
| Net loss  applicable to common stockholders                    |   | $                                   | (2,782 | ) |
|                                                           |   |                                |   |
| Pro forma basic  and diluted net loss per common share         |   | $                                   | (0.07  | ) |
|                                                           |   |                                |   |
| Weighted-average  number of shares of common stock outstanding |   | 42,377                              |   |

 

On August 21, 2001, (the “Merger Date”) Pinnacor Inc. (the “Company”),acquired Stockpoint, Inc. (“Stockpoint”) pursuant to a merger of our newly-formedwholly-owned subsidiary SCRM Merger Corp. with and into Stockpoint withStockpoint surviving as our wholly-owned subsidiary (the “Merger”). TheCompany has accounted for the combination with Stockpoint as a purchasebusiness combination under SFAS No. 141. Stockpoint is a provider of onlinefinancial applications, investment analysis tools and market information. As aresult of the acquisition, the Company has strengthened its offerings to thefinancial services industry, a key client sector. It also expects to reducecosts through economies of scale.

 

The results of Stockpoint’s operations have been included in theCompany’s consolidated statement of operations since the Merger Date.

 

The total purchase price agreed to was approximately $24.6 millionand consisted of approximately $1,056,000 cash paid, 4.1 million shares ofcommon stock issued, valued at approximately $9.4 million determined basedon the average closing market price of Pinnacor’s common shares at the time ofacquisition, warrants for the purchase of 362,000 shares of common stock valuedat approximately $699,000 using the Black-Scholes Pricing Model, using anexercise price of $6.00, expected lives of 5 years, 146% volatility, 4.5%discount rate, and a Company stock price of $2.26, and Stockpoint debt ofapproximately $6.2 million paid off at the Merger Date. As part of theapproximate $24.6 million purchase price agreed to and in addition to theaforementioned items, the Company paid approximately $5.9 million in otherassumed debt subsequent to the Merger Date that was directly attributable tothis transaction. Pursuant to the merger agreement, the Company withheld tenpercent of the consideration agreed to be paid to Stockpoint’s equity holders,totaling approximately $1.1 million in cash, common stock and warrants forpossible future purchase price adjustments. This holdback amount had not beenplaced in escrow and such withheld common shares and warrants have been issuedin full during 2002. In addition, the Company incurred approximately$1.4 million in acquisition expenses. The Company funded the acquisitionthrough the use of its

 

8

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cash andcash equivalents. The Company obtained an independent valuation of the assets(including other intangibles) and liabilities it has acquired and finalized itsallocation of the purchase price of the transaction during the third quarterended September 30, 2002. The following table summarizes the fair valuesof the assets acquired and liabilities assumed at the Merger Date.

 
| Cash                    |   | $           | 675,829     |   |
|-------------------------|--------|-------------|-------------|--------|
| Current assets          |   | 3,166,819   |        |
| Property and equipment  |   | 1,222,546   |        |
| Other intangible assets |   | 2,500,000   |        |
| Goodwill                |   | 31,192,240  |        |
| Total assets acquired   |   | 38,757,434  |        |
| Current liabilities     |   | (14,131,647 | )           |
| Total purchase price    |   | $           | (24,625,787 | )      |

 

Additionally,in connection with this acquisition, the Company recorded exit costs of$1,417,506 to exit certain Stockpoint activities. As of March 31, 2003 all exitcosts in connection with the purchase of Stockpoint have been satisfied. Suchcosts primarily related to employee terminations and lease terminations andhave been recorded as additions to goodwill.

 

The other intangible assets acquired from Stockpoint were its TradeName valued at $600,000 and Customer List valued at $1,900,000. The Trade Nameis an indefinite lived intangible and is not amortized, but rather reviewedannually (or more frequently if impairment indicators arise) for impairment.The Customer List is being amortized on a straight-line basis over4 years.

 

5.RESTRUCTURING AND ASSET ABANDONMENT

 

During the year ended December 31, 2002, the Company recorded arestructuring and asset abandonment charge of $2.4 million. This chargeconsisted of two components (1) the reversal of accrued lease payments of$2.2 million upon settlement of a property previously restructured in 2001and (2) a $4.6 million restructuring and asset abandonment chargerelated to management’s current year restructuring plan.

 

The following table summarizes the components of the Company’s 2002restructuring and asset abandonment charge:

 
|                       |   | **Cost**  |      | **Cash Payments  Made** |   | **Non-cash  Charges Utilized** |   | **Balance Remaining at  March 31, 2003** |      |
|----------------------------|--------|-----------|-----------|-------------------------|--------|--------------------------------|--------|------------------------------------------|-----------|
|                       |   |      |      |                    |   |                           |   |                                     |      |
| Facility  shutdowns        |   | $         | 520,430   |                    | $      | 233,517                        |   | $                                        | 7,796     |   | $ | 279,117 |   |
| Workforce  reductions      |   | 699,354   |      | 699,354                 |   | —                         |   | —                                   |      |
| Asset  abandonment charges |   | 3,425,560 |      | —                  |   | 3,425,560                      |   | —                                   |      |
|                       |   | $         | 4,645,344 |                    | $      | 932,871                        |   | $                                        | 3,433,356 |   | $ | 279,117 |   |

 

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In September 2002, our management negotiated an early terminationof a lease related to a facility previously restructured in 2001. Thenegotiated terms included a cash payment of approximately $690,000, paid during2002, and the forfeiture of a $128,000 security deposit. This resulted in areversal of previously recognized restructuring expense of approximately$2.2 million.

 

During the quarter ended June 30, 2002, we recorded a$4.6 million restructuring and asset abandonment charge. This chargeconsisted of $3.4 million of asset abandonment charges, workforcereduction costs of approximately $700,000, and the shutdown or otherrationalization of certain sales facilities and a data center of approximately$520,000. The 2002 Plan was materially completed as of December 31, 2002.

 

Rationalization entails the consolidation, shutdown or movement offacilities to achieve more efficient operations. Two locations, a sales officein Europe and a data center in the United States, were affected by theseactions. Facility shutdown charges consisted of approximately $520,000 of leasecancellation payments through June 2005.

 

The workforce reduction charge of $700,000 included involuntaryemployee separation costs for 34 employees worldwide. The Company reducedheadcount in sales and marketing, research and development and general andadministrative areas. The affected employees received severance benefitspursuant to established severance policies or by governmentally mandated laborregulations.

 

As of December 31, 2002, all of the planned employee eliminationswere completed. Cash severance payments of approximately $700,000 were madeduring the fiscal year ended December 31, 2002.

 

The $3.4 million asset abandonment charge consists ofapproximately $2.0 million for the abandonment of software modules andrelated professional services incurred in the design of our computinginfrastructure and MIS systems as well as $1.4 million for the abandonmentof leasehold improvements, furniture and fixtures, and computer and networkequipment in conjunction with our facility and data center closures.

 

The following table summarizes the components of the Company’s 2001restructuring charge:

 
|                       |   | **Cost**  |       | **Cash Payments  Made** |   | **Non-cash  Charges Utilized** |   | **Balance Remaining at  March 31, 2003** |      |
|----------------------------|--------|-----------|------------|-------------------------|--------|--------------------------------|--------|------------------------------------------|-----------|
|                       |   |      |       |                    |   |                           |   |                                     |      |
| Facility  shutdowns        |   | $         | 6,028,201  |                    | $      | 3,248,066                      |   | $                                        | 2,429,795 |   | $ | 350,340 |   |
| Workforce  reductions      |   | 1,297,019 |       | 1,297,019               |   | —                         |   | —                                   |      |
| Asset  abandonment charges |   | 4,913,982 |       | —                  |   | 4,913,982                      |   | —                                   |      |
|                       |   | $         | 12,239,202 |                    | $      | 4,545,085                      |   | $                                        | 7,343,777 |   | $ | 350,340 |   |
|                            |        |           |            |                         |        |                                |        |                                          |           |  |  |  |  |  |  |

 

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During fiscal year 2001, we recorded a $12.2 million restructuringcharge. This charge consisted of $6.0 million for the shutdown or otherrationalization of certain sales facilities, workforce reduction costs of$1.3 million and asset impairment charges of $4.9 million. The 2001Plan was materially completed at the end of fiscal year 2001.

 

Rationalization entails the consolidation, shutdown or movement offacilities to achieve more efficient operations. Six locations, located in boththe United States and Europe, were affected by these actions. Facility shutdowncharges consisted of $4.8 million of lease cancellation payments and$1.2 million for expense recognition related to the termination ofwarrants issued to lessors.

 

The workforce reduction charge of $1.3 million includedinvoluntary employee separation costs for 74 employees worldwide. The Companyreduced headcount in sales and marketing, research and development and generaland administrative areas. The affected employees received severance benefitspursuant to established severance policies or by governmentally mandated laborregulations. All of the planned employee eliminations were completed as ofDecember 31, 2002. Cash severance payments of approximately $975,000 and$322,000 were made during the year ended December 31, 2001 and the yearended December 31, 2002, respectively.

 

The $4.9 million asset abandonment charge consists of$3.4 million for the abandonment of software modules and relatedprofessional services incurred in the design of our computing infrastructureand MIS systems as well as $1.5 million for the abandonment of leaseholdimprovements, furniture and fixtures and computer equipment in conjunction withour facility shutdowns.

 

6. MARKETABLE SECURITIES

 

Marketable securitiesinvestments as of March 31, 2003 consist of the following:

 
|                       |   | **COST** |       | **UNREALIZED****HOLDING  GAINS** |   | **FAIR****VALUE** |   |
|----------------------------|--------|----------|------------|----------------------------------|--------|-------------------|--------|
| Corporate Notes  and Bonds |   | $        | 26,727,708 |                             | $      | 253,523           |   | $ | 26,981,231 |   |
|                            |        |          |            |                                  |        |                   |        |  |  |  |

 
|                                   |   | **COST**   |       | **FAIR****VALUE** |   |
|----------------------------------------|--------|------------|------------|-------------------|--------|
| Due within one  year                   |   | $          | 10,292,077 |              | $      | 10,298,168 |   |
| Due after one  year through five years |   | 16,435,631 |       | 16,683,063        |   |
| Total  marketable securities           |   | $          | 26,727,708 |              | $      | 26,981,231 |   |

 

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Available-for-sale securities are carried at fair value, withunrealized gains and losses reported as a separate component of stockholders’equity as of March 31, 2003. The Company does not hold these securities forspeculative or trading purposes.

 

7. STOCK-BASED COMPENSATION

 

In connection with the grantof stock options and restricted stock to employees, we recognized (reversed)deferred stock-based compensation expense of approximately $44,000 and($570,000) for the three months ended March 31, 2003 and 2002, respectively.Stock-based compensation is a result of the issuance of stock options toemployees, directors and affiliated parties with exercise prices per sharedetermined for financial reporting purposes to be below the fair market valueper share of our common stock at the date of the applicable grant. This differenceis recorded as a reduction of stockholders’ equity and amortized as non-cashcompensation expense on an accelerated basis over the vesting period of therelated options. The reversal for thethree months ended March 31, 2002 relates to previously recognized butunearned stock-based compensation of forfeited, unvested stock optionsgranted to terminated employees. Grants of restricted stock are included in common stock outstanding.

 

8. GOODWILL AND OTHERINTANGIBLE ASSETS

 

The Company operates in two reporting units, Financial Services andBusiness Information, under one principal business segment, for purposes ofevaluating the recoverability of goodwill.

 

The changes in the carrying amount of goodwill for the three monthsended March 31, 2003 is as follows:

 
| Balance as of January 1, 2003                                   |   | $      | 34,874,692 |   |
|-----------------------------------------------------------------|--------|--------|------------|--------|
| Additional transaction costs related to the Inlumen acquisition |   | 11,754 |       |
| Balance as of December 31, 2002                                 |   | $      | 34,886,446 |   |

 

Goodwill at March 31, 2003 consisted of the following:

 
| Stockpoint acquisition |   | $         |  32,609,746 |   |
|------------------------|--------|-----------|------------------|--------|
| Inlumen acquisition    |   | 2,276,700 |             |
|                   |   | $         |  34,886,446 |   |

 

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At March 31, 2003 other intangible assets identified from theacquisition of Stockpoint consisted of the Customer List, which is being amortizedover four years with amortization expense being recorded in depreciation andamortization. In addition, the Trade Name which has an indefinite life is notbeing amortized, but instead will be assessed for impairment at least annually.The Company had no other intangible assets as of March 31, 2003. TheCompany is in the process of obtaining an independent valuation and identifyingthe intangible assets it has acquired from the acquisition of the operatingassets of Inlumen. The Company will finalize its valuation as soon as possibleor within one year of the acquisition date.

 

The Company’s intangible assets andaccumulated amortization consist of the following as of March 31, 2003:

 
|                          |   | **Gross  Carrying  Value** |      | **Accumulated****Amortization** |   |
|-------------------------------|--------|----------------------------|-----------|---------------------------------|--------|
|                          |   |                       |      |                            |   |
| Amortized Intangible Assets   |   |                       |      |                            |   |
| Customer List                 |   | $                          | 1,900,000 |                            | $      | 316,667 |   |
| Unamortized Intangible Assets |   |                       |      |                            |   |
| Trade Name                    |   | $                          | 600,000   |                            | $      | — |   |

 

Amortization charged to expense was approximately $119,000 and $0 forthe three months ended March 31, 2003 and 2002, respectively.

 

At March 31, 2003,estimated amortization expense for other intangible assets for the next fiveyears is as follows

 
| **Year** |   | **Estimated Amortization Expense:** |    |
|----------|--------|-------------------------------------|---------|
|     |   |                                |    |
| 2003     |   | $                                   | 356,000 |   |
| 2004     |   | $                                   | 475,000 |   |
| 2005     |   | $                                   | 475,000 |   |
| 2006     |   | $                                   | 277,000 |   |
| 2007     |   | $                                   | —  |   |
|          |        |                                     |         |  |  |

 

Due to certain conditions, the Company re-evaluated the carryingvalue of goodwill and indefinite lived intangible assets under SFASNo. 142 as of December 31, 2002 and as a result of this impairmenttest determined that these assets were not impaired. Impairment tests will beconducted annually in April, or sooner if circumstances indicate impairment mayhave taken place.

 

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9. TREASURY STOCK

 

During the fiscal year 2002, the Board ofDirectors authorized a stock buy-back program to repurchase up to2.0 million shares of the Company’s common stock. During the three monthsended March 31, 2003 the Company repurchased 100,100 shares of common stock ata cost of approximately $130,000. No shares were repurchased for the threemonths ended March 31, 2002.

 

10. RESTRICTED STOCK

 

In January 2003, the Company  granted a total of 225,000 shares ofrestricted common stock (“Restricted Stock”) to four executives of the Company,pursuant to the 2000 Plan. The Restricted Stock was issued under the terms andconditions set forth in the 2000 Plan. The Company did not receive proceedsfrom the issuance of the Restricted Stock. One-third of the RestrictedStock vests on the first anniversary of the grant date, and the remainingshares vest in eight equal quarterly installments thereafter, as long as theexecutive is employed by the Company.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion andanalysis of our financial condition and results of operations (MD&A) should be read together with our consolidated financial statements andrelated notes contained herein and the information contained in our AnnualReport on Form 10-K for the year ended December 31, 2002, as filed with the SECon March 31, 2003. This MD&A contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended and Section21E of the Securities Exchange Act of 1934, as amended.

 

Any statements that express, or involvediscussions as to, expectations, beliefs, plans, objectives, assumptions orfuture events or performance (often, but not always, through the use of wordsor phrases such as “intends,” “plans,” “will result,” “are expected to,” “willcontinue,” “is anticipated,” “estimated,” “projection” and “outlook”) are nothistorical facts and may be forward-looking and, accordingly, suchstatements involve estimates, assumptions, and uncertainties which could causeactual results to differ materially from those expressed in the forward-lookingstatements.

 

The Company cautions that actual results oroutcomes could differ materially from those expressed in any forward-lookingstatements made by or on behalf of the Company. Any forward-lookingstatement speaks only as of the date on which such statement is made, and theCompany undertakes no obligation to update any forward-looking statementor statements to reflect events or circumstances after the date on which suchstatement is made or to reflect the occurrence of unanticipated events. Newfactors emerge from time to time, and it is not possible for management topredict all of such factors. Further, management

 

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cannotassess the impact of each such factor on the business or the extent to whichany factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward-looking statements.

 

**THE COMPANY**

 

Pinnacor Inc. is an outsourced provider of information andanalytical applications to financial services companies and globalcorporations.

 

The Company delivers information-based applications and tools aswell as customized data and news packages that help businesses cost-effectivelyserve their external or internal clients. Pinnacor’s solutions include marketdata and investment analysis tools for financial services firms; criticalbusiness information for the enterprise; and personalized portal applicationsand messaging services for wireless carriers and ISPs.

 

**CRITICAL ACCOUNTING POLICIES**

 

The SEC recently issueddisclosure guidance for “critical accounting policies”. The SEC defines“critical accounting policies” as those that require application ofmanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain and may change in subsequent periods.

 

The following listing is notintended to be a comprehensive list of all of our accounting policies. TheCompany’s significant accounting policies are more fully described in Note 2 ofthe Notes to the Consolidated Financial Statements included in our AnnualReport on Form 10-K for the year ended December 31, 2002 as filed with the SECon March 31, 2003. In many cases, the accounting treatment of a particulartransaction is specifically dictated by accounting principles generallyaccepted in the United States of America, with no need for management’sjudgment in their application. There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.

 

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We have identified thefollowing items as critical accounting policies to our Company:

 

*Revenue recognition:*  Ourrevenue recognition policy is significant as our revenue is a key component ofour results of operations. The Company principally recognizes revenue pursuantto Staff Accounting Bulletin (SAB) 101, “Revenue Recognition in FinancialStatements” as it relates to revenue derived from our Application ServiceProvider (ASP) model. In accordance with SAB 101, we recognize revenue when asigned contract exists, the fee is fixed and determinable, delivery hasoccurred and collection of the resulting receivable is probable. Generally,revenue is recognized ratably over the life of the applicable contract.

 

*Goodwill and Other Intangible Assets:*  TheCompany’s intangibles consist primarily of goodwill from the acquisitions ofStockpoint, Inc. and Inlumen, Inc. accounted for under the purchasemethod and other intangible assets identified in the acquisition of Stockpoint.The other intangible assets acquired from Stockpoint were its Trade Name valuedat $600,000 and Customer List valued at $1,900,000. Under the transitionprovisions of Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets”, the goodwill andindefinite lived Trade Name related to the Company’s Stockpoint acquisitionhave not been periodically amortized during the three months endedMarch 31, 2003, but instead are assessed for impairment at least annually.The Customer List is carried at cost less accumulated amortization and theCustomer List is being amortized on a straight-line basis over its expectedlife, which is estimated to be four years.

 

The Company is in the process of obtaining an independent valuation ofthe operating assets and liabilities it has acquired from Inlumen as well asidentifying the intangible assets it has acquired in order to finalize theallocation of the purchase price of the transaction. The Company will finalizeits valuation as soon as possible or within one year of the acquisition date.The Company’s preliminary allocation of the purchase price is subject torefinement based on the final determination of fair value. Goodwill from theCompany’s Inlumen acquisition has not been periodically amortized.

 

*Costs of Computer Software Developed orObtained for Internal Use:*  Costs of computer software developedor obtained for internal use are capitalized while in the applicationdevelopment stage and are expensed while in the preliminary stage andpost-implementation stage. The Company amortizes these capitalized costs overthe life of the systems, which is estimated to be two years. As ofMarch 31, 2003, the Company had capitalized a total of approximately$2,227,000 of internal development and software purchase costs relating toweb-site development and the Company’s proprietary content engine which wereincurred during the application development stage. These costs were fullydepreciated as of March 31, 2003.

 

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*Software Capitalization for Software SoldExternally:*  Prior to 2002, the Company had developedinternal use software to provide their products to customers through our ASPmodel. During 2002, management decided to market its internal use software as“Actrellis”, a standalone product. The Company sold an insignificant amount ofActrellis software during 2002 and for the three months ended March 31, 2003.

 

*Use of Estimates:*  TheCompany’s preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amount ofassets and liabilities and disclosures of contingent assets and liabilities atthe date of the financial statements and reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

 

**REVENUE**

 

We derive our revenue from the sale of hosted applications, customizedinformation, processing and delivery of information as well as set-up,professional services, and maintenance.

 

*Hosted Applications:*  We selland host end-user applications that enable our customers to present and analyzeinformation. We sell individual applications such as stock quotes or charts andbundle many of our applications into business solutions that include theFinancial Services, Business Information and Access Solutions Product Suites.Our contracts are fixed price and include a variable component if the customerexceeds the minimum page view, per article, real-time stock quote, shortmessaging services (SMS) or downloadable limit. We recognize the fixedcomponent of revenue on a subscription basis, ratably over the contract term.Any variable component of revenue is recognized in the period the service wasrendered.

 

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*Customized Information:*  Weprovide clients with information, which is provided as either customized datafeeds or presented in our applications. We charge clients based on the type andvolume of information and recognize this revenue on a subscription basis, ratablyover the contract term.

 

*Processing and Delivery:*  Forclients that have direct relationships with information providers and for mediaclients with direct relationships to their customers, we provide a technologyplatform for the delivery and integration of information. We charge aprocessing and delivery fee based on the amount of data delivered. This revenueis recognized on a subscription basis ratably over the contract term.

 

*Set-Up Fees:*  From timeto time, we may charge our customers an explicit one-time set-up fee, or thisset-up fee may be bundled within the recurring hosted applications fee. Thisset-up fee includes charges for the implementation of the client website andbuilding custom filters that enable the customer to receive customized information.Set-up revenue is recognized ratably over the term of the related contract oncethe product has been implemented.

 

*Professional Services:*  From timeto time, we offer more sophisticated professional services, which includecustomization of products, systems integration services, the build-out ofcustomized portals and platforms to allow our customers and partners to deliverreal time alerts, personalized information including short messaging services(SMS) and other critical information to their subscribers and employees andother special projects including editorial services and consulting. Dependingon the nature of the customization, this revenue is generally recognized as theservice is performed or over the life of the related contract.

 

M*aintenance:*  Revenue for technical product support is recognized on asubscription basis, ratably over the contract term.

 

We record billed amounts due from clients in excess of revenuerecognized as deferred revenue on our balance sheet. Our contracts typicallyhave lengths of one or two years. We report our revenue net of allowances andrebates.

 

**COST OF SERVICES**

 

Cost of services consists of royalties to information providers as wellas costs for bandwidth, storage of our servers in third-party network datacenters, and certain costs associated with the maintenance of ourinfrastructure. We also include certain payroll and related expenses pertainingto staff and outsourced development associated with client implementation,developing custom applications, performing editorial and quality assuranceservices, and maintaining our network operations.

 

We have several different arrangements with information providers. Themajority of our contracts are based on royalty fees that are calculatedmonthly, based on the volume

 

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of aprovider’s information relayed to our customers or on a per client basis. Incertain cases, the contractual agreement is based on fixed fees or subject to aminimum charge. Certain fixed fee arrangements include additional fees at avariable rate once our clients exceed a specified usage volume.

 

**RESEARCH AND DEVELOPMENT EXPENSES**

 

Research and development expenses consist primarily of salaries andrelated personnel costs associated with the research, design and development ofsoftware applications and services supporting our business. These includeengineers that are developing and maintaining our software and infrastructureand our product managers.

 

Research and development costs are expensed as incurred untiltechnological feasibility has been established for software to be sold inaccordance with SFAS No. 86. To date, we believe under our currentsoftware engineering processes that the establishment of technologicalfeasibility and general release have substantially coincided. As a result, nosoftware development costs have been capitalized to date for software developedfor external sales. For software developed for internal use, expenses arecapitalized while in the application development stage and expensed while inthe preliminary and post implementation stages in accordance with SOP 98-1.

 

**SALES AND MARKETING EXPENSES**

 

Sales and marketing expenses include costs of sales and marketingpersonnel, as well as business development and customer support personnel,related overhead, commissions, advertising and promotion expenses, travel andentertainment expenses and other selling and marketing costs.

 

**GENERAL AND ADMINISTRATIVE EXPENSES**

 

General and administrative expenses consist primarily of personnel andrelated costs for general corporate functions including accounting, finance,human resources, legal and other administrative functions, as well asprovisions for doubtful accounts and bad debt expense.

 

**STOCK-BASED COMPENSATION**

 

In connection with the grant of stock options to employees, werecognized deferred stock-based compensation (income) expense ofapproximately $44,000 and $(570,000) for the three months ended March 31,2003 and 2002, respectively. Stock-based compensation is a result of theissuance of stock options to employees, directors and affiliated parties withexercise prices per share determined for financial reporting purposes to bebelow the fair market value per share of our common stock at the date of theapplicable grant. This difference is recorded as a reduction of stockholders’equity and amortized as non-cash compensation expense on an accelerated basisover the vesting period of the related options. The income for the three monthsended March 31, 2002 relates to previously

 

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recognizedbut unearned stock-based compensation of forfeited, unvested stockoptions granted to terminated employees.

 

In connection with the granting of stockoptions to employees, we recorded deferred stock-based compensation of$225,000 and $0 for the three months ended March 31, 2003 and 2002,respectively.

 

**RESULTS OFOPERATIONS**

 

The following table setsforth our unaudited results of operations as a percentage of revenue for theperiods indicated.

 
|                                                                                                                                                         |   | **For The Three****Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                                                                         |   | **2003**                                     |   | **2002** |   |
| Revenue                                                                                                                                                      |   | 100                                          | %      | 100 | % |
|                                                                                                                                                         |   |                                         |   |   |   |
| Operating expenses:                                                                                                                                          |   |                                         |   |   |   |
|                                                                                                                                                         |   |                                         |   |   |   |
| Cost of services (excluding  depreciation of 1% and 3% for the three months ended March 31, 2003 and 2002,  respectively, shown below)                       |   | 35                                           |   | 32 |   |
| Research and development  (excluding stock-based compensation of 0% for the three months ended March  31, 2003 and 2002, shown below)                        |   | 21                                           |   | 23 |   |
| Sales  and marketing (excluding stock-based compensation of 0% and (8)% for the  three months ended March 31, 2003 and 2002, respectively, shown below)      |   | 19                                           |   | 33 |   |
| General  and administrative (excluding stock-based compensation of 1% and 2% for the  three months ended March 31, 2003 and 2002, respectively, shown below) |   | 19                                           |   | 23 |   |
| Depreciation  and amortization                                                                                                                               |   | 11                                           |   | 13 |   |
| Stock-based  compensation                                                                                                                                    |   | 1                                            |   | (6 | ) |
| Total operating  expenses                                                                                                                                    |   | 106                                          |   | 118 |   |
| Operating loss                                                                                                                                               |   | (6                                           | )      | (18 | ) |
| Other income,  net                                                                                                                                           |   | 4                                            |   | 6 |   |
| Net loss                                                                                                                                                     |   | (2                                           | )%     | (12 | )% |

 

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**THREEMONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002**

 

REVENUE. Revenue totaled approximately $8.3 million for the threemonths ended March 31, 2003, a decrease of approximately $1.1 million or 11%from $9.4 million for the three months ended March 31, 2002. This decrease wasprimarily due to a decrease in the total number of customers partially offsetby a 19% increase in the average contract value per customer and theacquisition of Inlumen that accounted for approximately $1.1 million of revenuefor the three months ended March 31, 2003.

 

COST OF SERVICES. Cost ofservices remained at approximately $3.0 million for the three months endedMarch 31, 2003 and 2002.  Theacquisition of Inlumen, which occurred on November 20, 2002, accounted forapproximately $380,000 of incremental cost of services for the three monthsended March 31, 2003.  As a percentageof revenue, and including Inlumen from its acquisition date, cost of servicesincreased to approximately 35% for the three months ended March 31, 2003 fromapproximately 32% for the three months ended March 31, 2002.  This increase as a percentage of revenueis  due to  higher cost of services as a percentage of revenues for theincremental gross profit associated with our Inlumen acquisition and an increasein personnel costs related to client customization.  This was partially offset by cost savings including renegotiatedcontent fee contracts, monthly fees for housing our servers in third-partynetwork data centers and other telecom costs.

 

RESEARCH AND DEVELOPMENT.Research and development expenses decreased to $1.8 million for the threemonths ended March 31, 2003, a decrease of approximately $300,000 or 16%, from$2.1 million for the three months ended March 31, 2002. This was primarily dueto a decrease in personnel costs as a result of fully realizing the savingsfrom our restructuring plans and from the greater allocation of salaries intocost of services related to client customization.  As a percentage of revenue, and including Inlumen from its acquisitiondate, research and development expenses decreased to approximately 21% duringthe three months ended March 31, 2003 from approximately 23% for the threemonths ended March 31, 2002.  Thisdecrease in research and development expense as a percentage of revenueresulted primarily from the reduction in research and development expensesoutpacing the decrease in revenue.

 

SALES AND MARKETING. Salesand marketing expenses decreased to $1.6 million for the three months endedMarch 31, 2003, a decrease of approximately $1.5 million or 50%, from $3.1million for the three months ended March 31, 2002.  This was due to a decrease in marketing programs and a decreasein compensation expense associated with the reduction of our sales force.   As a percentage of revenue, and includingInlumen from its acquisition date, sales and marketing expenses decreased toapproximately 19%

 

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for the three months ended March 31, 2003 from approximately 33% forthe three months ended March 31, 2002. The decrease in sales and marketingexpense as a percentage of revenue resulted primarily from the significantreductions in sales and marketing expenditures outpacing the decrease inrevenue.

 

GENERAL AND ADMINISTRATIVE.General and administrative expenses decreased to $1.6 million for the threemonths ended March 31, 2003, a decrease of approximately $500,000 or 24%, from$2.1 million for the three months ended March 31, 2002. This was due to asignificant decrease in bad debt expense and a decrease in facilities andpersonnel costs, professional fees and travel expenses.  As a percentage of revenue, and includingInlumen from its acquisition date, general and administrative expenses decreasedto approximately 19% for the three months ended March 31, 2003 from 23% for thethree months ended March 31, 2002. The decrease in general and administrativeexpense as a percentage of revenue resulted primarily from the significantreductions in general and administrative expenditures outpacing the decrease inrevenue.

 

DEPRECIATIONAND AMORTIZATION.  Depreciation andamortization expense decreased to approximately $900,000 for the three monthsended March 31, 2003, a decrease of approximately $300,000 or 25%, from $1.2million for the three months ended March 31, 2002.  As a percentage of revenue, and including Inlumen from itsacquisition date, depreciation and amortization expense decreased toapproximately 11% for the three months ended March 31, 2003 from approximately13% for the three months ended March 31, 2002. The decrease in depreciation and amortization expense as a percentage ofrevenue was due the depreciation savings from the abandonment of $3.4 millionof assets in our 2002 restructuring plan and an overall decrease in the capitalassets purchased.  This was partiallyoffset by the increase in the amortization of our customer list intangible fromour Stockpoint acquisition of approximately $119,000 in the statement ofoperations for the three months ended March 31, 2003.

 

In connection with theacquisition of Inlumen, we are in the process of obtaining an independentvaluation of the assets and liabilities acquired, as well as identifying theintangible assets acquired in order to finalize the allocation of the purchaseprice of the transaction.  The valuationwill be finalized as soon as possible or within one year of the acquisitiondate.

 

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STOCK-BASED COMPENSATION.  Inconnection with the granting of stock options to employees, the Company hasrecognized deferred stock-based compensation (income) expense of approximately$44,000 and ($570,000) for the three months ended March 31, 2003 and 2002,respectively.  Included in stock-basedcompensation expense for the three months ended March 31, 2002, the Company hasreversed previously recognized deferred stock-based compensation expense ofapproximately $639,000. This reversal relates to previously recognized butunearned stock-based compensation of forfeited, unvested stock options grantedto terminated employees. In addition, due to the forfeiture of these optionsduring the period, the Company reversed future amortization expense ofapproximately $1.3 million, included in the balance sheet as deferredcompensation, against paid-in capital. As a percentage of revenue, stock basedcompensation increased to 1% for the period ended March 31, 2003 fromapproximately (6)% for the period ended March 31, 2002.

 

At March 31, 2003, the Company has twostock-based employee compensation plans. The Company accounts for thoseplans under the recognition and measurement principles of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”*,*and related Interpretations. Stock-based employee compensation cost is calculatedwhen certain options were granted under those plans with exercise prices belowthe fair market value to the market value of the underlying common stock on thedate of grant. Stock- based compensation is deferred and amortized toexpense generally over the vesting period of such option grants.

 

SFAS No. 123, “Accounting for Stock-Based Compensation,”provides for a fair value based method of accounting for employee options andoptions granted to non-employees and measures compensation expense usingan option valuation model that takes into account, as of the grant date, theexercise price and expected life of the option, the current price of theunderlying stock and its expected volatility, expected dividends on theunderlying stock and its expected volatility, expected dividends on the stock,and the risk-free interest rate for the expected term of the options.

 

The following table illustrates the effect on net income and earningsper share as if the Company had applied the fair value recognition provisionsof SFAS No. 123, “Accounting for Stock-Based Compensation”*,*to stock-based employee compensation.

 
|                                                                                                                                         |   | **March 31,** |     | **March 31,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|----------|---------------|--------|
|                                                                                                                                         |   | **2003**      |     | **2002**      |   |
| Net loss applicable to common stockholders as reported                                                                                       |   | $             | (160,651 | )             | $      | (1,003,495 | ) |
| Add: Stock-based employee compensation expenses included in reported  net loss                                                               |   | 44,292        |     | (570,329      | )      |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects |   | (554,142      | )        | (475,734      | )      |
| Net loss applicable to common stockholders pro forma                                                                                         |   | $             | (670,501 | )             | $      | (2,049,558 | ) |
| Earnings per share:                                                                                                                          |   |          |     |          |   |
| Net loss per common share as reported                                                                                                        |   | $             | (0.00    | )             | $      | (0,02 | ) |
| Net loss per common share pro-forma                                                                                                          |   | $             | (0.02    | )             | $      | (0.05 | ) |

 

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The fair value of each option grant is estimated on the date of grantusing the Black-Scholes option pricing model using the following weighted-averageassumptions:

 
|                    |   | **Period ended March 31,** |   |
|-------------------------|--------|----------------------------|--------|
|                    |   | **2003**                   |   | **2002** |   |
|                    |   |                       |   |   |   |
| Risk-free interest rate |   | 2.91                       | %      | 3.82 | % |
| Expected lives          |   | 5                          |   | 5 |   |
| Expected Volatility     |   | 100.00                     | %      | 100.00 | % |
| Expected Dividend Yield |   | 0.00                       | %      | 0.00 | % |

 

OTHER INCOME, NET. Otherincome, net includes interest income from cash and cash equivalents andmarketable securities offset by interest expense on capital leases. Otherincome, net, decreased to approximately $327,000 for the three months endedMarch 31, 2003, from approximately $604,000 for the three months ended March31, 2002. This decrease was due to a reduction in overall interest rates andthe interest income earned on lower cash balances, cash equivalents andinvestments in marketable securities.

 

**QUARTERLYOPERATING RESULTS**

 

The following table setsforth our unaudited quarterly operating results (in thousands) for each of ourlast eight quarters. This information has been derived from our unauditedinterim financial statements. In our opinion, this unaudited information hasbeen prepared on a basis consistent with our audited consolidated financialstatements elsewhere contained herein and includes all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of theinformation for the quarters presented. Historical results for any quarter arenot necessarily indicative of the results to be expected for any future period.

 

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**QUARTERLYOPERATING RESULTS**

**(In thousands exceptper share data)**

 
|                                                                                                                                                                                                                  |   | **Three Months Ended** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------|--------|
|                                                                                                                                                                                                                  |   | **June 30,**      |   | **September 30,** |   | **December 31,** |   | **March 31,** |   | **June 30,** |   | **September 30,** |   | **December 31,** |   | **March 31,** |   |
|                                                                                                                                                                                                                  |   | **2001**               |   | **2001** |   | **2001** |   | **2002** |   | **2002** |   | **2002** |   | **2002** |   | **2003** |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  revenue                                                                                                                                                                                                        |   | $                      | 6,701  |   | $ | 7,244 |   | $ | 9,405 |   | $ | 9,411 |   | $ | 8,902 |   | $ | 8,051 |   | $ | 8,203 |   | $ | 8,341 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses:                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of services (excluding depreciation of $259, $156, $227, $247, $229, $164,  $132 and $102 in the second quarter of 2001 through the first quarter of  2003, respectively, as shown below)                       |   | 1,887                  |   | 2,239 |   | 2,866 |   | 2,988 |   | 2,851 |   | 2,719 |   | 2,922 |   | 2,958 |   |
| Research  and development (excluding stock-based compensation of $229, $161, $236, $23,  $(99), $(39), $187 and $3 in the second quarter of 2001 through the first  quarter of 2003, respectively, as shown below)    |   | 1,955                  |   | 2,150 |   | 1,893 |   | 2,128 |   | 1,849 |   | 1,760 |   | 1,676 |   | 1,783 |   |
| Sales  and marketing (excludes stock-based compensation of $430, $(473), $(196),  $(734), $139, $(67), $(266) and $17 in the second quarter of 2001 through the  first quarter of 2003, respectively, as shown below) |   | 3,670                  |   | 3,145 |   | 3,377 |   | 3,116 |   | 2,413 |   | 1,973 |   | 1,551 |   | 1,558 |   |
| General  and administrative (excludes stock-based compensation of $407, $485, $(296),  $141, $141, $139, $247 and $24 in the second quarter of 2001 through the  first quarter of 2003, respectively, as shown below) |   | 3,474                  |   | 3,128 |   | 2,671 |   | 2,120 |   | 1,766 |   | 1,513 |   | 1,804 |   | 1,608 |   |
| Depreciation  and amortization                                                                                                                                                                                        |   | 1,476                  |   | 1,141 |   | 1,353 |   | 1,236 |   | 1,091 |   | 906 |   | 901 |   | 878 |   |
| Stock-based  compensation                                                                                                                                                                                             |   | 1,066                  |   | 173 |   | (256 | ) | (570 | ) | 181 |   | 33 |   | 167 |   | 44 |   |
| Restructuring  and asset abandonment                                                                                                                                                                                  |   | —                 |   | 12,239 |   | — |   | — |   | 4,645 |   | (2,183 | ) | — |   | — |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  operating expenses                                                                                                                                                                                             |   | 13,528                 |   | 24,215 |   | 11,904 |   | 11,018 |   | 14,796 |   | 6,721 |   | 9,021 |   | 8,829 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  income (loss)                                                                                                                                                                                              |   | (6,827                 | )      | (16,971 | ) | (2,499 | ) | (1,607 | ) | (5,894 | ) | 1,330 |   | (818 | ) | (488 | ) |
| Other  income                                                                                                                                                                                                         |   | 1,038                  |   | 213 |   | 607 |   | 604 |   | 385 |   | 340 |   | 328 |   | 327 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  income (loss)                                                                                                                                                                                                    |   | (5,789                 | )      | (16,758 | ) | (1,892 | ) | (1,003 | ) | (5,509 | ) | 1,670 |   | (490 | ) | (161 | ) |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) attributable to common stockholders                                                                                                                                                                    |   | $                      | (5,789 | ) | $ | (16,758 | ) | $ | (1,892 | ) | $ | (1,003 | ) | $ | (5,509 | ) | $ | 1,670 |   | $ | (490 | ) | $ | (161 | ) |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  net income (loss) per common share                                                                                                                                                                             |   | $                      | (0.15  | ) | $ | (0.42 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | 0.04 |   | $ | (0.01 | ) | 0.00 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted  net income (loss) per common share                                                                                                                                                                           |   | $                      | (0.15  | ) | $ | (0.42 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.13 | ) | $ | 0.04 |   | $ | (0.01 | ) | 0.00 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average  number of shares used in computation of basic net loss per share                                                                                                                                    |   | 38,097                 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   | 42,755 |   | 40,483 |   | 40,762 |   |
|                                                                                                                                                                                                                  |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted-average  number of shares used in computation of diluted net loss per share                                                                                                                                  |   | 38,097                 |   | 40,087 |   | 42,256 |   | 42,377 |   | 42,454 |   | 42,826 |   | 40,483 |   | 40,762 |   |

 

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* Certain reclassifications have been made to the 2001 financialstatements to conform with the 2002 and 2003 presentation

 

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**NET INCOME (LOSS) PERCOMMON SHARE**

 

Basic net income (loss) per share was computed by dividing net income(loss) attributable to common stockholders by the weighted average number ofcommon shares outstanding during the period. Diluted net income per share isbased on the assumption that options and warrants are included in thecalculation of diluted net income per share, except when their effect would beanti-dilutive. Dilution is computed by applying the “treasury stock” method.Under this method, options and warrants are assumed to be exercised at thebeginning of the period (or at the time of issuance, if later) and as if fundsobtained thereby were used to purchase common stock at the average market priceduring the period.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We have financed our operations through private sales of equity anddebt securities and through our initial public offering. Sales of equitysecurities included $57.9 million of net proceeds from ourAugust 2000 initial public offering of common stock and $46.2 millionof net proceeds received from the July 2000 private placement ofconvertible preferred stock, which converted into common stock upon thecompletion of our initial public offering. As of March 31, 2003, we hadcash and cash equivalents and marketable securities of approximately $48.6 million.

 

We have commitments to make future payments under various leaseagreements for computer and networking equipment and our facilities leases.Future commitments under these leases are as follows:

 
| **Contractual  Cash Obligations** |   | **Total** |      | **Less than  1 year** |   | **1-3  years** |   | **4-5  years** |      | **After  5 years** |   |
|-----------------------------------|--------|-----------|-----------|-----------------------|--------|----------------|--------|----------------|-----------|--------------------|--------|
|                              |   |      |      |                  |   |           |   |           |      |               |   |
| Capital lease obligations         |   | $         | 2,242,043 |                  | $      | 1,428,072      |   | $              | 813,971   |               | $      | — |   | $ | — |   |
| Operating leases                  |   | $         | 5,137,000 |                  | $      | 1,097,000      |   | $              | 2,010,000 |               | $      | 1,244,000 |   | $ | 786,000 |   |

 

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We operate from leased premises in New York, satellite offices in SanFrancisco, Iowa, and Israel. Our current aggregate annual rental obligationsunder these leases, including our abandoned UK office, are approximately $1.5million for the year ended December 31, 2003. For the year endedDecember 31, 2002, we negotiated a favorable buyout of one of our realestate leases for approximately $2.2 million. As a result of this buyout,we reduced our expected future minimum lease payment obligation byapproximately $3.3 million. For the three months ended March 31, 2003 and2002, our capital expenditures were approximately $116,000 and $607,000,respectively. Capital expenditures were primarily for computers, hardware,software and networking equipment.

 

As of March 31, 2003, our principal commitments consisted ofobligations outstanding under a series of capital leases for computer andnetworking equipment and our facilities leases. In prior years, we entered intoother capital leases for the design and implementation of our financialsystems. A leasing company is the beneficiary of a $1.8 million standbyletter of credit with a bank securing our lease arrangement with them. At theend of each capital lease term, we have the option to purchase the equipment,typically at the lesser of fair market value or approximately 10% of grossasset value. We presently intend to exercise the purchase option for themajority of the leases. Our landlord is the beneficiary of a $175,000irrevocable standby letter of credit with a financial institution securing ourNew York office lease arrangement with them.

 

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For the three months ended March 31, 2003 the net cash used inoperating activities was approximately $1.3 million. The net cash used inoperating activities for the quarter ended March 31, 2003 resultedprimarily from net losses of $161,000, a decrease in accounts payable andaccrued expenses of approximately $732,000, a decrease in deferred revenue of$1.2 million, a decrease in accrued restructuring expenses of $136,000, and anincrease in prepaid expenses of $131,000. This was offset by non-cash chargesof approximately $919,000 and a decrease in accounts receivable ofapproximately $218,000.

 

For the three months endedMarch 31, 2002 the net cash used in operating activities was approximately $1.4million.  The net cash used in operatingactivities for the quarter ended March 31,2003 resulted primarily from netlosses of $1.0 million, a decrease in deferred revenue of $2.2 million and adecrease in accrued restructuring expenses of $489,000. This was offset byapproximately $666,000 of net non-cash charges, a decrease in trade accountsreceivable of $1.2 million, and a decrease in prepaid expenses and other assetsof $367,000.

 

For the threemonths ended March 31, 2003 the net cash provided by investing activitieswas approximately $8.4 million. The net cash provided by investingactivities for the quarter ended March 31, 2003 resulted principally fromthe sale of marketable securities in order to fund operations of approximately$8.6 million, offset by approximately $112,000 for the payments of exitcosts associated with the acquisitions of Stockpoint and Inlumen, andapproximately $116,000 for the purchase of property and equipment.

 

For the three months endedMarch 31, 2002 the net cash provided by investing activities was approximately$7.1 million. The net cash provided by investing activities for the quarterended March 31, 2002 resulted principally from the sale of marketablesecurities in order to fund operations of approximately $7.8 million,offset by approximately $81,000 for the payments of exit costsassociated with the acquisition of Stockpoint and approximately $607,000 for the purchase of property and equipment.

 

For the three months ended March 31, 2003 the net cash used infinancing activities was approximately $636,000. The net cash used in financingactivities for the quarter ended March 31, 2003 was primarily fromrepayments of our capital lease obligations of approximately $516,000 andapproximately $130,000 used for the repurchase of treasury stock offset byproceeds of approximately $9,000 from the exercise of stock options.

 

For the three months endedMarch 31, 2002 the net cash used in financing activities was approximately$652,000.  The net cash used infinancing activities for the quarter ended March 31, 2002 was primarily fromrepayments of our capital lease obligations of approximately $709,000, offsetby approximately $57,000 fromthe exercise of stock options.

 

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**RISK FACTORS**

 

An investment in our commonstock involves a high degree of risk. The risks and uncertainties describedbelow are not the only ones we face. Additional risks and uncertainties notpresently known to us may also impair our operations and business. If we do notsuccessfully address any of the risks described below, there could be amaterial adverse effect on our financial condition, operating results andbusiness. We cannot assure you that we will successfully address these risks.

 

You should carefullyconsider the risks described below before deciding to invest in shares of ourcommon stock. The trading price of our common stock could decline due to any ofthese risks, in which case you could lose all or part of your investment. Inassessing these risks, you should also refer to the other information in thisand our other public filings, including our financial statements and therelated notes.

 

**RISKS RELATEDTO OUR BUSINESS**

 

**BECAUSE WE HAVE A LIMITED OPERATING HISTORY,IT WILL BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS.**

 

It is difficult to value our business and evaluate our prospectsbecause of our limited operating history. We began our current line of businessat the end of 1998 and expanded our line of business with the acquisition ofStockpoint, Inc. in August of 2001 and again with the acquisition of theoperating assets of Inlumen, Inc. in November of 2002. Accordingly, wehave limited financial and operating data for evaluating our business. Inaddition, our business model is unproven, which creates a risk that ourperformance will not meet the expectations of investors.

 

**WE HAVE A HISTORY OF SIGNIFICANT OPERATINGLOSSES.**

 

We have incurred operating losses (excluding non-recurring reversals ofprior restructuring charges in the third quarter of 2002) in every quartersince we began our current line of business in 1998. While our operating losseshave narrowed significantly in recent quarters, our ability to achieveprofitability will depend on our ability to generate and sustain higher netsales while maintaining reasonable expense levels. We cannot be certain that ifwe were to achieve profitability, we would be able to sustain or increase that profitability.

 

**OUR QUARTERLY FINANCIAL RESULTS MAY BEVOLATILE AND COULD CAUSE OUR STOCK PRICE TO FLUCTUATE.**

 

Our revenues and operating results may vary significantly from quarterto quarter. Because of these fluctuations, our results in any quarter may notbe indicative of future performance and it may be difficult for investors toproperly evaluate our results. It is possible that in some future periods ourrevenues or earnings may fall below the expectations of investors and result inthe market price of our common stock to decline. The factors that may cause ourfinancial results to vary from quarter to quarter include:

 

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•                  the demand for our services;

 

•                  the value, timing and renewal of contracts withcustomers;

 

•                  the amount and timing of operating costs andcapital expenditures;

 

•                  the performance of our technology;

 

•                  actions taken by our competitors, including newproduct introductions and enhancements; and

 

•                  adverse changes in the financial markets.

 

These factors, some of which are beyond our control, make it difficultto forecast our future revenues or results of operations accurately. A portionof our operating expenses are related to costs that cannot be adjusted quickly.Our operating expense levels reflect, in part, our expectations of futurerevenues. If actual revenues on a quarterly basis are below management’sexpectations, or if our expenses exceed increased revenues, results ofoperations would be materially adversely affected.

 

**WE DEPEND UPON FINANCIAL MARKETS.**

 

The target clients for our products include a range of financialservices organizations, including investment advisors, brokerage firms andbanks. The success of many of our clients is intrinsically linked to thefinancial markets. We believe that demand for our products could bedisproportionately affected by fluctuations, disruptions, instability ordownturns in the financial markets which may cause clients and potentialclients to exit the industry or delay, cancel or reduce any plannedexpenditures for our products. In addition, a slowdown in formation of newfinancial services organizations could cause a decline in demand for ourproducts. We believe that a continuing economic downturn in the financialmarkets would negatively impact the demand for our products, which could have amaterially adverse effect on our business and results of operations.

 

**WE FACE INTENSE COMPETITION THAT COULD IMPAIROUR ABILITY TO RETAIN EXISTING CUSTOMERS, ATTRACT NEW CUSTOMERS AND ACHIEVEPROFITABILITY.**

 

We face significant competition in our markets. We may experiencegreater competition in the future as we address a wider range of marketsegments, additional entrants join the market and existing competitors offernew or upgraded products. If we fail to compete successfully, we could losemarket share, or be forced to lower our prices or spend more on marketing,which would reduce our margins.

 

We compete with:

 

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•                  financial information providers and mediacompanies, who often sell their own information directly to customers;

 

•                  application service providers and informationaggregators, who aggregate information and either host private-labelapplications that use that data or deliver that data in the form of feeds tocustomers;

 

•                  financial software vendors, who have already, ormay in the future, develop extensions to their software capabilities to be ableto manage external information as efficiently as internal information;

 

•                  the in-house development staffs of many of ourclients, who develop technology solutions often in conjunction with consultingand systems integration firms.

 

We expect all of these forms of competition to continue to intensify.Some of our existing competitors, as well as a number of potential newcompetitors, have longer operating histories, greater name recognition, largerclient bases and significantly greater financial, technical and marketingresources than we do. These factors may provide them with significant advantagesover us. In addition, larger, well-established and well-financed entities mayacquire, invest in or form joint ventures with our competitors. Increasedcompetition from these or other competitors could adversely affect ourbusiness.

 

**WE DO NOT HAVE A PROVEN TRACK RECORD OFSELLING OUR NEW TECHNOLOGY OFFERINGS.**

 

We have developed and introduced new products and services that have avery limited track record. We cannot assure you whether there will be asignificant demand for our new products and services by either our currentclients or prospective clients. If the investment we have made in producing andselling these new products and services does not result in significant sales,our business may be materially adversely affected.

 

**SOME OF OUR CUSTOMERS ARE STARTUP COMPANIESWHO POSE CREDIT RISKS. THE FAILURE OF THESE CUSTOMERS TO PAY THEIR BILLS HASLED TO A LOSS OF REVENUE, A TREND WHICH MAY CONTINUE.**

 

While the majority of our customers are large and mid-sized enterprisecustomers, a number of our customers are smaller startup companies. Many ofthese companies have limited operating histories, operate at a loss and havelimited cash reserves and limited access to additional capital. With some ofthese customers, we have experienced difficulties collecting accountsreceivable. As a result, our allowance for doubtful accounts as ofMarch 31, 2003 was approximately $600,000. While our bad debt expense hasnarrowed significantly in recent quarters and, we believe, will continue tonarrow, we may continue to encounter these difficulties in the future. If anysignificant part of our customer base is unable or unwilling to pay our feesfor any reason, our business will suffer.

 

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**IF WE DO NOT CONTINUE TO DEVELOP OURTECHNOLOGY, OUR SERVICES MAY QUICKLY BECOME OBSOLETE.**

 

The market we compete in is characterized by rapidly changingtechnology, evolving industry standards and customer demands and frequent newproduct introductions and enhancements. To be successful, we will have tocontinually improve the performance, features and reliability of our productsand services. We cannot assure you that our technological development willadvance at the pace necessary to sustain our growth.

 

Additionally, new technologies may require us to alter our technologyand products to avoid becoming obsolete. Improving our current products anddeveloping and introducing new products will require additional research anddevelopment.

 

**INTERNAL OR THIRD-PARTY SYSTEM OR EQUIPMENTFAILURES COULD ADVERSELY AFFECT OUR BUSINESS.**

 

Our systems and operations are vulnerable to damage or interruptionfrom a variety of factors, including human error, natural disasters, powerloss, telecommunication failures, break-ins, sabotage (physical or electronic),computer viruses, vandalism and similar unexpected adverse events. Moreover,while we presently have multiple data centers and have implemented internalredundancy measures, we presently do not have all functionality of all datacenters available in multiple sites. We presently have a data center at ourIowa facility, and in addition, we have a data center operation located infacilities owned by third-parties in Carteret, NJ. Any failure of thecomputer equipment we use or the third-party telecommunications networksand data centers on which we rely for distribution could interrupt or delay ourservice. This could lead to customers canceling contracts and could damage ourreputation, which could limit our ability to attract additional customers, decreaseour revenue and lead to a drop in the value of our common stock.

 

**UNDETECTED SOFTWARE ERRORS OR FAILURES FOUNDIN NEW PRODUCTS MAY RESULT IN LOSS OF OR DELAY IN MARKET ACCEPTANCE OF OURPRODUCTS THAT COULD SERIOUSLY HARM OUR BUSINESS.**

 

Our products may contain undetected software errors or failures whenfirst introduced or as new versions are released. Despite testing by us and bycurrent and potential customers, errors may not be found in new products untilafter delivery to our customers, resulting in loss of, or a delay in marketacceptance, which could seriously harm our business.

 

**LOSING MAJOR INFORMATION PROVIDERS MAY LEAVEUS WITH INSUFFICIENT INFORMATION TO RETAIN AND ATTRACT CUSTOMERS.**

 

We do not generate original content or data and are therefore highlydependent upon third-party information providers. If we were to lose several ofour major information providers and were not able to obtain similar content ordata from other sources our 

 

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serviceswould be less attractive to customers. In addition, we cannot be certain thatwe will be able to license content or data from our current or new providers onfavorable terms in the future, if at all.

 

**WE RECENTLY CHANGED OUR NAME TOPINNACOR INC., A NAME THAT HAS NO PRIOR NAME RECOGNITION IN OUR INDUSTRY.IF WE ARE UNABLE TO MAINTAIN OUR REPUTATION AND EXPAND OUR NAME RECOGNITION, WEMAY HAVE DIFFICULTY ATTRACTING NEW BUSINESS AND RETAINING CURRENT CUSTOMERS ANDEMPLOYEES, AND OUR BUSINESS MAY SUFFER.**

 

We believe that establishing and maintaining a good reputation and namerecognition is critical for attracting and retaining customers and employees.We also believe that the importance of reputation and name recognition isincreasing, and will continue to increase. If our reputation is damaged ordiminished because of our name change in October of 2002, or if potentialcustomers are not familiar with us or the services we provide, we may be unableto attract new, or retain existing, customers and employees. Promotion andenhancement of our name will depend largely on our success in continuing toprovide effective services. If customers do not perceive our services to beeffective or of high quality, our brand name and reputation will suffer.

 

**PROTECTION OF OUR INTELLECTUAL PROPERTY ISLIMITED AND EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY BE INADEQUATE,TIME-CONSUMING AND EXPENSIVE.**

 

We regard our trademarks, service marks, copyrights, trade secrets andsimilar intellectual property as critical to our success. The unauthorizedreproduction or other misappropriation of our trademarks or other intellectualproperty could diminish the value of our proprietary rights or reputation. Inaddition, the laws of some foreign countries do not protect proprietary rightsto the same extent as do U.S. laws. Moreover, potential competitors might beable to develop technologies or services similar to ours without infringing ourpatents. In addition, if our agreements with employees, consultants and otherswho participate in product and service development activities are breached, wemay not have adequate remedies, and our trade secrets may become known orindependently developed by competitors. If this were to occur, our businesscould be materially and adversely affected.

 

We rely upon a combination of trademark and copyright law, patent law,trade secret protection and confidentiality and license agreements with ouremployees, customers and others to protect our proprietary rights. We havereceived and have filed a number of trademarks and service marks, and havefiled several patent applications with the United States Patent and TrademarkOffice. However, registrations and patents may only be granted in selectedcases, and there can be no assurance that we will be able to secure these oradditional registrations or patents. Furthermore, policing and enforcementagainst the unauthorized use of our intellectual property rights could entailsignificant expenses and could prove difficult or impossible.

 

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**THIRD-PARTIES MAY CLAIM THAT WE HAVE BREACHEDTHEIR INTELLECTUAL PROPERTY RIGHTS, WHICH COULD DIVERT MANAGEMENT’S ATTENTIONAND RESULT IN EXPENSE TO DEFEND OR SETTLE CLAIMS.**

 

Third-parties may bring claims of copyright or trademarkinfringement, patent violation or misappropriation of creative ideas or formatsagainst us with respect to information that we distribute or our technology ormarketing techniques and terminology. These claims, with or without merit,could be time consuming to defend, result in costly litigation, divertmanagement attention, require us to enter into costly royalty or licensingarrangements or limit our ability to distribute information or prevent us fromutilizing important technologies, ideas or formats.

 

**ACQUISITIONS AND STRATEGIC INVESTMENTS MAYRESULT IN INCREASED EXPENSES, DIFFICULTIES IN INTEGRATING TARGET COMPANIES ANDDIVERSION OF MANAGEMENT’S ATTENTION.**

 

We anticipate that from time to time we may be reviewing one or moreacquisitions or strategic investments or other opportunities to expand ourrange of technology and products and to gain access to new markets. Growththrough acquisitions or strategic investments entails many risks, including thefollowing:

 

•                  our management’s attention may be diverted duringthe acquisition and integration process;

 

•                  we may face costs, delays and difficulties ofintegrating the acquired company’s operations, technologies and personnel intoour existing operations, organization and culture;

 

•                  we may issue new equity or debt securities to payfor acquisitions, which would dilute the holdings of existing stockholders;

 

•                  the timing of an acquisition or our failure tomeet operating expectations for acquired businesses may impact adversely on ourfinancial condition; and

 

•                  we may be adversely affected by expenses of anyundisclosed or potential legal liabilities of the acquired company, includingintellectual property, employment and warranty and product liability-relatedproblems.

 

If realized, any of these risks could have a material adverse effect onour business, financial condition and operating results. Any of these risks andour limited experience in integrating acquisitions could affect any possiblefuture acquisitions.

 

**IF THE INFORMATION WE DISTRIBUTE IS UNLAWFULOR CAUSES INJURY, WE MAY HAVE TO PAY FINES OR DAMAGES.**

 

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The publication or dissemination of information that we havedistributed may give rise to liability for defamation, negligence, breach ofcopyright, patent, trade secret or trademark infringement or other claims orcharges based on the nature of the information. As a licensor of thisinformation, we may be directly or indirectly liable to claims or charges ofthis nature. In addition, we could be exposed to liability arising from theactivities of our customers or their users with respect to the unauthorizedduplication of, or insertion of inappropriate material into, the information wesupply. Although we carry general liability insurance, our insurance may notcover claims of these types or may be inadequate to indemnify us for allliability that may be imposed on us.

 

**IF WE DISTRIBUTE INFORMATION TO UNAUTHORIZEDRECIPIENTS, WE MAY HAVE TO PAY DAMAGES TO OUR INFORMATION PROVIDERS.**

 

Our proprietary software technologies enable us to deliver informationwe receive from participating information providers only to customers who havebeen authorized to access that information. We might inadvertently distributeinformation to a customer who is not authorized to receive it, which couldsubject us to a claim for damages from the information provider or harm ourreputation in the marketplace.

 

**LEGAL UNCERTAINTIES AND GOVERNMENT REGULATIONOF THE INTERNET COULD INHIBIT GROWTH OF THE INTERNET.**

 

Many legal questions relating to the Internet remain unclear and theseareas of uncertainty may be resolved in ways that damage our business. It maytake years to determine whether and how existing laws governing matters such asintellectual property, privacy, libel and taxation apply to the Internet. Inaddition, new laws and regulations that apply directly to Internetcommunications, commerce and advertising are becoming more prevalent. Forexample, the U.S. Congress has passed Internet-related legislation concerningcopyrights, taxation, and the online privacy of children. As the use of theInternet grows, there may be calls for further regulation, such as morestringent consumer protection laws. Finally, our distribution arrangements andcustomer contracts could subject us to the laws of foreign jurisdictions inunpredictable ways.

 

These possibilities could affect us adversely in a number of ways. Newregulations could make the Internet less attractive to users, resulting inslower growth in its use and acceptance than we expect. Complying with newregulations could result in additional cost to us, which could reduce ourmargins, or it could leave us at risk of potentially costly legal action. Wemay be affected indirectly by legislation that fundamentally alters thepracticality or cost-effectiveness of utilizing the Internet, including thecost of transmitting over various forms of network architecture, such astelephone networks or cable systems, or the imposition of various forms oftaxation on Internet-related activities. Regulators continue to evaluatethe best telecommunications policy regarding the transmission of Internettraffic.

 

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**NEW LAWS AND REGULATIONS AFFECTING CORPORATEGOVERNANCE MAY IMPEDE OUR ABILITY TO RETAIN AND ATTRACT COMPETENT BOARDMEMBERS, A CHIEF EXECUTIVE OFFICER, AND A CHIEF FINANCIAL OFFICER.**

 

On July 30, 2002, President George W. Bush signed into law theSarbanes-Oxley Act of 2002. The Act is designed to enhance corporateresponsibility through new corporate governance and disclosure obligations,increase auditor independence, and tougher penalties for securities fraud. Inaddition, the SEC and NASDAQ have adopted rules in furtherance of the Act andare considering adopting others. This Act and the related new rules andregulations will likely have the effect of increasing the complexity and costof our company’s corporate governance and the time our executive officers spendon such issues, and this may increase the risk of personal liability for ourBoard members, chief executive officer, chief financial officer and otherexecutives involved in the governance process. As a result, it may become moredifficult to attract and retain Board members, a chief executive officer, achief financial officer and/or other executives involved in corporategovernance.

 

**RISKS RELATED TO OUR SECURITIES**

 

**VOLATILITY OF OUR STOCK PRICE COULD ADVERSELYAFFECT STOCKHOLDERS.**

 

The stock market in general and the market for technology or Internet-relatedstocks in particular, has experienced extreme price fluctuations. At times,technology or Internet-related stocks have traded at prices and multiplesthat are substantially above the historical levels of the stock market ingeneral. Since estimates of the value of technology or Internet-relatedcompanies have little historical basis and often vary widely, fluctuations inour stock price may not be correlated in a predictable way to our performanceor operating results. Our stock price may also fluctuate as a result of factorsthat are beyond our control or unrelated to our operating results. We expectour stock price to fluctuate as a result of factors such as:

 

•                  variations in our actual or anticipated quarterlyoperating results or those of our competitors;

 

•                  announcements of technological innovations by usor our competitors;

 

•                  introduction of new products or services by us orour competitors;

 

•                  conditions or trends in the technology or Internetindustry;

 

•                  changes in the market valuations of other technologyor Internet companies;

 

36

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•                  announcements by us or our competitors ofsignificant acquisitions; and

 

•                  our entry into strategic partnerships or jointventures.

 

**WE DO NOT INTEND TO PAY DIVIDENDS.**

 

We have never declared or paid any cash dividends on our capital stock.We currently intend to retain any future earnings for funding growth and,therefore, do not expect to pay any cash dividends in the foreseeable future.

 

**WE ARE EFFECTIVELY CONTROLLED BY OUREXECUTIVE OFFICERS AND DIRECTORS AND THE INTERESTS OF THESE STOCKHOLDERS COULDCONFLICT WITH YOUR INTERESTS.**

 

Our executive officers and directors, in the aggregate, beneficiallyown approximately 32% of our outstanding common stock on a fully diluted basis.As a result, these stockholders, if acting together, would be able to exertconsiderable influence on any matters requiring approval by our stockholders,including the election of directors, amendments to our charter and by-laws andthe approval of mergers or other business combination transactions. Theownership position of these stockholders could delay, deter or prevent a changein control of Pinnacor and could adversely affect the price that investorsmight be willing to pay in the future for shares of our common stock.

 

**IT MAY BE DIFFICULT FOR A THIRD-PARTY TOACQUIRE OUR COMPANY, WHICH COULD DEPRESS OUR STOCK PRICE.**

 

Delaware corporate law and our certificate of incorporation and by-lawscontain provisions that could have the effect of delaying, deferring, orpreventing a change in control of the Company that stockholders may considerfavorable or beneficial. These provisions could discourage proxy contests andmake it more difficult for you and other stockholders to elect directors andtake other corporate actions. These provisions could also limit the price thatinvestors might be willing to pay in the future for shares of our common stock.These provisions include:

 

•                  a staggered board of directors, so that it wouldtake three successive annual meetings to replace all directors;

 

•                  prohibition of stockholder action by writtenconsent; and

 

•                  advance notice requirements for the submission bystockholders of nominations for election to the board of directors and forproposing matters that can be acted upon by stockholders at a meeting.

 

In addition, we have entered into a stockholder rights agreement thatmakes it more difficult for a third-party to acquire us without thesupport of our board of directors and principal stockholders.

 

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**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In July 2001, the FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations”. SFAS No. 143 is effective for fiscal yearsbeginning after June 15, 2002, and establishes an accounting standardrequiring the recording of the fair value of liabilities associated with theretirement of long-lived assets in the period in which they are incurred. TheCompany adopted of SFAS No. 143 at January 1, 2003. This Statement did nothave a material effect on the Company’s financial position and operating results.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting forCosts Associated with Exit or Disposal Activities”. SFAS No. 146 willsupersede EITF Issue No. 94-3, “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring).” SFAS No. 146 requires that costsassociated with an exit or disposal plan be recognized when incurred rather thanat the date of a commitment to an exit or disposal plan. SFAS No. 146 isto be applied prospectively to exit or disposal activities initiated afterDecember 31, 2002. The adoption of SFAS No. 146 as of January 1, 2003has not had a material effect on our financial position and operating results.

 

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness to Others” which elaborates on the disclosuresto be made by a guarantor in its interim and annual financial statements aboutits obligations under certain guarantees that it has issued. It also clarifiesthat a guarantor is required to recognize, at the inception of a guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and measurement provisions of InterpretationNo. 45 are applicable on a prospective basis to guarantees issued ormodified after December 31, 2002. The disclosure requirements in thisInterpretation are effective for financial statements of interim or annualperiods ending after December 15, 2002. The adoption of FIN 45 sinceJanuary 1, 2003 has not had a material effect on our financial position andoperating results.

 

In January 2003, the FASBissued Interpretation No. 46, “Consolidation of Variable Interest Entities”, (“FIN46”). FIN 46 requires that companies that control another entity throughinterests other than voting interests should consolidate the controlled entity.FIN 46 applies to variable interest entities created after January 31, 2003,and to variable interest entities in which an enterprise obtains an interest inafter that date. The related disclosure requirements are effective immediately.We do not anticipate that this interpretation will have a significant impact onour consolidated financial position and results of operations.

 

In November 2002, the EITF reached a consensus on IssueNo. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITFIssue 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which the vendor will perform multiple revenue generatingactivities. The EITF will be effective for fiscal years beginning afterJune 15, 2003. The Company is currently evaluating the effects of thischange on their consolidated financial position and operating results.

 

In December 2002, the FASB issued SFAS No. 148, “Accountingfor Stock-Based Compensation-Transition and Disclosure-an amendment ofFASB Statement No. 123”. SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation” to provide alternative methodsto account for the transition from the intrinsic value method of recognition ofstock-based employee compensation in accordance with APB OpinionNo. 25, “Accounting for Stock Issued to Employees” to the fair valuerecognition provisions under SFAS No. 123. SFAS No. 148 provides twoadditional methods of transition and will no longer permit the SFASNo. 123 prospective method to be used for fiscal years beginning afterDecember 15, 2003. In addition, SFAS No. 148 amends the disclosurerequirements of SFAS No. 123 to require prominent disclosure in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the pro forma effects had the fairvalue recognition provisions of SFAS No. 123 been used for all periodspresented. The Company has adopted the disclosure provisions of  SFAS No. 148 as of December 31,2002 (see  Note 7  to the consolidated Financial Statements).The adoption of SFAS No. 148 did not have a significant impact on theCompany’s financial position and results of operations.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Interest Rate Sensitivity -We do not enter into financial instrument transactions for trading purposes.Some of our investments may be subject to market risk which means that a changein prevailing interest rates may cause the principal amount of the investmentto fluctuate.

 

Exchange Rate Sensitivity -We consider our exposure to foreign currency exchange rate fluctuations to beminimal as we currently do not have significant amount of revenue and assetsdenominated in a foreign currency and have minimal expenses paid in a foreigncurrency. Currently, the exposure is primarily related to revenue and operatingexpenses in U.K. Accordingly, we may be subject to exposure from adversemovements in foreign currency exchange rates in relation to these revenues andexpenses. We do not currently use derivative financial instruments. As of March31, 2003 the effect of foreign exchange rate fluctuations was not material.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

(a) Evaluation of DisclosureControls and Procedures.

The Company’s ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof the Company’s disclosure controls and procedures (as such term is defined inRules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, asamended (the “Exchange Act”)) as of a date within 90 days prior to the filingdate of this quarterly report (the “Evaluation Date”).  Based on such evaluation, such officers haveconcluded that, as of the Evaluation Date, the

Company’s disclosurecontrols and procedures are effective in alerting them on a timely basis tomaterial information relating to the Company (including its wholly ownedsubsidiaries) required to be included in the Company’s reports filed orsubmitted under the Exchange Act.

 

(b)  Changes in Internal Controls.  Since the Evaluation Date, there have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly affect such controls.

 

**PART II.OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

There are no materialpending legal proceedings to which we are a party.

 

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

From the date of receipt offunds from our initial public offering through March 31, 2003, the net proceedsof the offering have been used to support our domestic sales and marketingactivities, our international operations, product development and for generalcorporate purposes. We also may use a portion of the net proceeds to invest incomplementary businesses or technologies. None of the net proceeds from theoffering 

 

38

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was paid directly orindirectly to any director, officer, general partner or their associates, or toany persons owning 10% or more of any class of equity securities. Pendingapplication of the net proceeds towards one of the above uses, the net proceedshave been invested in interest-bearing, investment-grade securities.

 

We have never declared orpaid any cash dividends on our common or preferred stock. We do not anticipatepaying any cash dividends in the foreseeable future. We currently intend toretain future earnings, if any, to finance operations and the expansion of ourbusiness. Any future determination to pay cash dividends will be at the discretionof the board of directors and will be dependent upon our financial condition,operating results, capital requirements, general business conditions,restrictions imposed by financing arrangements, if any, legal and regulatoryrestrictions on the payment of dividends and other factors that our board ofdirectors deems relevant.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

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**ITEM 5. OTHER INFORMATION**

 

Michael H.Jordan resigned as a Director of the Registrant on March 24, 2003 after beingappointed CEO of EDS Corporation. Alan Ellman resigned as a Director of theRegistrant on March 26, 2003. It is currently anticipated that the Board ofDirectors will appoint two Directors to fill such vacancies upon the locationof suitable candidates.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

(a) Exhibits

 

99.1             CEO certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

99.2             CFO certification pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code.

 

(b) Reports on Form 8-K

None

 

**SIGNATURES**

 

Pursuant to the requirementsof the Securities Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

**PINNACOR, INC.**

(Registrant)

 
| **SIGNATURE**         |   | **TITLE**                                                                                                |       | **DATE**     |       |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------|------------|--------------|------------|
|                  |   |                                                                                                     | ** ** |         | ** ** |
| /s/  KIRK LOEVNER     |   | President, Chief Executive Officer  and  Chairman                                                   |       | May 15, 2003 |       |
| Kirk  Loevner         |   |                                                                                                     |       |         |       |
|                  |   |                                                                                                     |       |         |       |
| /s/  DAVID M. OBSTLER |   | Chief Financial Officer, Executive Vice  President of Corporate Development & Strategy and Treasurer |       | May 15, 2003 |       |
| David  M. Obstler     |   |                                                                                                     |       |         |       |

 

 

40

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**CERTIFICATIONS**

 

I, Kirk Loevner, certify that:

 
| 1.     | I have  reviewed this quarterly report on Form 10-Q of Pinnacor 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:                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | 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/ Kirk  Loevner                                |   |
|--------|--------------------------------------------------|--------|
|   | Kirk Loevner                                     |
|   | Chief  Executive Officer, President and Chairman |

 

 

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I, David Obstler, certify that:

 
| 1.     | I have  reviewed this quarterly report on Form 10-Q of Pinnacor 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:                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                               |   |
|   | 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/ David  Obstler                                                                                            |   |
|--------|---------------------------------------------------------------------------------------------------------------|--------|
|   | David  Obstler                                                                                                |
|   | Chief  Financial Officer,  Executive Vice President of  Corporate Development &  Strategy & Treasurer |

 

 

 

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