U.S. Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
Commission file number 0-29750
IENTERTAINMENT NETWORK, INC.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-2092059
(State of incorporation) (I.R.S. Employer Identification Number)
124-126 Quade Drive
Cary, North Carolina 27513
(Address of principal executive office)
(919) 678-8301
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes | X | No | |
As of November 13, 2002 there were 40,566,918 shares of the issuer's Common
Stock, $.10 par value per share, outstanding.
Transitional Small Business Disclosure Format (check one)
Yes |_| No | X |
IENTERTAINMENT NETWORK, Inc.
Form 10-QSB Quarterly Report
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements 3
Management's Discussion and Analysis of
Financial Condition and
Item 2 Results of Operation 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 Controls and Procedures 20
Part II OTHER INFORMATION 20
Item 1 Legal Proceedings 20
Item 2 Changes in Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
CERTIFICATIONS 23
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
iEntertainment Network, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
September 30 December 31
2002 2001
UNAUDITED
------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 10 $ 259
Trade receivables, net of allowances of $21 and $82 at September 30,
2002 and December 31, 2001, respectively 154 148
Prepaid expenses and other 24 114
------------------------------------
Total current assets 188 521
Property and equipment, net 281 428
Software development costs, net 401 607
Other non-current assets 15 17
------------------------------------
Total assets $ 885 $ 1,573
====================================
Liabilities and stockholders' (deficit) equity
Current liabilities:
Accounts payable and accrued expenses $ 779 $ 1,032
Unearned revenue 105 35
Current portion of capital lease obligations 18 32
------------------------------------
Total current liabilities 902 1,099
Unearned revenue, less current portion 75
Capital lease obligations, less current portion - 10
------------------------------------
Total liabilities 977 1,109
Stockholders' (deficit) equity:
Common stock, $.10 par value; 50,000,000 shares authorized; 40,566,918 and
29,832,329 shares issued and outstanding 4,057 2,983
Additional paid-in capital 42,053 42,612
Accumulated deficit (46,150) (45,077)
Accumulated other comprehensive loss (52) (54)
====================================
Total stockholders' (deficit) equity (92) 464
------------------------------------
Total liabilities and stockholders' (deficit) equity $ 885 $ 1,573
====================================
See accompanying notes.
3
iEntertainment Network, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Three months ended Nine months ended
September 30 September 30 September 30 September 30
2002 2001 2002 2001
---------------------------------------------------------------------
Unaudited Unaudited Unaudited Unaudited
Net revenues:
Online sales $ 209 $ 240 $ 657 $ 777
Advertising and other 143 117 422 575
Royalties and licenses 1 36 5 57
---------------------------------------------------------------------
Total net revenues 353 393 1,084 1,409
Cost of revenues:
Cost of products and services 30 61 102 157
Royalties and amortized software costs 91 69 286 151
---------------------------------------------------------------------
Total cost of revenues 121 130 388 308
---------------------------------------------------------------------
Gross profit 232 263 696 1,101
Operating expenses:
Sales and marketing 118 122 299 851
Product development 304 411 858 1,071
General and administrative 200 310 725 815
Reversal of accrued liabilities for prize points
- - - (447)
---------------------------------------------------------------------
Total operating expenses 622 843 1,882 2,290
---------------------------------------------------------------------
Operating loss (390) (580) (1,186) (1,189)
Other (income) expense:
Interest (income)/expense 1 1 3 1
Other 25 (14) 9 (85)
---------------------------------------------------------------------
Total other (income) expense 26 (13) 12 (84)
---------------------------------------------------------------------
Loss before income taxes and extraordinary item (416) (567) (1,198) (1,105)
Income tax expense - - - -
---------------------------------------------------------------------
Loss before extraordinary item (416) (567) (1,198) (1,105)
Extraordinary gain on early extinguishment of debt
125 - 125 -
---------------------------------------------------------------------
Net Loss (291) (567) (1,073) (1,105)
---------------------------------------------------------------------
Accretion of Series D Convertible Preferred Stock
- (74) - (221)
---------------------------------------------------------------------
Net loss available to common stockholders $ (291) $ (641) $ (1,073) $ (1,326)
=====================================================================
Basic and diluted loss per share:
Loss before extraordinary item $ (0.01) $ (0.04) $ (0.03) $ (0.08)
Extraordinary gain on early extinguishment of debt
- - - -
---------------------------------------------------------------------
Net loss per share $ (0.01) $ (0.04) $ (0.03) $ (0.08)
Weighted average shares used in computing basic and diluted
loss per share 40,566,918 15,914,311 37,489,616 15,914,311
4
iEntertainment Network, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
Nine months ended September 30
2002 2001
--------------------------------------
Unaudited Unaudited
Operating activities
Net loss $ (1,073) $ (1,105)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 198 428
Amortization of capitalized software development costs 206 149
Write-off of accrued liability for prize points - (447)
Changes in operating assets and liabilities:
Trade receivables (6) 636
Prepaid expenses and other assets 90 (118)
Accounts payable and accrued expenses (253) 420
Unearned revenue 145 -
--------------------------------------
Net cash used in operating activities (693) (37)
Investing activities
Purchase of property and equipment (49) (142)
Capitalized software development costs - (167)
--------------------------------------
Net cash used in investing activities (49) (309)
Financing activities
Proceeds from issuance of common and preferred stock 515 -
Payments on capital lease obligations (24) (23)
--------------------------------------
Net cash provided by (used in) financing activities 491 (23)
Effect of currency exchange rate changes on cash and cash equivalents
2 1
--------------------------------------
Net decrease in cash and cash equivalents (249) (368)
Cash and cash equivalents at beginning of period 259 437
--------------------------------------
Cash and cash equivalents at end of period $ 10 $ 69
======================================
5
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements
(INFORMATION AS OF SEPTEMBER 30, 2002 AND FOR THE NINE AND THREE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
1. Description of Business and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
consolidated financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation of the statements have been included. The interim operating results
are not necessarily indicative of the results that may be expected for a full
fiscal year. The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. For further information,
refer to the financial statements and accompanying footnotes thereto included in
the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001.
Description of Business
iEntertainment Network, Inc. (the "Company") is a developer and publisher of
Internet games and an operator of online game services. The Company develops and
publishes proprietary online multi-player games and has built an Internet
distribution infrastructure which offers online gamers a variety of free,
subscription and pay-for-play games and services, including simulation, parlor,
strategy, role playing and action games.
Disposition of CD-ROM Assets
In connection with the Company's June 1999 disposition of its CD-ROM assets,
management decided to terminate certain CD-ROM distribution agreements and began
negotiations to mutually release each partner from any obligation under the
terms of these agreements. In the second quarter of 1999, the Company estimated
a liability of $850,000 for potential settlements upon termination of these
agreements. The balance of this liability at September 30, 2002 and December 31,
2001 was $114,000 and $124,000, respectively, and is reflected as accounts
payable and accrued expenses in the consolidated balance sheets.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries, iMagicOnline Corporation, Interactive Magic Ltd.
and Interactive Magic GmbH. All significant intercompany accounts and
transactions have been eliminated in consolidation.
6
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Software Development Costs
The Company capitalizes costs incurred in the development of its gaming
software. Capitalization of such costs is discontinued when a product is
available for general release to customers. Capitalized software development
costs are capitalized at the lower of cost or net realizable value and amortized
using the greater of the revenue curve method or the straight-line method over
the estimated economic life of the related product. Amortization begins when a
product is ready for general release to customers.
Information related to net capitalized software development costs is as follows
(in thousands):
Nine months ended Year ended
September 30 December 31
2002 2001
------------------ --------------
(Unaudited)
Balance at beginning of period $ 607 $ 658
Capitalized - 167
Amortized (206) (218)
------------------ --------------
Balance at end of period $ 401 $ 607
================== ==============
Revenue Recognition
Revenue from online sales is recognized monthly as earned and is based either
upon actual usage by the customer on an hourly basis or on an unlimited use
subscription basis. Certain payments are received in advance and are recorded as
unearned revenue until earned. The Company records advertising revenues in the
period the advertising impressions are delivered to customers. The Company
records advertising revenues net of related administrative fees as reported by
its outside advertising vendor. The Company's advertising contracts do not
guarantee a minimum number of impressions to be delivered.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. SAB No. 101 provides guidance on
a variety of revenue recognition issues, including gross versus net income
statement presentation. Based on the criteria of SAB No. 101, the Company
presents its advertising revenues net of these administrative fees.
The Company licensed the rights to produce and distribute a CD ROM version of
its WarBirds III(TM) product to a publisher during the three months ended
September 30, 2002 for various royalty rates specified in the contract. The
Company received an advance royalty payment of $150,000 from the publisher which
it will recognize as income ratably over the two year term of the contract based
on the criteria of SAB No. 101.
Trade Receivable Allowance
The accounts receivable allowance at September 30, 2002 and December 31, 2001
includes a reserve for doubtful accounts which management records based on
historical experience and current evaluation of potential collectibility issues.
The Company does not require collateral for unpaid balances. Credit losses have
historically been within management's expectations.
7
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include provisions for doubtful
accounts, sales returns and allowances and estimates regarding the
recoverability of capitalized software development costs. Actual results could
differ from those estimates.
Foreign Currency Translation
The Company follows the principles of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation," using the local currency of its operating subsidiaries as
the functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in effect
at the balance sheet date. Income and expense items are translated at the
weighted average exchange rate prevailing during the period. Adjustments
resulting from translation of financial statements are reflected as a component
of accumulated other comprehensive loss.
The following chart details the Company's comprehensive loss for the periods
presented (in thousands):
Three months ended Nine months ended
September 30 September 30
2002 2001 2002 2001
------------------------------ ----------------------------
(Unaudited)
(Unaudited)
Net Loss $(141) $(567) $(923) $(1,105)
Other comprehensive income - foreign currency
translation adjustment - 3 2 1
--------------- -------------- -------------- -------------
Comprehensive loss $(141) $(570) $(921) $(1,104)
=============== ============== ============== =============
Basic Net Loss Per Share
Basic net loss per share has been calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic net loss per share is calculated by dividing net
loss available to common stockholders by the weighted average shares of common
stock outstanding during the period.
Had the Company been in a net income position, diluted earnings per share would
have been presented and would have included potential common shares related to
outstanding options and warrants. The diluted earnings per share computation is
not included, as all potential common shares are anti-dilutive.
8
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which was later amended by SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" and by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" an Amendment of FASB Statement No.
133." SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the statement of financial position,
and that the corresponding gains or losses be reported either in the statements
of operations or as a component of comprehensive income, depending on the type
of hedging relationship that exists.
If the derivative is determined to be a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives are offset against the change in
fair value of the hedged assets, liabilities, or firm commitments through the
statements of operations or recognized in other comprehensive income until the
hedged item is recognized in the statements of operations. The ineffective
portion of a derivative's change in fair value is immediately recognized in
earnings. We were required to adopt SFAS 133 as of January 1, 2001. The adoption
of SFAS 133 did not have a significant impact on our results of operations,
financial position, or cash flows.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets. SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria
that intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Company is required to adopt the provisions of SFAS No. 141 immediately,
except with regard to business combinations initiated prior to July 1, 2001, and
SFAS No. 142 will become effective January 1, 2002. We are currently assessing
the impacts of adoption of SFAS No. 141 and SFAS No. 142 on goodwill and other
intangible assets and the respective impact on the results of operations,
financial position and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." We
will adopt SFAS No. 144 in fiscal year 2002. We do not expect the provisions of
SFAS No. 144 to have any significant impact on its financial condition or
results of operations. We do not expect the adoption of other recently issued
accounting pronouncements to have a significant impact on our results of
operations, financial position, or cash flows.
In June 2002 the FASB issued SFAS No. 146, "Accounting For Costs Associated with
Exit or Disposal Activities." This statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. SFAS No. 146 also establishes that the fair value is the
objective for initial measurement of the liability. The Company will adopt this
standard by the required December 2002 deadline. The Company does not believe
there will be any material impact as a result of this statement.
9
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
2. Stockholders' Equity
Recapitalization - 2001
During December 2001, the Company completed several financing transactions to
eliminate certain obligations and to improve its financial position:
-- The Company and its then Chairman of the Board of Directors agreed to
terminate the consulting agreement between the parties in exchange for
newly issued shares of the Company's common stock. The Company was
released from $46,875 of its debt under the consulting agreement in
exchange for 937,500 shares of its common stock. The $46,875 balance
of the liability is to be settled on the one-year anniversary of the
termination agreement through a further issuance of common stock
valued at the trading price of the Company's common stock on that
date.
-- The Company issued 10,000,000 shares of common stock to certain
stockholders under the terms of the Securities Purchase and Exchange
Agreement in exchange for $300,000 in cash and 3,910.844 shares of the
Company's Series D Preferred Stock. The Series D Preferred Stock
repurchased was immediately retired.
-- The Company issued 2,980,518 shares of common stock to certain
stockholders under the terms of the Series D Preferred Stock Exchange
Agreement in exchange for 1,000 shares outstanding of its Series D
Preferred Stock. The Series D Preferred Stock was immediately retired.
The agreement contains certain anti-dilution rights for the
shareholders in the repurchase transaction. Terms of the anti-dilution
provision include rights related to the issuance of the first $203,125
of common stock following the execution of the Stock Exchange
Agreement.
The Company incurred approximately $30,000 of legal fees related to these
transactions. These fees were recorded as a reduction to additional paid-in
capital.
From January 1, 2002 through April 3, 2002, the Company issued an additional
10,284,000 shares of its common stock, in exchange for approximately $514,000 in
cash, to new investors pursuant to the exercise of certain terms of the
Securities Purchase and Exchange Agreement dated December 18, 2001.
Additionally, pursuant to the Company's anti-dilution obligations under the
Series D Preferred Stock Exchange Agreement, the Company issued approximately
451,000 shares of its common stock to certain shareholders.
10
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following (in thousands):
September 30 December 31
2002 2001
---------------------------------------
(Unaudited)
Equipment $ 619 $ 737
Furniture and fixtures 20 46
Software 378 477
---------------------------------------
1,017 1,260
Less accumulated depreciation and amortization (736) (832)
---------------------------------------
$ 281 $ 428
=======================================
Depreciation expense for the three month periods ended September 30, 2002 and
2001, respectively, was $66,000 and $159,000, including amortization of
equipment leased under capital leases of $7,000 and $12,000, respectively.
Depreciation expense for the nine month periods ended September 30, 2002 and
2001, respectively, was $196,000 and $429,000, including amortization of
equipment leased under capital leases of $20,000 and $38,000, respectively. The
Company disposed of assets totaling approximately $293,000 in the three month
period ended September 30, 2002 resulting in a loss on disposal of approximately
$1,700.
4. Stock Options and Warrants
The following summarizes the Company's stock option and warrant activity:
Shares Available Shares Available Weighted-Average
for Grant - for Grant - Options Outstanding Exercise Price
1995 Plan 1998 Plan Per Share
------------------- ------------------- -------------------- -------------------
Balances at December 31, 2001 1,295,998 246,249 2,509,695 $0.89
Options granted 1,285,000 300,000 1,585,000 $0.08
Options canceled - 538,333 (538,333) $1.10
------------------- ------------------- -------------------- -------------------
Balances at September 30, 2002 10,998 484,582 3,556,362 $0.50
=================== =================== ==================== ===================
11
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
4. Stock Options and Warrants (continued)
At September 30, 2002, the Company had 1,383,520 vested options outstanding
exercisable at exercise prices ranging from $0.05 - $6.00 per share.
The Company had 1,055,168 common stock warrants outstanding at September 30,
2002 and 1,131,905 at December 31, 2001, all of which were exercisable at prices
ranging from $1.00 to $9.60 per share. Terms of the warrants range from three to
ten years.
5. Accrued Liability for Prize Points
The Company operates a prize point system for the users of its online games. In
2000, prize points were redeemable for cash and other prizes. The Company
recorded an accrued liability of $343,000 in accounts payable and accrued
expenses on its December 31, 2000 balance sheet based on management's best
estimate of prize points that have not been redeemed. At December 31, 2000, the
Company also recorded a liability in accounts payable for redeemed but unpaid
prize points of $112,000. In 2001, the Company revised its prize point
redemption policy such that prize points are no longer directly redeemable for
cash or merchandise. Prize points have been converted to chance points to be
used by customers to enter prize drawings. Due to the change in its prize point
system, Management has determined that the Company no longer has prize point
obligations as previously recorded in the December 31, 2000 balance sheets.
Accordingly, the accrued liability of $343,000 and the payable of $112,000 were
reversed and netted against Sales and Marketing operating expenses in the
Consolidated Statements of Operations for the quarter ended March 31, 2001.
Following the Company's restructuring of its prize point system in early 2001,
three individuals filed complaints with the Consumer Protection Division of the
Office of the Attorney General for the State of North Carolina with respect to
prize points that they intended to redeem for cash prizes. The Attorney
General's office also has asserted that the Company's operation of the game of
"Bingo," which the Company allows users to play for free, violates North
Carolina's gambling statutes. Management, after consultation with counsel, does
not believe that the Company has violated such statutes, which, as interpreted
by North Carolina's Attorney General's office, would cause free Bingo games
operated by many companies to be in violation. In order to avoid costly
litigation, however, the Company negotiated and paid a settlement in the amount
of $25,000 regarding these claims. This settlement does not bar individual
consumer claims or claims of violations of other states' gaming regulations.
Consequently, there can be no assurance that similar claims will not be made
against the Company in the future.
In order to aide in the resolution of its dispute with the Office of the
Attorney General of North Carolina, the Company changed the operations of its
"Bingo" game to again allow prize points to be directly redeemable for cash. The
total value of any single award is statutorily limited. Players are notified of
their eligibility to redeem accumulated prize points for cash awards. Unredeemed
awards expire after one month. The Company recorded an accrued liability of
$12,000 and $7,000 in accounts payable and accrued expenses on its September 30,
2002 and December 31, 2001 balance sheets, respectively, based on management's
best estimate of prize points that have not been redeemed.
12
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
6. Leases
The Company rents its facilities and certain office equipment under
noncancelable operating leases which expire at various times through 2004. The
monthly rent under certain facility leases are periodically adjusted based on
changes in the Consumer Price Index.
Property and equipment includes the following amounts for capital leases (in
thousands):
September 30 December 31
2002 2001
-------------------------------------------
(Unaudited)
Leased equipment $ 97 $ 188
Leased furniture and fixtures - -
-------------------------------------------
97 188
Less: accumulated amortization (71) (139)
-------------------------------------------
$ 26 $ 49
===========================================
Total rent expense incurred was approximately $19,000 and $14,000 for the three
month periods ended September 30, 2002 and 2001, respectively, and approximately
$58,000 and $63,000 for the nine month periods then ended.
7. Related Party Transactions
In January 2002, the Company entered into a licensing arrangement with IamGame,
Inc. (the "related entity"), a company owned by the Chief Executive Officer of
iEntertainment Network, Inc. for the right to utilize a gaming system developed
by that related entity. Under the terms of the arrangement, the Company has
agreed to manage the related entity's gaming website for a fee. The costs
associated with operating the website are the responsibility of the Company. The
Company has agreed to pay certain set fees and monthly royalties to the related
entity under the license to use its gaming system and on advertising revenue
generated from the related entity's website. During the nine months ended
September 30, 2002, the Company recognized $130,000 in advertising and
subscription revenues, $101,000 in direct costs associated with operating the
IamGame website and $81,000 in set-up fees and royalty expense under the
agreement. The Company does not have the right to transfer the license, but it
can terminate the arrangement at any time.
8. Significant Customers
Three customers comprised 74% of accounts receivable at September 30, 2002 and
one customer comprised 60% of accounts receivable at December 31, 2001. The
Company's largest customer accounted for 18% of its sales during the three month
period ended September 30, 2002.
13
iEntertainment Network, Inc.
Notes to Consolidated Financial Statements (continued)
9. Extraordinary Gain from Extinguishment of Certain Liabilities
During 2002, the Company completed a restructuring of certain of its liabilities
through negotiations with vendors for settlements, which resulted in the
satisfaction of approximately $165,000 of liabilities for total payments of
approximately $40,000. In connection with this restructuring of liabilities, the
Company recorded a gain from extinguishment of certain liabilities of
approximately $125,000.
14
IENTERTAINMENT NETWORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These forward-looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from historical results or
anticipated results, including those set forth under "Cautionary Statement"
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this report. The following discussion should be
read in conjunction with the Company's Consolidated Financial Statements and
notes thereto included elsewhere in this report.
OVERVIEW
The Company is a developer and publisher of Internet and online games, and an
operator of online game services. The Company develops and publishes proprietary
online multi-player games, and through its Internet distribution infrastructure
offers online gamers a variety of free, subscription and pay-for-play games and
services, including simulation, parlor, strategy, role playing and action games.
The percentages and dollar amounts in the following discussions have generally
been rounded to aid presentation. As a result, all such figures are
approximations.
NET REVENUES
The advertising revenue is generally based on:
(1) the revenue we receive from the number of times an advertisement is
displayed on our site, commonly referred to as "cost per thousand impressions,"
or "CPMs"; and
(2) the number of times users click on an advertisement displayed on our sites,
commonly referred to as "cost per click," or "CPCs."
CPM advertising revenue is recognized during the period that the campaign runs,
as is CPC revenue, which is recognized as users click on the ads.
The Company recognizes Internet advertising revenue generated through
third-party agency representation on a net basis, after deduction of agency
commission expense. The recognition of revenue in this manner is consistent with
the actual cash received. The Company derived 0% and 17% of its advertising
revenue from reciprocal advertising arrangements, or "barter" during the three
and nine-month periods ended September 30, 2001, respectively, and 0% during the
three and nine-month periods ended September 30, 2002. The Company does not
expect that barter will account for any significant portion, if any, of its
revenues in the foreseeable future.
The online revenues are generated primarily from pay-for-play usage for
WarBirds(TM), the Company's award winning World War II air combat simulation
game. WarBirds(TM) consists of a suite of products including the original
WarBirds(TM)II, the latest 3D graphic WarBirds(TM)III, and Dawn of Aces, the
Company's World War I air combat simulation game. Revenue from online sales is
recognized monthly as earned and is based either upon actual usage by the
customer on an hourly basis or on an unlimited use subscription basis. Certain
payments are received in advance. Additionally, in the first quarter of 2002,
the Company began offering subscription-based Bingo which accounted for 8% and
10% of online revenues in the three and nine-month periods ended September 30,
2002, respectively. Revenue from subscription-based Bingo is recognized when
earned. Payments are received in advance.
Net revenues decreased by 10% to $353,000 for the three months ended September
30, 2002 from $393,000 for the three months ended September 30, 2001. Net
revenues decreased by 23% to $1,084,000 for the nine months ended September 30,
2002 from $1,409,000 for the nine months ended September 30, 2001.
15
IENTERTAINMENT NETWORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NET REVENUES (CONTINUED)
The following table summarizes the changes in the components of revenue from
2001 to 2002:
Three months Nine months
ended September 30 ended September 30
($000) ($000)
----------------------- ------------------------
Revenue for the period in 2001 $ 393 $ 1,409
Increase / (Decrease) in Advertising and Other Revenue 26 (153)
Increase / (Decrease) in Online Sales (31) (120)
Increase / (Decrease) in Royalty & Licenses (35) (52)
----------------------- ------------------------
Revenue for the period in 2002 $ 353 $ 1,084
======================= ========================
Advertising revenues decreased 27% from the nine-month period ended September
30, 2001 to the nine-month period ended September 30, 2002. The decrease is due
primarily to a 50% decline in advertising impressions served over the periods.
Advertising revenues increased 22% from the three-month period ended September
30, 2001 to the three-month period ended September 30, 2002. The increase is due
primarily to the Company's use of more aggressive, higher-value advertising
formats and to a general improvement in advertising rates.
Online sales revenue decreased 13% to $209,000 for the three months ended
September 30, 2002 from $240,000 for the three months ended September 30, 2001
and decreased 15% to $657,000 for the nine months ended September 30, 2002 from
$777,000 for the nine months ended September 30, 2001. Pay-for-Play revenue
related to the Company's WarBirds(TM) product decreased 20% for the three months
ended September 30, 2002 from the prior year's comparable period and decreased
24% for the nine months ended September 30, 2002 from the prior year's
comparable period, primarily due to a decrease in the Game's player base. The
balance of the change in both the three- and nine-month periods is primarily
attributable to the introduction of subscription-based Bingo during the first
quarter of 2002.
Royalty & Licenses revenue decreased 97% to $1,000 for the three months ended
September 30, 2002 from $36,000 for the three months ended September 30, 2001
and decreased 91% to $5,000 for the nine months ended September 30, 2002 from
$57,000 for the nine months ended September 30, 2001. The decrease is due to a
lack of royalty activity on the Company's older CD ROM Box Game titles during
2002. The Company licensed the rights to produce and distribute a CD ROM version
of its WarBirds III(TM) product to a publisher during the three months ended
September 30, 2002 for various royalty rates specified in the contract. The
Company received an advance royalty payment of $150,000 from the publisher which
it will recognize as income ratably over the two year term of the contract.
COST OF REVENUES
Cost of revenues consists of costs of products sold (including cost of Internet
access) and royalties and amortization of software development costs. Cost of
revenues decreased 7% to $121,000 for the three months ended September 30, 2002
from $130,000 for the three months ended September 30, 2001. Decreases in the
cost of internet access were offset by additional costs associated with the
royalties due to a related party and expenses related to obtaining new
advertising partners. Cost of revenues increased 26% to $388,000 in the
nine-month period ended September 30, 2002 from $308,000 in the nine-month
period ended September 30, 2001. This increase was due primarily to an
additional quarter of amortized software development costs in 2002 and to the
additional costs associated with the royalties related to the arrangement
between the Company and IamGame, a related party.
16
IENTERTAINMENT NETWORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSES
Operating expenses decreased by 26% to $622,000 for the three months ended
September 30, 2002 from $843,000 for the three months ended September 30, 2001
and decreased by 18% to $1,882,000 for the nine months ended September 30, 2002
from $2,290,000 for the nine months ended September 30, 2001.
The following table summarizes the changes in the components of operating
expenses from 2001 to 2002:
Three months Nine months
ended September 30 ended September 30
($000) ($000)
----------------------- ------------------------
Operating Expenses for the period in 2001 $ 843 $ 2,290
Increase/ (Decrease) in Sales and Marketing (4) (552)
Increase/ (Decrease) in Product Development (107) (213)
Increase/ (Decrease) in General and Administrative (110) (90)
Increase/ (Decrease) in Reversal of accrued liabilities for prize points
- 447
----------------------- ------------------------
Operating Expenses for the period in 2002 $ 622 $ 1,882
======================= ========================
SALES AND MARKETING
Sales and marketing expenses decreased by 3% to $118,000 for the three months
ended September 30, 2002 from $122,000 for the three months ended September 30,
2001, and decreased by 65% to $299,000 for the nine months ended September 30,
2002 from $851,000 for the nine months ended September 30, 2001. Beginning with
the first quarter of 2001, the Company revised its prize point redemption policy
such that prize points were no longer directly redeemable for cash or
merchandise. Prize points were converted to chance points to be used to enter
fixed-value prize drawings. Accordingly, the associated accrued liability
related to unredeemed prize points and the payable related to redeemed, but
unpaid, prize points were reversed against operating expenses in the quarter
ended March 31, 2001. These decreases in the nine months ended September 30,
2002 were due primarily to the reduction of costs associated with customer
incentives ($300,000), the elimination of expenses related to marketing
agreements with Internet Service Providers ($200,000) and those expenses related
to barter advertising ($100,000).
PRODUCT DEVELOPMENT
Product development expenses decreased 26% to $304,000 for the three-month
period ended September 30, 2002 from $411,000 for the three months ended
September 30, 2001 and decreased 20% to $858,000 for the nine-month period ended
September 30, 2002 from $1,071,000 for the nine months ended September 30, 2001
due to a combination of factors including the decrease in staffing costs and the
decrease in corporate overhead related to the department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 36% to $200,000 for the three
month period ended September 30, 2002 from $310,000 for the three months ended
September 30, 2001 and decreased 13% to $725,000 for the nine-month period ended
September 30, 2002 from $815,000 for the nine months ended September 30, 2001.
Savings in personnel and facilities costs were partially offset by increases in
insurance costs and the decrease in corporate overhead allocated to other
departments based upon department headcount.
17
IENTERTAINMENT NETWORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, the Company had cash of $10,000. The following is a
condensed table of cash on hand and major cash flow items (in thousands):
Cash on hand, December 31, 2001 $ 259
Net loss (1,073)
Add: non-cash charges and expenses 404
Changes in working capital (24)
------------------
Net Cash Used in Operations (693)
Net Cash provided by investing and financing activities 442
Effect of exchange rates on cash and cash equivalents 2
------------------
Cash on hand, September 30, 2002 $ 10
==================
The Company used $693,000 more net cash in operating activities during the first
nine months of 2002 compared with the nine-month period ended September 30,
2001. Cash generated from the collection of receivables declined approximately
$600,000 during the first nine months of 2002 compared with the same period in
2001. The Company experienced a substantial decrease in non-barter revenues of
approximately $800,000 between the three months ended December 31, 2000 and 2001
and a corresponding decrease in accounts receivable available for collection
during the subsequent periods.
The Company's success is highly dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing or refinancing as may be required, and ultimately to attain
profitability. Management expects to need and be able to attract additional
capital for its online operations. However, there can be no assurance that
management's plans will be executed as anticipated. In April 2002, the Company
raised gross proceeds of $350,000 through the private placement of 7,000,000
shares of common stock to one accredited investor at $0.05 per share.
Unless and until its online revenue stream matures, the Company recognizes that
it will likely not have sufficient cash resources to fund its operations through
the end of 2002 or for 2003. The Company might not be able to close on any
financing transaction necessary to fund ongoing operations. The Company does not
have any current arrangements or commitments for any future financing. The
Company might be required to obtain financing on terms that are not favorable to
it and its shareholders. The Company received a going concern qualification on
its December 31, 2001 audited financial statements and the Company's cash and
financial positions have not improved since that time.
If the Company is unable to obtain additional financing when needed, it may be
required to shutdown, delay or scale back product development and marketing
programs in order to meet its short-term and long-term cash requirements, which
could have a material adverse effect on its business, financial condition and
results of operations.
The Company operates in a highly competitive environment that involves a number
of risks, some of which are beyond the Company's control. The following
statement highlights some of these risks.
Statements contained in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" which are not historical facts are or
might constitute forward-looking statements under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Although the Company
believes the expectations reflected in such forward-looking statements are based
on reasonable assumptions, its expectations might not be attained.
Forward-looking statements involve known and unknown risks that could cause the
Company's actual results to differ materially from expected results. Factors
that could cause actual results to differ materially from the Company's
expectations include, among others: we have incurred significant operating
losses and we cannot predict whether we will become profitable; we have changed
our business focus and we may not be successful operating a new business; we
have significant capital requirements, and if we do not obtain sufficient
additional funds our ability to grow may be limited; our growth strategy,
including acquisitions, may not succeed and may adversely effect our financial
condition, results of operations and cash flows; if we are unable to introduce
new products and incorporate rapidly developing technologies into our products,
our business may be adversely affected; we depend on the continued growth in use
of the Internet; intense competition may adversely affect our operating results;
and other risks. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained in
this report to reflect any change in our expectations or any changes in events,
conditions or circumstances upon which any forward-looking statement is based.
18
IENTERTAINMENT NETWORK, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission (SEC) recently released Financial
Reporting Release No. 60, which requires all companies to include a discussion
of critical accounting policies or methods used in the preparation of financial
statements. In addition, Financial Reporting Release No. 61 was recently
released by the SEC to require all companies to include a discussion to address,
among other matters, liquidity, off-balance sheet arrangements and contractual
obligations and commercial commitments. The following is a brief discussion of
each of our critical accounting policies:
Allowance for Doubtful Accounts.
Our allowance for doubtful accounts relate to customer accounts receivable. The
allowance for doubtful accounts is an estimate prepared by management based on
identification of the collectibility of specific accounts and the overall
condition of the receivable portfolios. We specifically analyze customer
receivables, as well as analyze historical bad debts, customer credits, customer
concentrations, customer credit-worthiness, current economic trends, and changes
in customer payment terms, when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of the our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Likewise, should we determine that we
would be able to realize more of our receivables in the future than previously
estimated, an adjustment to the allowance would increase income in the period
such determination was made. The allowance for doubtful accounts is reviewed on
a quarterly basis and adjustments are recorded as deemed necessary.
Software Development Costs
We capitalize costs incurred in the development of its gaming software.
Capitalization of such costs is discontinued when a product is available for
general release to customers. Capitalized software development costs are
capitalized at the lower of cost or net realizable value and amortized using the
straight-line method over the estimated economic life of the related product.
Amortization begins when a product is ready for general release to customers.
Income Taxes
We are required to estimate income taxes in each of the jurisdictions in which
we operate. This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities. We must assess the likelihood that the deferred tax
assets will be recovered from future taxable income and to the extent that we
believe recovery is not likely, we must establish a valuation allowance. To the
extent we establish a valuation allowance in a period, we must include an
expense within the tax provision in the Statements of Operations. We have
recorded a valuation allowance against our entire net deferred tax assets given
the losses we have incurred and the uncertainties regarding our future operating
profitability and taxable income.
Revenue Recognition
Revenue from online sales is recognized monthly as earned and is based either
upon actual usage by the customer on an hourly basis or on an unlimited use
subscription basis. Certain payments are received in advance. We record
advertising revenues in the period the advertising impressions are delivered to
customers. We record advertising revenues net of related administrative fees as
reported by our outside advertising vendors. We recorded barter revenue and
expense under the criteria established by the Emerging Issues Task Force Issue
No. 99-17 "Accounting for Advertising Barter Transactions."
19
IENTERTAINMENT NETWORK, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
(a) Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14c. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that the information required to be
disclosed in the Company's filings with the SEC under the Securities
Exchange Act of 1934 is accumulated and communicated to the Company's
management, including its principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
(b) There have been no significant changes in the Company's internal
controls or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 24, 2002 the Company filed an administrative claim for patent
infringement before the Air Force pursuant to Title 10 United States Code,
Section 2386 in compliance with 48 CFR Subpart 227.70, Infringement Claims,
Licenses, and Assignments. The Company is the holder of United States Patent no.
6,042,477 - a method of and system for minimizing the effects of time
latency...on interconnected computers. The Company uses its technology to manage
the effects of time latency across the internet for its massively multi-player
flight simulators. The Company believes that the actions of the Air Force
infringe the above named patent. The Company desires to license the above
referenced patent to the Air Force or to be compensated for past infringement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From January 1, 2002 through September 30, 2002, the Company had the following
changes in its unregistered securities: (1) options to purchase 50,000 shares of
common stock priced at market value on the date of issuance to a contractor for
services rendered; (2) 450,589 shares of common stock to one accredited investor
pursuant to the anti-dilution obligations under the Series D Preferred Stock
Exchange Agreement; and (3) 10,284,000 shares of common stock for total cash of
$514,200 at $0.05 per share to a total of eight accredited investors. The
Company used the proceeds of the sale for general working capital requirements.
The issuances described in items (1) through (3) above were exempt from
registration under Section 5 of the Securities Act of 1933, as amended, by
reason of Section 4(2) of the Act and Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering. Recipient of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
certificates issued in the transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
IENTERTAINMENT NETWORK, INC.
ITEM 5. OTHER INFORMATION
On July 29, 2002, the Company received a response from an examining attorney at
the United States Patent and Trademark Office (the "USPTO") rejecting the
Company's trademark application for WARBIRDS on the grounds that the mark
allegedly is merely descriptive. The Company, based on the advice of its
trademark counsel, believes the rejection is improper and intends to contest it.
The Company has until January 29, 2003 to formally respond to the USPTO.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
99.1 Chief Executive Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Chief Financial Officer certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) REPORTS ON FORM 8-K
None
21
IENTERTAINMENT NETWORK, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by each of the
undersigned thereunto duly authorized.
IENTERTAINMENT NETWORK, INC.
----------------------
J. W. Stealey
Chief Executive Officer
----------------------
Allan Kalbarczyk
Chief Accounting Officer
Date: November 14, 2002
22
CERTIFICATION
Securities and Exchange Act of 1934 Rule 13a-14 as adopted pursuant to Section
302 of Sarbanes-Oxley Act of 2002:
I, J.W. Stealey, certify that:
1. I have reviewed this quarterly report on Form 10Q of iEntertainment
Network, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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: November 14, 2002 By:_____________________________
J.W. Stealey
Chief Executive Officer
23
CERTIFICATION
Securities and Exchange Act of 1934 Rule 13a-14 as adopted pursuant to Section
302 of Sarbanes-Oxley Act of 2002:
I, Allan Kalbarczyk, certify that:
1. I have reviewed this quarterly report on Form 10Q of iEntertainment
Network, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether 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: November 14, 2002 By: __________________________________
Allan Kalbarczyk
Chief Financial Officer
24