U. S. Securities and Exchange Commission
WASHINGTON, D. C. 20549
FORM 10-QSB/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number 0-33345
GAMES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware | 75-2926440 |
(State of Incorporation) | (I.R.S. Employer Identification Number) |
425 Walnut Street, Suite 2300
Cincinnati, Ohio 45202
(Address of principal executive office)
(513) 721-3900
(Issuer’s telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or15 (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 March 31, 2003 there were 16,333,207 shares of the issuer’s Common Stock, $.001 par value per share, outstanding.
This Form 10-Q includes un-reviewed financial statements in lieu of reviewed financial statements because the Registrant elected not to have King Griffin & Adamson P.C. conduct a review of the financial statements. Refer to Item 1 and Note A in this Form 10-Q.
Transitional Small Business Disclosure Format (check one)
Yes ( )
No (X)
#
GAMES, INC.
Form 10-QSB Quarterly Report
INDEX
PART 1 - FINANCIAL INFORMATION
3
ITEM 1 - FINANCIAL STATEMENTS
3
ITEM 2 - MAAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
14
ITEM 3 - CONTROLS AND PROCEDURES
19
PART II. OTHER INFORMATION
20
ITEM 1. LEGAL PROCEEDINGS
20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIEY HOLDERS
22
ITEM 5. OTHER INFORMATION
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
24
SIGNATURES
24
#
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Refer to Notes on page 8 regarding the fact that the financial statements presented have not been reviewed by an independent auditor.
Games, Inc. and Subsidiary |
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Consolidated Balance Sheets |
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Assets | March 31, 2003 |
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(unaudited) | June 30, 2002 |
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Current assets | |||
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Cash | $ 99,051 | $ 16,513 |
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Accounts receivable – trade | 14,088 | 29,783 |
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Prepaid expenses | 1,222 | 1,222 |
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Total current assets | 114,361 | 47,518 |
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Property, equipment and software |
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Equipment | 290,283 | 284,386 |
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Furniture and fixtures | 77,075 | 77,075 |
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Leasehold improvements | 2,137 | 2,137 |
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Software | 2,915,500 | 2,915,500 |
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| 3,284,995 | 3,279,098 |
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Less accumulated depreciation and amortization | (2,429,635) | (1,959,370) | |
Net property, equipment and software | 855,360 | 1,319,728 |
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Intangibles, net of amortization | 572,904 | 897,583 |
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Total assets | $ 1,542,625 ========= | $ 2,264,829 ========= |
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The accompanying notes are an integral part of these consolidated financial statements.
#
Games, Inc. and Subsidiary | ||
Consolidated Balance Sheets | ||
March 31, 2003 | ||
(unaudited) | June 30, 2002 | |
Liabilities and stockholders' deficit |
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Current liabilities |
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Current maturities of long-term debt | $ 861,992 | $ 758,091 |
Accounts payable | 639,680 | 810,838 |
Accrued liabilities | 922,122 | 585,667 |
Due to related parties | 340,882 | 208,068 |
Total current liabilities | 2,764,676 | 2,362,664 |
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Long-term debt, net of maturities | 556,268 | 384,681 |
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Commitments and contingencies (Notes D and H) |
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Stockholders' deficit |
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Preferred stock, $.001 par value, 10,000,000 shares |
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authorized, none issued and outstanding | -- | -- |
Common stock, $.001 par value; 40,000,000 shares authorized | ||
16,333,207 and 6,870,680 shares issued |
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at March 31, 2003 and June 30, 2002, respectively | 16,729 | 8,443 |
Additional paid-in capital | 32,103,314 | 31,208,541 |
Accumulated deficit | (33,855,058) | (31,699,500) |
Less treasury stock, at cost, 14,500 shares | (43,304) | -- |
Total stockholders’ deficit | (1,778,319) | (482,516) |
Total liabilities and stockholders’ deficit | $ 1,542,625 ========= | $ 2,264,829 ========== |
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The accompanying notes are an integral part of these consolidated financial statements.
Games, Inc. and Subsidiary
Consolidated Statements of Operations
Three months ended | Nine months ended | ||||||
March 31, | March 31, | ||||||
2003 | 2002 | 2003 | 2002 | ||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||
| |||||||
Revenues | $53,771 |
| $100,602 |
| $155,279 |
| $300,234 |
Cost of goods sold | 33,777 |
| 15,131 |
| 60,109 |
| 114,857 |
Gross profit | 19,994 |
| 85,471 |
| 95,170 |
| 185,377 |
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Operating expenses |
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Marketing and sales | 48,747 |
| 67,697 |
| 187,111 |
| 255,264 |
General and administrative | 360,206 |
| 689,649 |
| 921,374 |
| 1,502,919 |
Research and development | 97,297 |
| 103,590 |
| 312,639 |
| 495,295, |
Depreciation of property, equipment |
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and software | 156,212 |
| 179,881 |
| 470,265 |
| 539,642 |
Amortization of intangibles | 106,650 |
| 143,322 |
| 324,678 |
| 253,476 |
Write-off of software and intangibles | -- |
| (99,986) |
| -- |
| 1,923,553 |
Total operating expenses | 769,112 |
| 1,084,153 |
| 2,216,067 |
| 4,970,149 |
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Operating loss | (749,118) |
| (998,682) |
| (2,120,897) |
| (4,784,772) |
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Interest income- related party | -- |
| -- |
| -- |
| 71,469 |
Interest expense | (5,754) |
| (10,117) |
| (34,661) |
| (31,824) |
Forgiveness of debt | -- |
| -- |
| -- |
| 472,991 |
Other, net | -- |
| (56,003) |
| -- |
| (56,003) |
Net loss before non-controlling interest | (754,872) |
| (1,064,802) |
| (2,155,558) |
| (4,328,139) |
Non-controlling interest | - |
| 3,158 |
| - |
| 1,239,475 |
Net loss | ($754,872) ======== |
| ($1,061,644) ======== |
| ($2,155,558) ========= |
| ($3,088,664) ========= |
Weighted average common shares |
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outstanding -basic and diluted | 16,353,724 ======== |
| 5,760,848 ======== |
| 15,179,731 ========= |
| 7,291,099 ========= |
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Net loss per share - basic and diluted | ($0.05) ======== |
| ($0.18) ======== |
| ($0.14) ========= |
| ($0.42) ========= |
The accompanying notes are an integral part of these consolidated financial statements.
Games, Inc. and Subsidiary | ||||
Consolidated Statements of Cash Flows | ||||
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| Nine months ended | Nine months ended | |
March 31,2003 | March 31,2002 | |||
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| (unaudited) | (unaudited) | |
Net cash flows from operating activities: |
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Net loss |
| ($2,155,558) |
| ($3,088,664) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization |
| 794,943 |
| 793,118 |
Amortization of debt discount |
| 21,915 |
| 17,888 |
Write-off of software intangibles |
| -- |
| 1,923,553 |
Non-controlling interest |
| -- |
| (1,239,475) |
Forgiveness of debt |
| -- |
| (472,991) |
Common stock issued for services |
| 85,643 |
| 889 |
Common stock issued in legal settlement |
| -- |
| 31,083 |
Common stock options issued as compensation expense | 30,417 | -- | ||
Addition of interest income to shareholder note receivable |
| -- |
| (71,469) |
Changes in assets and liabilities: |
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Accounts receivable-trade |
| 15,695 |
| (16,456) |
Accounts related-related party |
| -- |
| 22,401 |
Prepaid expenses and other assets |
| -- |
| (4,245) |
Accounts payable and accrued liabilities |
| 190,796 |
| 926,456 |
Net cash used in operating activities |
| (1,016,149) |
| (1,177,912) |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
| (5,897) |
| (2,723) |
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Cash flows from financing activities: |
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Repayments on long-term debt |
| (21,426) |
| (206,678) |
Proceeds from issuance of convertible notes |
| 275,000 |
| 430,000 |
Increase in due to related parties |
| 132,814 |
| 114,559 |
Proceeds from issuance of stock |
| 761,500 |
| 840,289 |
Purchase of treasury stock |
| (43,304) |
| -- |
Net cash provided by financing activities |
| 1,104,584 |
| 1,178,170 |
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Net increase (decrease) in cash |
| 82,538 |
| (2,465) |
Cash at beginning of period |
| 16,513 |
| 3,263 |
Cash at end of period |
| $ 99,051 ======= | $ 798 ======= |
The accompanying notes are an integral part of these consolidated financial statements
#
Games, Inc. and Subsidiary |
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Consolidated Statements of Cash Flows – continued |
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| Nine months ended | Nine months ended |
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| March 31, 2003 | March 31, 2002 |
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| (unaudited) | (unaudited) |
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NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Common stock issued to settle accounts payable | $ 25,499 ======== | $ -- ========= | |||
Common stock returned in exchange for stockholder note receivable |
| $ -- ======== |
| $ 1,271,410 ========= |
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Intangibles acquired through the issuance of debt, net of debt discount |
| $ -- ======== |
| $ 406,465 ========= |
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The accompanying notes are an integral part of these consolidated financial statements
#
Games, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
Financial Statements Not Reviewed - The financial statements have not been reviewed by the company’s independent auditor because the company elected not to have King Griffin & Adamson P.C. conduct a review of the financial statements. The financial statements will be reviewed in the
fourth quarter of 2003 by the new independent auditor that will be selected in June 2003. No auditor has opined that the unaudited and unreviewed statements present fairly, in all material respects, the financial position, the results of operations or cash flows of the company for the periods reported in accordance with generally accepted accounting principles.
The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions per Item 310(b) of Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The accompanying unaudited interim consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position and consolidated results of operations and cash flows of Games, Inc. and Subsidiary (the “Company”). Results of operations for the three and nine months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ending June 30, 2003.
These financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Form 10-KSB for the year ended June 30, 2002. The consolidated balance sheet at June 30, 2002 has been derived from the audited consolidated financial statements at that date. Certain amounts have been reclassified to conform to the current year presentation.
NOTE B - ORGANIZATION AND NATURE OF OPERATIONS
Games, Inc. ("Games") was initially incorporated as Super Shops, Inc. (“Super”) under the laws of the State of Arizona. In October 2000, Games changed its State of Incorporation from Arizona to Delaware by means of a merger with and into a Delaware corporation formed on October 13, 2000 solely for the purpose of effecting a re-incorporation.
On September 30, 2001, Super issued 525,000 shares of restricted, unregistered common stock in exchange for 100% of the issued and outstanding stock of Colley Corporation ("Colley"), a Delaware corporation formed on August 27, 2001. Colley and Super then merged and changed their name to Colley Corporation.
On June 3, 2002, Chicago West Pullman, LLC ("CWP"), an Ohio limited liability company, acquired 525,000 shares or 51.19% of the outstanding common stock of Colley in exchange for a cash payment of $25,000. On June 25, 2002, the Board of Directors approved an exchange of shares of Colley for shares of common stock of GameBanc Corporation ("GameBanc"), formerly The Lottery Channel, Inc., held by CWP and its members on a one share for one share basis. On the date of this exchange Colley had no assets or liabilities. Through June 30, 2002, shareholders of GameBanc had exchanged 7,417,618 shares of GameBanc common stock for 7,417,618 shares of Colley. Colley acquired a majority interest in GameBanc as a result of this exchange.
On July 23, 2002, Colley offered to exchange up to 8,906,866 shares of its common stock for the remaining outstanding shares of common stock and preferred stock of GameBanc. The exchange offer was conducted on the basis of one share of Colley's common stock for one share of GameBanc common stock, and 50 shares of Colley's common stock for one share of preferred stock of GameBanc. The exchange offer remained open until August 6, 2002. 7,539,582 shares of additional common stock of Colley were issued through the second exchange. Additionally, all holders of GameBanc stock options and warrants were offered to exchange their stock options and warrants for Colley stock options and warrants with identical terms. Effective September 16, 2002, the Company changed its name from Colley Corporation to Games, Inc. (the 7;Company”).
For accounting purposes, the exchanges discussed above have been treated as a recapitalization of GameBanc with GameBanc as the acquirer (a reverse acquisition). The historical financial statements included herein are those of GameBanc. As of March 31, 2003 and June 30, 2002, the Company owned 97.5% and 52.28%, respectively, of the outstanding common stock of GameBanc.
We are a leading online media and value-added information service providing subscribers with access to entertaining proprietary content via the Internet. The Company, and its subsidiaries operate a branded network of web sites targeting three allied areas of interactive entertainment: government sponsored lotteries, Internet games, and digital greetings.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Non-Controlling Interest in Consolidated Subsidiary
Non-controlling interest in results of operations of consolidated subsidiary represents the non-controlling shareholders' portion of the loss of GameBanc. The non-controlling interest in the consolidated balance sheets reflects the non-controlling shareholders' portion of GameBanc's net equity. In accordance with generally accepted accounting principles, the non-controlling interest cannot fall below zero, therefore, at March 31, 2003 and June 30, 2002, no amount is presented as non-controlling interest in consolidated subsidiary in the accompanying consolidated balance sheet.
Revenue Recognition
The Company's revenues are derived principally from advertising and are recognized as “impressions”, or times an advertisement appears in pages viewed by users of the Company’s online properties, are delivered.
Loss Per Share
Basic and diluted loss per share is computed by dividing consolidated net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents are not included in the diluted loss per share for the three and nine months ended March 31, 2003 and 2002 as they are anti-dilutive.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted accounting principles, management makes 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, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE D - GOING CONCERN UNCERTAINTY
The consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. The Company sustained net losses before non-controlling interest of $5,278,234 and $6,799,943 for the years ended June 30, 2002 and 2001, respectively, and a net loss of $2,143,595 for the nine months ended March 31, 2003. Current liabilities at March 31, 2003 of $2,649,300 exceed current assets of $114,361. Total liabilities at March 31, 2003 of $3,308,981 exceed total assets of $1,542,625.
Currently the Company's operations are primarily funded through advances from related parties and capital raised. Management believes that future advances from related parties and its ability to raise capital will provide sufficient liquidity to enable the Company to meet its obligations and continue in business. However, there is no assurance such actions will be successful. The consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or classification of liabilities, which may result from the inability of the Company to continue as a going concern.
NOTE E - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at:
| March 31, 2003 (unaudited) | June 30, 2002 | |
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Notes for the acquisition of Lottoballs.com, LLC; | $ 347,900 |
| $ 347,900 |
Note due to Promo-Travel International, Inc. related to attempted merger, payments of $75,000 due quarterly beginning June 1, 2001 (see additional discussion in Note H) | 300,000 |
| 300,000 |
Note for the acquisition of Cards.com; imputed Interest of 6%; monthly payments ranging from $15,0000 to $165,000 through June 2006; includes debt discount of $38,997 and $55,646 at December 31, 2002 and June 30, 2002, respectively | 341,268 | 379,354 | |
Note to Bingo, Inc. for the purchase of internet domain name | 28,442 |
| 28,442 |
Convertible notes bears interest at 6%; due October 30, 2004 | 275,000 | -- | |
Capital lease obligations; monthly payments of $3,780 through October 2004 | 125,650 |
| 87,076 |
| 1,418,260 |
| 1,142,772 |
Less current maturities | 861,992 |
| 758,091 |
| $ 556,268 ======== |
| $ 384,681 ======== |
NOTE F - WRITE-OFF OF ASSETS
During the nine months ended March 31, 2002, the Company determined that certain software and websites were no longer being used and would not be used in the future. Therefore, the Company wrote off the assets, which had carrying values of $1,923,553 on the dates that they were written off.
NOTE G - FORGIVENESS OF DEBT
During the nine month period ended March 31, 2002, the Company wrote off certain accounts payable totaling $472,991. These amounts were written off, as the Company no longer believed that they represented liabilities of the Company. These amounts were forgiven primarily because the services were not provided to the satisfaction of the Company or written off because the provider is no longer in business.
NOTE H - LITIGATION AND CONTINGENCIES
The Company is involved in litigation resulting from an attempted merger in 2001 between subsidiary GameBanc and Promo-Travel International, Inc. Following certain disagreements, both parties agreed to unwind the merger and that GameBanc would pay the plaintiffs $300,000 and that the plaintiffs would return approximately 1.3 million shares of GameBanc common stock they had received under the merger agreement. The plaintiffs failed to return the stock certificates and therefore GameBanc refused to pay $300,000. At March 31, 2003 and June 30, 2002, the Company has recorded a $300,000 note payable to Promo-Travel International, Inc. The plaintiffs have sued in Georgia District Court for this amount plus an additional $400,000 they claim is now due under the unwinding agreement. GameBanc has asserted a counterclaim seeking to recover the proceeds of certai n contracts and other damages incurred prior to the unwinding. At this time, the Company is not able to estimate their ultimate financial liability, if any, with respect to this claim.
GameBanc is also involved in litigation stemming from its 2001 attempted merger with Bingo.com. GameBanc had previously purchased the domain name Lottery.com from a principal of Bingo.com. After GameBanc aborted the merger, Bingo.com filed a lawsuit alleging that GameBanc had failed to provide them with publicly traded stock as called for in the purchase agreement. The parties are negotiating settlement terms. No liability has been recorded associated with this litigation, as the Company is unable to estimate their ultimate financial liability, if any.
GameBanc is involved in litigation resulting from its asset purchase of the website Lottoballs.com ("Lottoballs") in 2001. This website was purchased for stock and for promissory notes to the principals of Lottoballs. The promissory notes were due and payable one year after signing the purchase agreement. During that year, Lottoballs was obligated to provide to the Company certain financial information and to pay GameBanc for certain amounts. Those amounts were never paid and the financial information was not provided in a timely fashion. Furthermore, the website, the major asset acquired, did not function properly. The plaintiffs refused to repair it and GameBanc was forced to take the site down in July 2001. The plaintiffs filed suit against GameBanc for failure to make the payment on the promissory notes. GameBanc's counterclai ms seek to recover costs it incurred in repairing the software and damages arising from the plaintiff's misrepresentations and breach of contract. GameBanc has a liability recorded of $347,900 at March 31, 2003 and June 30, 2002 related to the original purchase.
A former employee and manager of GameBanc's Gameland.com site sued GameBanc in Virginia District Court for bonus payments under his employment agreement. The employee obtained a default judgment against GameBanc in the amount $99,000. This amount is included in accrued liabilities in the accompanying consolidated balance sheets at March 31, 2003 and June 30, 2002. Settlement discussions are ongoing at present.
In the ordinary course of conducting its business, the Company has become subject to additional litigation and claims regarding various matters. There exists a reasonable possibility that the Company will not prevail in all cases. Although sufficient uncertainty exists in these cases to prevent the Company from determining the amount of its liability, if any, the ultimate exposure upon the resolution of any such litigation or claims is not expected to materially adversely affect the Company's financial condition or results of operations.
The Company has various employment agreements that may result in liability to the Company if the employees are terminated.
NOTE I - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS 123, “Accounting for Stock-Based Compensation.” SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. SFAS 148 is effective for fiscal years ending after December 15, 2002.
ITEM 2. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion and analysis in this Form 10-QSB contains certain 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 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.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
OVERVIEW AND RECENT DEVELOPMENTS
We are a leading online media and value-added information service providing subscribers with access to entertaining proprietary content via the Internet. The Company, and its subsidiaries operate a branded network of web sites targeting three allied areas of interactive entertainment: government sponsored lotteries, Internet games, and digital greetings. In addition, we continue to develop and manage a large opt-in e-mail database of over 12 million subscribers. We currently own and/or license and operate leading games and entertainment sites that include:
-Lottery.com
-GameLand.com
-SkillMoney.com
-Cards.com
The Company has traditionally derived its revenues from advertising sources. Advertising revenues are derived principally from online advertising arrangements under which we receive revenues on fixed payment over a contract period, a cost-per-thousand impression basis and design of advertising campaigns to be placed on our network. We are currently developing programs to expand our revenue generating sources through non-advertising revenues. These non-advertising revenues will be primarily derived from subscription fee-based services and software sales.
REVENUE
Revenue for the three months ended March 31, 2003 of $ 53,771 was less than the revenue for the three months ended March 31, 2002 by $46,831 or 46%. The reduction is due to reduced advertising revenues mainly in response to softness in the Internet advertising market in the U.S.
COSTS AND EXPENSES
During the three months ended March 31, 2003, cost of sales was $18,646 more than the cost of sales for the three months ended March 31, 2002. The increase in cost of sales was primarily attributable to increased costs of modifying web servers for the period. The Company incurred operating expenses of $769,112 during the three months ended March 31, 2003. This represents a decrease of $315,041 or 29% from the operating expenses for the three months ended March 31, 2002. The decrease is primarily due to a reduction of general and administrative expenses in the amount of $329,443 or 48%, sales and marketing expenses decreased $18,950 or 28% from the same period in the prior year, a reduction in and research and development expenses of $6,293 or 6% less than the same period in the prior year. The decreases in these expenses occurred as a result of fewer office locations and fewer employees during the three months ended March 31, 2003 compared to the same quarter in the prior year due to cash flow constraints.
Depreciation and amortization expense decreased $60,341 or 39% for the three months ended March 31, 2003 from the three months ended March 31, 2002 due primarily to a reduced asset base from the prior year. Amortization periods for intangible assets were changed in current fiscal year from 20 to 5 years to reflect the decrease in the lives of such assets.
Interest expense decreased slightly from to $10,117 to $5,754 or 43% due to the conversion of notes payable to stock, interest is principally due to the note payable in connection with Cards.com.
The non-controlling interest expense was zero during the three months ended March 31, 2003 as the non-controlling interest had fallen to zero during the year 2002. In accordance with generally accepted accounting principles, the non-controlling interest cannot fall below zero; therefore, there is no effect of the non-controlling interest on the statement of operations for the three months ended March 31, 2003.
RESULTS OF OPERATIONS – NINE MONTHS ENDED MARCH 31, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2002
REVENUE
Revenue of $155,279 for the nine months ended March 31, 2003 was $144,955 or 48% less than the same period in the prior year. The reduction is due to reduced advertising revenues mainly in response to softness in the Internet advertising market in the U.S.
COSTS AND EXPENSES
During the nine months ended March 31, 2003, the cost of goods sold of $60,109 was $54,748 or 47% less than the nine months ended March 31, 2002. The reduction in cost of sales was primarily attributable to reduced revenues for the period. The Company incurred operating expenses of $2,216,067 for the nine months ended March 31, 2003. This represents a decrease of $2,754,082 or 55% compared to the operating expenses in the nine months ended March 31, 2002. The decrease was primarily attributed to write off of software and intangibles in the nine months ended March 31, 2002 of $1,923,553 or 100%. Marketing and sales expenses the nine months ended March 31, 2003 decreased $68,153 or 27% from the comparable period ended March 31, 2002. General and administrative expenses during the nine months ended March 31, 2003 decreased $581,545 or 39% from the comparable period e nded March 31, 2002. Research and development expense for the nine months ended March 31, 2003 decreased $182,656 or 37% from the comparable prior period. The decreased general and administrative expenses, marketing and sales expenses, and research and development expenses occurred as a result of fewer office locations and fewer employees compared to the prior year due to cash flow constraints.
Depreciation and amortization increased $1,825 or 16% during the nine months ended March 31, 2003 compared to the nine months ended March 31, 2002. The increase is due primarily to a change in amortization periods for intangible assets from 20 to 5 years to reflect the decrease in the lives of such assets.
Interest expense increased slightly from $31,824 to $34,661 or 9% due to increased debt, principally due to note payable in connection with cards.com.
The Company recorded $472,991 of forgiveness of debt income in the nine months ended March 31, 2002 related to the reversal of payables on the books during fiscal 2001 that the Company no longer deemed bona fide. These amounts were written off, as the Company no longer believed that they represented liabilities of the Company. These amounts were forgiven primarily because the services were not provided to the satisfaction of the Company or the provider is no longer in business.
The non-controlling interest expense was zero during the nine months ended March 31, 2003 as the non-controlling interest had fallen to zero during the year 2002. In accordance with generally accepted accounting principles, the non-controlling interest cannot fall below zero; therefore, there is no effect of the non-controlling interest on the statement of operations for the nine months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
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 from related parties as may be required, and ultimately to attain profitability. Management expects to need and be able to attract additional capital for its operations. However, there can be no assurance that management’s plans will be executed as anticipated.
At March 31, 2003, the Company had $99,051 in cash compared to $16,513 at March 31, 2002. Current liabilities at March 31, 2003 of $2,764,676 exceed current assets of $114,361. Total liabilities at March 31, 2003 of $3,320,944 exceed total assets of $1,542,625.
Net cash used by operating activities was $1,016,149 for the nine months period ended March 31, 2003 compared to $1,177,912 for the nine month period ended March 31, 2002, a decrease of $161,763. The cash used by operating activities during the nine months ended March 31, 2003 was primarily related to a net loss of $2,155,558 partially offset by depreciation and amortization of $794,943, an increase in accounts payable and accrued liabilities of $190,796 and common stock issued for services of $85,643 and $30,417 of stock options issued as compensation expense. Cash used in operating activities during the nine months ended March 31, 2002 was primarily due to a net loss of $3,088,664, non-controlling interest of $1,239,475 and forgiveness of debt of $472,991, partially offset by depreciation and amortization of $793,118, write off of software and intangibles of $1,923,55 3 and an increase in accounts payable and accrued liabilities of $926,456.
Cash provided by financing activities of $1,104,584 for the nine months ended March 31, 2003 included proceeds from the issuance of common stock of $761,500 and issuance of $275,000 6% interest convertible notes, an increase in due to related parties of $132,814, offset by repayments of $21,426 on notes payable and purchase of treasury stock of $43,304. Cash provided by financing activities during for nine months ended March 31, 2002 of $1,178,170 included proceeds from the issuance of common stock of $840,289, net borrowings on notes payable of $430,000, and an increase in due to related parties of $114,559, offset by repayments of $206,678 on notes payable.
At March 31, 2003 a substantial portion of our outstanding debt is represented by the debts of our subsidiary of $1,379,686, related to acquisitions (see additional discussion in Legal Proceedings).
Unless and until its revenue stream matures, the Company recognizes that it will likely not have sufficient cash resources to fund its operations through the end of fiscal 2003. The Company must be able to close on additional financing transactions to fund ongoing operations. 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 opinion on its June 30, 2002 audited financial statements.
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 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 bus iness focus and we may not achieve our plan; we have capital requirements to fund our operations, 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 services and incorporate rapidly developing technologies into our products and services, 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.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
In addition, there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Current Litigation
Games, Inc. None.
Current litigation of Games, Inc. subsidiary GameBanc Corporation or its predecessor Lottery Channel, Inc.
Charles Mintz, David Alpert and Promo Travel International, Inc. v. The Lottery Channel, Inc., Case Number 1-01-CV-1740, United States District Court, Northern Division of Georgia, Atlanta Division, Suit filed July 2, 2001.
This litigation results from an aborted merger in 2001 between the Lottery Channel, Inc and Promo-Travel, Inc. Following certain disagreements, both parties agreed to unwind the merger and that we would pay the plaintiffs $300,000 and they agreed to return approximately 1.3 million shares of our stock they received under the merger agreement. A liability in the amount of $300,000 has been recorded in connection with the original purchase. The shares have not yet been returned to us.
They are suing us in Georgia District Court for this amount plus an additional $400,000 they claim is now due under the Lottery unwinding agreement. We have asserted a counterclaim seeking to recover the proceeds of certain contracts and other damages incurred prior to the unwinding; management believes the Company will prevail in its claims.
Court-ordered, non-binding mediation was unsuccessful, but we are continuing our efforts to resolve this matter.
Bingo Inc. v. The Lottery Channel, Inc.
Case Number C-1-02-002, United States District Court, Southern District of Ohio at Cincinnati, Suit filed January 2, 2002.
This lawsuit is related to our aborted merger with Bingo.com. We had previously purchased the domain name Lottery.com from a principal of this Company. After Lottery called off the merger, Bingo.com filed a lawsuit alleging that we had failed to provide them with publicly traded stock as called for in our purchase agreement for the domain name, lottery.com. The parties are negotiating settlement terms.
William Mayhew and David Erce v. The Lottery Channel, Inc. and Game Banc Corporation, David Erce, William Mayhew, Dale Mayhew, Mitchell Peskin, John Lauder, Darrin Weber, James Sweeney, Randall Jacklin, Joseph Zinnecker, John Christoper, Thomas O'Connell, Steven Ziegle and Rob Schoder v. The Lottery Channel, Inc. and Game Banc Corporation.
Case Numbers C-1-02-225 and C-1-02-465 (consolidated), United States District Court, Southern District of Ohio at Cincinnati, Suit filed May 31, 2002.
This action results from our asset purchase of the website lottoballs.com. GameBanc purchased this site for stock and for promissory notes to the principals. The promissory notes were due and payable one year after signing the purchase agreement. During that year, Lottoballs was obligated to give GameBanc closing financials and to pay us receivables that were on their books at closing but that were uncollected. Those monies were never paid over to GameBanc, nor did they provide the financial accounting in a timely fashion. Furthermore, their software, the major asset GameBanc acquired, did not function properly. They refused to fix it and we were forced to take the site down in July 2001. GameBanc notified them of the problems, asked repeatedly for financial accounting and when GameBanc did not receive it, GameBanc informed them of their intention to pursue action against them. They have filed suit against GameBanc for payment of the promissory notes. GameBanc’s counterclaims seek to recover costs incurred in repairing the software and damages arising from their misrepresentations and breach of contract. The Lottoballs shareholders were all Lottery Channel, Inc. (now called GameBanc Corporation) shareholders and most have exchanged their Lottery Channel, Inc. shares for Colley shares. A liability in the amount of $347,900 has been recorded in connection with the original purchase.
In a separate but consolidated lawsuit, two of the Lottoballs principals, Erce and Mayhew, sued for an alleged breach of their employment contracts. The employment agreements were deemed to be unenforceable and the action has been withdrawn.
Christopher Hunter v. The Lottery Channel, Inc.
Case Number 3:01CV390, United States District Court, Eastern District of Virginia, Richmond Division Suit filed June 25, 2001
This is an action by a former employee and manager of our Gameland.com site who sued Lottery in Virginia District Court for bonus payments under his employment agreement. Mr. Hunter obtained a default judgment against The Lottery Channel, Inc. at a time when they were attempting to negotiate and resolve his claims. Currently, approximately $99,000 remains unpaid on this judgment. To date, Mr. Hunter's collection efforts have been unsuccessful. We have made attempts to settle this case but, so far, they have been rejected. A liability has been recorded for this exposure. The Company has filed a counter claim against Christopher Hunter and Toadgames.com. Toadgames.com offers to its customers many internet-based games, which are in all material respects identical to games offered by the Company to its customers. By misappropriating Gameb anc’s trade secrets and confidential and proprietary information, Hunter breached his Agreement with the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
None
(B) REPORTS ON FORM 8-K
None
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GAMES, 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, who certify to their knowledge that this report fully complies with the requirements of Section 13(a) or 15(d) of that Act and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of the registrant as of and for the period ended March 31, 2003 .
GAMES, INC.
By: /s/ Roger W. Ach II
Roger W. Ach, II
Chief Executive Officer
By: /s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
Date: May 30, 2003
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Certifications
I, Roger W. Ach, II, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;
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 Securities 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 function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 30, 2003
/s/ Roger W. Ach, II
Roger W. Ach, II
Chief Executive Officer
I, Myles S. Cairns, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Games, Inc. and Subsidiary;
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 Securities 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 function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 30, 2003
/s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
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Exhibit 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending March 31, 2003 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roger W. Ach, II, Chief Executive Officer of the Company, certify, pursuant to the 18 U.S.C. (SS) 1350, as adopted pursuant to (SS) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Roger W. Ach, II
Roger W. Ach, II
Chief Executive Officer
May 30, 2003
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Exhibit 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of Games, Inc. and Subsidiary (the "Company") Quarterly Report on Form 10-QSB for the period ending March 31, 2003 with the Securities and Exchange Commission on the date hereof (the "Report"), I, Myles S. Cairns, Chief Financial Officer of the Company, certify, pursuant to the 18 U.S.C. (SS) 1350, as adopted pursuant to (SS) 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Myles S. Cairns
Myles S. Cairns
Chief Financial Officer
May 30, 2003
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