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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ___________________ TO _________________
Commission File Number: 001-10377
ACTV, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2907258
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
233 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10003
(Address of principal executive offices) (Zip Code)
(212) 497-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes |_| No |X|
As of May 12, 2003, there were 55,885,716 shares of the registrant's common
stock outstanding.
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ITEM 1. FINANCIAL STATEMENTS
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 22,643,506 $ 23,813,611
Short-term investments 21,181,683 23,997,246
Accounts receivable-net 1,202,579 1,947,866
Other 1,843,410 1,932,721
------------- -------------
Total current assets 46,871,178 51,691,444
Property and equipment-net 2,922,270 3,578,176
Other assets:
Restricted cash 484,913 484,913
Investment in warrant 2,534,090 2,655,681
Investments--other 5,747,776 5,783,697
Patents and patents pending 8,846,297 8,835,376
Software development costs 4,536,725 4,730,223
Goodwill 935,701 935,701
Other 81,385 79,961
------------- -------------
Total other assets 23,166,887 23,505,552
------------- -------------
Total assets $ 72,960,335 $ 78,775,172
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,830,623 $ 944,179
Deferred revenue 3,805,426 3,879,960
------------- -------------
Total current liabilities 5,636,049 4,824,139
Deferred revenue 62,441,873 63,346,826
Minority interest -- 366,940
Stockholders' equity:
Common stock, $0.10 par value, 200,000,000 shares
authorized: issued and outstanding 55,881,047 at
March 31, 2003, and 55,877,545 at December 31, 2002 5,588,105 5,587,755
Stockholder loans (82,999) (82,999)
Additional paid-in capital 311,392,934 311,392,444
Accumulated deficit (312,015,627) (306,659,933)
------------- -------------
Total stockholders' equity 4,882,413 10,237,267
------------- -------------
Total liabilities and stockholders' equity $ 72,960,335 $ 78,775,172
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
Revenue $ 2,259,515 $ 3,186,421
Costs and expenses:
Selling, general and administrative expenses 5,918,561 6,050,416
Depreciation and amortization 1,085,535 1,305,461
Restructuring charge 1,001,237 --
Stock-based compensation income -- (6,002,831)
------------ ------------
Total costs and expenses 8,005,333 1,353,046
------------ ------------
(Loss)/income from operations (5,745,818) 1,833,375
Interest income 180,696 288,540
Other expense (157,512) (2,459,873)
------------ ------------
Loss before minority interest (5,722,634) (337,958)
Minority interest-subsidiaries 366,940 788,816
------------ ------------
Net (loss)/income $ (5,355,694) $ 450,858
============ ============
Net (loss)/income per share:
Basic
Basic net (loss)/income per share $ (0.10) $ 0.01
============ ============
Diluted
Diluted net (loss)/income per share $ (0.10) $ 0.01
============ ============
Shares used in basic calculations 55,879,101 55,883,934
============ ============
Shares used in diluted calculations 55,879,101 56,862,945
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL
----------------------------- STOCKHOLDER PAID IN ACCUMULATED
SHARES AMOUNT LOANS CAPITAL DEFICIT TOTAL
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 2002 55,877,545 $ 5,587,755 $ (82,999) $ 311,392,444 $(306,659,933) $ 10,237,267
Issuance of shares in
connection with exercise of
stock options & warrants 3,502 350 -- 490 -- 840
Net loss -- -- -- -- (5,355,694) (5,355,694)
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2003 55,881,047 $ 5,588,105 $ (82,999) $ 311,392,934 $(312,015,627) $ 4,882,413
============= ============= ============= ============= ============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
ACTV, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
------------------------------------
2003 2002
---------------- ----------------
Cash flows from operating activities:
Net (loss)/income: $ (5,355,694) $ 450,858
Adjustments to reconcile net (loss)/income to net cash used in operations:
Change in fair value of warrant 121,591 2,459,873
Depreciation and amortization 1,085,535 1,305,461
Stock-based compensation income -- (6,002,831)
Amortization of deferred revenue (904,953) (904,953)
Write-down of investment 35,921 --
Non-cash portion of restructuring charge 410,213 --
Minority interest (366,940) (788,816)
Changes in assets and liabilities:
Accounts receivable 745,287 (375,294)
Other assets 87,888 386,543
Accounts payable and accrued expenses 476,231 (2,013,383)
Deferred revenue (74,534) (181,695)
---------------- --------------
Net cash used in operating activities (3,739,455) (5,664,237)
---------------- --------------
Cash flows from investing activities:
Investment in short-term investments 2,815,563 (8,462,981)
Investment in patents (194,063) (71,689)
Investment in property and equipment (52,990) (265,099)
Investment in software development -- (509,549)
---------------- ----------------
Net cash provided by/(used in) investing activities 2,568,510 (9,309,318)
---------------- ----------------
Cash flows from financing activities:
Net proceeds from equity financings 840 1,611
Repayment of stockholder loans -- 18,750
---------------- ----------------
Net cash provided by financing activities 840 20,361
---------------- ----------------
Net decrease in cash and cash equivalents (1,170,105) (14,953,194)
Cash and cash equivalents, beginning of period 23,813,611 69,035,707
---------------- ----------------
Cash and cash equivalents, end of period $ 22,643,506 $ 54,082,513
================ ================
SUPPLEMENTAL DISCLOSURE TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2003 2002
------------------- -------------------
Retirement of common stock $ -- $ 15,004
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. BASIS OF PRESENTATION
The results of operations for the three months ended March 31, 2003 and 2002 are
not necessarily indicative of a full year's operations. In the opinion of
management, the accompanying consolidated financial statements include all
adjustments of a normal, recurring nature, which are necessary to present fairly
such financial statements.
All significant intercompany balances and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
These unaudited consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2002.
We consider all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
2. RECENT ACCOUNTING PRONOUNCEMENTS
As of August 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets", which is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The objective of SFAS No. 143 is to
provide accounting guidance for legal obligations associated with retirement of
long-lived assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The adoption of SFAS No. 143 on
January 1, 2003 did not impact our financial condition, cash flows or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", effective for exit or disposal activities
initiated after December 31, 2002. SFAS No. 146 addresses the financial
accounting and reporting for certain costs associated with exit or disposal
activities, including restructuring actions. SFAS No. 146 excludes from its
scope severance benefits that are subject to an on-going benefit arrangement
governed by SFAS No. 112, "Employer's Accounting for Post-employment Benefits",
and asset impairments governed by SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." We adopted SFAS No. 146 for the restructuring
charge incurred in the first quarter of 2003.
In November 2002, the Emerging Issues Task Force ("EITF") of the FASB reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables."
EITF Issue 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which the vendor will perform multiple revenue generating
activities. The EITF will be effective for fiscal years beginning after June 15,
2003. We are currently evaluating the effects this EITF may have on our
consolidated financial position and operating results.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
Statement permits two additional transition methods for entities that adopt the
preferable method of accounting for stock-based employee compensation. Both of
those methods avoid the ramp-up effect arising from prospective application of
the fair value-based method. In addition, to address concerns raised by some
constituents about the lack of comparability caused by multiple transition
methods, this Statement does not permit the use of the original Statement 123
prospective method of transition for changes to the fair value-based method made
in fiscal years beginning after December 15, 2003. SFAS No. 148 became effective
for the financial statements for fiscal years ending after December 15, 2002 for
companies that volunteer in changing to the fair value method of accounting for
stock options and like awards. The interim disclosure requirements of SFAS No.
148 for financial reports containing condensed financial statements became
effective for periods beginning after December 15, 2002. We adopted only the
disclosure provisions of this Statement for the year ended December 31, 2002 and
for the quarter ended March 31, 2003. As such, this Statement did not have an
impact on our consolidated financial position or results of operations.
We elected to account for the cost of our employee stock options and other forms
of employee stock-based compensation plans using the intrinsic value method
prescribed in APB Opinion 25, as allowed by SFAS No. 123, "Accounting for
Stock-based Compensation." APB Opinion 25 requires compensation cost for
stock-based compensation plans to be recognized based on the difference, if any,
between the fair market value of the stock on the date of grant and the option
exercise price. SFAS No. 123 established a fair value-based method of accounting
for compensation cost related to stock options and other forms of stock-based
compensation plans. SFAS No. 123 allows an entity to continue to measure
compensation cost using the principles of APR Opinion 25, if certain pro forma
disclosures are made.
5
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123 to
stock-based compensation:
For the Three Months Ended
March 31, 2003 March 31, 2002
-------------- --------------
Net (loss)/income
As reported $(5,355,694) $450,858
Deduct: Total stock-based employee
compensation expense
determined under fair value-
based method for all awards $0 $(999,598)
----------- ---------
Pro forma $(5,355,694) $(548,740)
=========== =========
Basic
Net (loss)/income per share
as reported $(0.10) $0.01
=========== =========
Pro forma basic net
loss per share $(0.10) $(0.01)
=========== =========
Diluted
Net (loss)/income per share
as reported $(0.10) $0.01
=========== =========
Pro forma diluted net
loss per share $(0.10) $(0.01)
=========== =========
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", ("FIN 46"). FIN 46 requires that companies that
control another entity through interests other than voting interests should
consolidate the controlled entity. FIN 46 applies to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. The related disclosure
requirements are effective immediately. We do not anticipate that this
interpretation will have a significant impact on our consolidated financial
position and results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and is effective for contracts entered into or modified after June
30, 2003. We are currently evaluating the impact that this Statement may have on
our financial position and results of operations.
3. INTANGIBLE ASSETS AND GOODWILL
Goodwill totaled $0.9 million at March 31, 2003 and December 31, 2002. Our other
intangible assets consist of patents, which as of March 31, 2003 and December
31, 2002 were as follows:
March 31, 2003 December 31, 2002
-------------- -----------------
Patents, cost $11,321,214 $11,127,153
Accumulated amortization (2,474,917) (2,291,777)
----------- -----------
Net intangible asset $ 8,846,297 $ 8,835,376
=========== ===========
6
Amortization expense related to patents totaled $183,140 and $162,515 during the
three months ended March 31, 2003 and 2002, respectively. The estimated
aggregate future amortization expense for intangible assets remaining as of
March 31, 2003 is as follows:
Remainder of 2003 $ 556,262
2004 741,684
2005 741,684
2006 741,684
2007 741,684
Thereafter 5,323,299
------------
Total $ 8,846,297
============
4. FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137 and 138. SFAS No. 133 requires that all
derivative financial instruments be recorded on the balance sheet at fair value.
The provisions of SFAS No. 133 affected accounting for our investment in a 2.5
million share restricted warrant issued by Ascent Media Group (formerly Liberty
Livewire Corporation). Prior to the adoption of SFAS No. 133, we carried our
investment in the warrant at cost. With the adoption of SFAS No. 133, we now
record the warrant investment at fair value. The adoption of SFAS No. 133
resulted in our recording a cumulative effect transition adjustment loss of
$58.7 million at January 1, 2001. In the first quarter of 2001, we began to
record subsequent changes in the fair value of the warrant in our statements of
operations, resulting in a charge of $0.1 million and $2.5 million for the three
months ended March 31, 2003 and 2002, respectively.
There may be periods with significant non-cash increases or decreases to our
operating results related to the changes in the fair value of our investment in
the Ascent Media Group warrant. Our carrying value of the warrant approximates
fair value. We determine the fair value of the warrant by reference to
underlying market values of Ascent Media Group's common stock, as reported by
Nasdaq, and on estimates using the Black-Scholes pricing model.
5. MINORITY INTEREST
We record minority interest related to Digital ADCO, in which our ownership
interest was 45.9% at March 31, 2003. Digital ADCO was formed in November 1999
by co-founders ACTV, Inc. and Motorola Broadband. Digital ADCO develops and
markets applications for the delivery of addressable advertising. Upon the
formation of Digital ADCO, we licensed five of our patents to it, and Motorola
Broadband licensed six of its patents and made a capital commitment to it. In
August 2000, Digital ADCO received a direct minority investment by OpenTV Corp.
OpenTV also contributed patents on a non-exclusive basis to Digital ADCO.
Concurrently, Digital ADCO and OpenTV together created a new subsidiary, SpotOn
International Ltd, to license and exploit Digital ADCO's technology outside the
U.S., Canada and Mexico.
Digital ADCO's issued and outstanding shares of capital stock presently consist
of Class A common stock, having one vote per share and Class B common stock,
having 25 votes per share. OpenTV Corp. currently owns the issued and
outstanding Class A common shares. ACTV, Inc. and Motorola Broadband own the
issued and outstanding Class B common shares. ACTV, Inc. currently exercises
voting control of Digital ADCO. Consequently, in accordance with accounting
rules we consolidate the results of Digital ADCO, even though our ownership
position in less than 50%.
For the three months ended March 31, 2003 and 2002, we allocated losses in the
amount of $366,940 and $685,559, respectively, from Digital ADCO to its minority
shareholders. For the three months ended March 31, 2002 we allocated losses in
the amount of $103,257 from our subsidiary Advision LLC to its minority
shareholders.
7
6. SEGMENT INFORMATION
We have two principal business segments, the Digital Television segment and the
Enhanced Media segment.
Information concerning our business segments for the three months ending March
31, 2003 and 2002 are as follows:
For the Three Months
Ended March 31,
------------------------------------------
2003 2002
--------------------- --------------------
Revenues
Digital Television $ 596,966 $ 856,109
Enhanced Media 1,662,549 2,330,312
--------------------- --------------------
Total $ 2,259,515 $ 3,186,421
===================== ====================
Depreciation & Amortization
Digital Television $ 615,095 $ 744,497
Enhanced Media 245,144 306,530
Unallocated Corporate 225,296 254,434
--------------------- --------------------
Total $ 1,085,535 $ 1,305,461
===================== ====================
Interest Income
Digital Television $ 3,682 $ 11,652
Enhanced Media -- 9,119
Unallocated Corporate 177,014 267,769
--------------------- --------------------
Total $ 180,696 $ 288,540
===================== ====================
Net (Loss)/Income
Digital Television $ (2,881,568) $ (1,538,746)
Enhanced Media 35,670 (1,920,274)
Unallocated Corporate (2,509,796) 3,909,878
--------------------- --------------------
Total $ (5,355,694) $ 450,858
===================== ====================
Capital Expenditures
Digital Television $ 48,000 $ 182,498
Enhanced Media 4,990 --
Unallocated Corporate -- 82,601
--------------------- --------------------
Total $ 52,990 $ 265,099
===================== ====================
Balance Sheet Accounts as of
March 31, 2003 December 31, 2002
--------------------- --------------------
Total Assets
Digital Television $ 7,032,660 $ 7,859,158
Enhanced Media 6,033,944 6,642,736
Unallocated Corporate 59,893,731 64,273,278
--------------------- --------------------
Total $ 72,960,335 $ 78,775,172
===================== ====================
8
7. INVESTMENT IN WARRANT
ACTV and Liberty Livewire LLC, a unit of Ascent Media Group, in April 2000
entered into a joint marketing arrangement to market "HyperTV with Livewire."
Ascent Media Group received various rights to use certain patented ACTV
technologies in providing turnkey convergence services, including application
hosting, web authoring services, data management, e-commerce and other
value-added services for advertisers, television programmers, studios and
networks.
In connection with granting these licensed rights to Ascent Media Group, we
received a warrant to acquire 2.5 million shares of Ascent Media Group common
stock at an exercise price of $30 per share. The warrant, which expires in June
2015 and includes registration rights, is exercisable ratably over five years,
beginning April 13, 2001. With certain exceptions, the warrant is not
transferable. The warrant is non-forfeitable and fully vested (as the term
"vesting" is used by the Financial Accounting Standards Board in its EITF 00-8,
"Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction
with Providing Goods or Services"). We recorded an investment and deferred
revenue in the amount of approximately $76.0 million, the estimated value of the
warrant (using the Black-Scholes pricing model) at the time the agreement was
executed. On January 1, 2001, we began to record changes in fair value of the
warrant in our statement of operations, as the result of our adoption of SFAS
No. 133. We expect the value of the warrant to fluctuate, based on the
underlying stock price of Ascent Media Group. We do not currently expect to
exercise or register shares in the current year. The deferred revenue resulting
from the Ascent Media Group transaction is being amortized into revenue over a
period of 21 years, the contractual term of the joint marketing arrangement.
The estimated fair value of our investment in the Ascent Media Group warrant at
March 31, 2003 and December 31, 2002 was $2.5 million and $2.7 million,
respectively. We determine the fair value of the warrant by reference to
underlying market values of Ascent Media Group's common stock as reported by
Nasdaq, and on estimates using the Black-Scholes pricing model. Currently, we
account for the warrant under SFAS No. 133 (See Note 4).
8. NET (LOSS)/INCOME PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
Three Months Ended March 31,
------------------------------------------
2003 2002
--------------------- --------------------
Numerator:
Net (loss)/income $ (5,355,694) $ 450,858
===================== ====================
Denominator:
Basic weighted-average shares outstanding 55,879,101 55,883,934
Weighted-average options outstanding -- 979,011
--------------------- --------------------
Diluted weighted-average shares outstanding 55,879,101 56,862,945
===================== ====================
Net (loss)/income per share
Basic net (loss)/income per share $ (0.10) $ 0.01
===================== ====================
Diluted net (loss)/income per share $ (0.10) $ 0.01
===================== ====================
9. CORPORATE RESTRUCTURING
During the first quarter 2003, we executed certain restructuring initiatives,
which resulted in approximately $1.0 million in restructuring charges related to
employee severance expenses; we reduced headcount by 28 people. During the three
months ended March 31, 2003, we paid out approximately $0.6 million of the
restructuring charges, leaving $0.4 million in accrued restructuring charges to
be paid out during the second and third quarter of 2003.
During the third and fourth quarters 2001, we executed certain restructuring
initiatives, which resulted in approximately $6.6 million in restructuring
charges related to the surrender of real estate leases and employee severance
expenses. During the three months ended March 31, 2002, we paid out
approximately $0.7 million of the $0.8 million accrued at December 31, 2001 for
these restructuring charges, leaving the remaining $0.1 million accrual to be
paid out during the second quarter of 2002.
10. SUPPLEMENTAL DISCLOSURE OF CASH AND NON-CASH ACTIVITIES
We recorded a non-cash reduction in stock-based compensation expense in the
amount of approximately $6.0 million for the three months ended March 31, 2002.
In the first quarter of 2002, we rescinded the applicable option exercise
provisions that resulted in the variable option accounting treatment in our
financial statements for such options.
9
During both the quarter ended March 31, 2003 and the quarter ended March 31,
2002, we recorded revenue of $904,954 from amortization of the deferred revenue
recognized in connection with the Ascent Media transaction. (See Note 7).
In January 2002, we canceled outstanding options totaling 2,093,334 shares at
exercise prices of $6.50 to $13.50 and, in their place, granted new options
totaling 1,046,667 shares at an exercise price of $2.00 per share, which was
above the market value of such shares at the time of grant. The grantees are all
present or former employees of ours.
The newly granted options are subject to variable option accounting treatment.
That is, if the closing market price of our common stock is greater than $2.00
per share at any reporting date, we must recognize a non-cash compensation
expense equal to the difference between such market price and $2.00 times the
number of outstanding option shares subject to variable accounting treatment. To
the extent that we are carrying an accrued expense of this type at any given
reporting date and there is a decline in the market price of our stock at the
end of the subsequent reporting period, we will recognize a reduction in expense
for the subsequent period.
Neither our March 31, 2003 nor March 31, 2002 consolidated financial statements
reflect expense related to the 1,046,667 variable options, since the closing
market price of our common stock at March 31, 2003 and March 31, 2002 was less
than the option exercise price of $2.00 per share.
11. AGREEMENT WITH IN DEMAND
In April 2002, ACTV Entertainment, Inc., a wholly-owned subsidiary of ours,
signed a multi-year agreement with iN DEMAND, pursuant to which iN DEMAND has
been using our digital video technology to offer digital cable customers Nascar
In Car on iN DEMAND. Nascar In Car is a multi-channel television package that
uses a mix of digital compression technology, real-time telemetry data and
superior graphics to give subscribers an enhanced, interactive viewing
experience. iN DEMAND is distributing the package on a pay-per-view basis
through certain digital cable systems in the United States. ACTV Entertainment's
agreement with iN DEMAND, which covers a total of approximately 90 Nascar races
through 2004, obligates ACTV Entertainment to incur certain production costs,
which it estimates will average $170,000 per race. In turn, ACTV Entertainment
receives a percentage of gross receipts from the sale of pay-per-view
subscriptions. Our revenues to date from Nascar In-Car subscription sales have
been negligible.
12. AGREEMENT WITH LIBERTY MEDIA CORPORATION REGARDNG POSSIBLE ACQUISITION OF
ACTV, INC.
On September 26, 2002, we entered into an agreement with OpenTV Corp. for the
acquisition by OpenTV of ACTV, Inc. through a stock-for-stock merger. OpenTV
Corp. is an affiliate of Liberty Media Corporation, our largest shareholder. The
merger is subject to approval of both OpenTV and ACTV shareholders and
regulatory approval.
Under the terms of the agreement, each outstanding share of ACTV common stock
will be exchanged in the merger for a fraction of an OpenTV Class A Ordinary
Share equal to $1.65 divided by the then average market price of the OpenTV
Class A Ordinary Shares, provided that if the average market price of an OpenTV
Class A Ordinary Share is then less than $2.25 per share, it will be valued at
$2.25 per share for this purpose and if the average market price of an OpenTV
Class A Ordinary Share is then greater than $6.05 per share, it will be valued
at $6.05 per share for this purpose. In the event that the average market price
of the OpenTV Class A Ordinary Shares at the time of the merger is less than
$0.80 per share, then we will have the right to terminate the merger agreement
unless OpenTV elects to adjust the exchange ratio so that our shareholders
receive not less than $0.584 per ACTV common share. The stock-for-stock merger
will be a taxable transaction for our shareholders. Both our board of directors
and that of OpenTV have agreed to recommend the merger to their respective
shareholders and key members of our board and management have entered into
agreements to vote their shares in favor of the transaction.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
You should read the following discussion together with our consolidated
financial statements and related notes included elsewhere. The results discussed
below are not necessarily indicative of the results to be expected in any future
periods. To the extent that the information presented in this discussion
addresses financial projections, information or expectations about our products
or markets or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. For
further information about forward-looking statements, see "Special Note
Regarding Forward-Looking Statements" in our annual report on Form 10-K for the
year ended December 31, 2002.
We are a digital media company that provides proprietary technologies, tools,
and technical and creative services for interactive TV advertising, programming,
and enhanced media applications. We have two operating business segments, which
we call Digital TV and Enhanced Media. We believe that our Digital TV
technologies are unique in providing targeting, interactivity and accountability
for television commercials, and in giving viewers the ability to instantly
customize their viewing experiences for a wide variety of programming
applications. Our Enhanced Media technologies allow for the enhancement of both
video and audio content, including standard TV programming, with Web-based
information and interactivity.
RESULTS OF OPERATIONS
COMPARISON OF THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31, 2002
Revenue. During the three-month period ended March 31, 2003, our revenues
decreased 28%, to $2.3 million, compared with $3.2 million in the three-month
period ended March 31, 2002. The decrease is the result of a decline in revenues
in both our Digital TV and Enhanced Media segments. Revenues from our
professional and technical services business, which accounted for the largest
percentage of our Digital TV revenues, were significantly lower in 2003.
Revenues for the each of quarters ended March 31, 2003 and 2002 included $0.9
million (39% and 28%, respectively, of total revenues) related to the
recognition of revenue from the Ascent Media Group (formally Liberty Livewire
Corporation) joint marketing arrangement.
Selling, General, and Administrative Expenses. Total selling, general and
administrative expenses decreased slightly in the first quarter of 2003, to $5.9
million, from $6.1 million in the first quarter of 2002. In the three months
ended March 31, 2003, decreases in personnel, occupancy, legal and other costs
totaling approximately $1.6 million, as compared to the three months ended March
31, 2002, were offset by increased expenses related to Nascar In Car of $1.4
million in the more recent quarter.
Depreciation and Amortization. Depreciation and amortization expense decreased
15% in the first quarter of 2003, to $1.1 million, from $1.3 million in the
first quarter of 2002.
Restructuring Expense. In the first quarter of 2003, we incurred restructuring
charges of $1.0 million related to employee severance costs, compared to $0 in
restructuring charges in the first quarter of 2002. We made the employee
terminations that resulted in these charges as a response to a weak market
environment for our products and services.
Stock-Based Compensation. We realized a reduction of stock-based compensation
expense of $0 and $6.0 million for the three months ended March 31, 2003 and
March 31, 2002, respectively. We had been recording a charge to or reduction of
stock-based compensation expense in relation to increases and decreases in the
market value of the our common stock above the exercise price of certain
employee options. These options were subject to variable option accounting
treatment. In the first quarter of 2002, we rescinded the applicable option
exercise provisions that resulted in the variable option accounting treatment of
such options and, as a consequence, reversed the accrued stock-based
compensation expense at December 31, 2001, of approximately $6.0 million.
Other Expense. Other expense in the first quarter of 2003 and 2002 includes the
changes in fair value of our investment in a warrant issued by Ascent Media
Group. We have accounted for this investment as a derivative instrument
subsequent to our adoption of SFAS No. 133 and the application of its
requirements. Since adopting SFAS No. 133 in 2001, we have carried the
investment in warrant at fair value rather than at cost. For the three months
ended March 31, 2003, we recorded a decrease in the value of the warrant of $0.1
million, compared with a decrease of $2.5 million for the three months ended
March 31, 2002. For the three months ended March 31, 2003, other expense also
includes a $35,921 write-down related to certain of our strategic investments
that we deemed to be other than temporarily impaired.
Interest Income. Interest income in first quarter of 2003 was $180,696, compared
with $288,540 in the first quarter of 2002. The decrease was the result of
significantly reduced prevailing interest rates and lower average cash balances
during the more recent quarter. We incurred no interest expense in the first
quarter of 2003 or 2002.
11
Net (Loss)/Income. For the three months ended March 31, 2003, our net loss was
$5.4 million or $0.10 per basic and diluted share, compared to a net income of
$0.5 million or $0.01 per basic and diluted share for the three months ended
March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have not generated revenues sufficient to fund our
operations and have incurred operating losses. Through March 31, 2003, we had an
accumulated deficit of $312.0 million. Our cash position on March 31, 2003
(including short-term investments) was $43.8 million, compared with $47.8
million on December 31, 2002. Management believes we have sufficient cash and
short-term investments to fund operations through the next twelve months.
Net Cash Used In Operating Activities. During the three-month period March 31,
2003, we used cash of $3.7 million for operations, compared with $5.7 million
for the three months ended March 31, 2002. The decrease in net cash used in
operating activities principally relates to changes in assets and liabilities:
accounts receivable decreased and accounts payable increased during the three
months ended March 31, 2003, while accounts receivable increased and accounts
payable decreased during the corresponding quarter in 2002.
Net Cash Provided By (Used In) Investing Activities. For the three month-period
ended March 31, 2003, investing activities provided cash of $2.6 million,
compared with $9.3 million in cash uses from investing activities for the three
months ended March 31, 2002. The change is the result of a decrease in
short-term investments for the three months ended March 31, 2003, compared to an
increase in short-term investments for the three months ended March 31, 2002.
Net Cash Provided By Financing Activities. We had no significant cash provided
by financing activities for either the first three months of 2003 or 2002. We
have funded, and continue to fund, our cash requirements from the net proceeds
of a public, follow-on offering completed in February 2000. Through a group of
underwriters, we sold a total of 4.6 million common shares, resulting in net
proceeds of $129.4 million. In addition, in the year ended December 31, 2000,
Liberty Digital, Inc. invested an additional $20 million in us by exercising a
warrant granted in March 1999, and OpenTV and Motorola invested a total of $13.0
million in our Digital ADCO subsidiary.
At March 31, 2003, future aggregate minimum lease commitments under
non-cancelable operating leases and employment contracts with guarantees, were
as follows:
Operating Employee
Year Leases Agreements
---- --------------- ----------------
2003 $677,663 $948,831
2004 791,602 1,102,117
2005 557,403 74,334
2006 427,595 -
2007 427,595 -
Thereafter 3,728,221 -
--------------- ----------------
Total $6,610,079 $2,125,282
=============== ================
In April 2002, ACTV Entertainment, Inc., a wholly-owned subsidiary of ours,
signed a multi-year agreement with iN DEMAND, pursuant to which iN DEMAND has
been using our digital video technology to offer digital cable customers Nascar
In Car on iN DEMAND. ACTV Entertainment's agreement with iN DEMAND, which covers
a total of approximately 90 Nascar races through 2004, obligates ACTV
Entertainment to incur certain production costs, which it estimates will average
$170,000 per race.
CRITICAL ACCOUNTING POLICIES
ACTV and Liberty Livewire LLC, a unit of Ascent Media Group, in April 2000
entered into a joint marketing arrangement to market "HyperTV with Livewire."
Ascent Media Group received various rights to use certain patented ACTV
technologies in providing turnkey convergence services, including application
hosting, web authoring services, data management, e-commerce and other
value-added services for advertisers, television programmers, studios and
networks.
In connection with granting these licensed rights to Ascent Media Group, we
received a warrant to acquire 2.5 million shares of Ascent Media Group common
stock at an exercise price of $30 per share. The warrant, which expires in June
2015 and includes registration rights, is exercisable ratably over five years,
beginning April 13, 2001. With certain exceptions, the warrant is not
transferable. The warrant is non-forfeitable and fully vested (as the term
"vesting" is used by the Financial Accounting Standards Board in its EITF 00-8,
"Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction
with Providing Goods or Services"). We recorded an investment and deferred
revenue in the amount of approximately $76.0 million, the estimated value of the
warrant (using the Black-Scholes pricing model) at the time the agreement was
executed. Beginning January 1, 2001, we have recorded changes in fair value of
the warrant in our statement of operations, as the result of our adoption of
SFAS No. 133. We expect the value of the warrant to fluctuate, based on the
underlying stock price of Ascent Media Group. We do not currently expect to
exercise or register shares in the current year. The deferred revenue resulting
from the Ascent Media Group transaction is being amortized into revenue over a
period of 21 years, the contractual term of the joint marketing arrangement.
12
The cost of patents, which represent patent acquisition costs and legal costs
relating to patents pending, is being amortized on a straight-line basis over
the estimated economic lives of the respective patents (averaging 15 years),
which is less than the statutory life of each patent. We capitalize costs
incurred for the development of software products when economic and
technological feasibility of such products has been established. Capitalized
software costs are amortized on a straight-line basis over the estimated useful
lives of the respective products. In businesses where we are delivering specific
services and products, revenue is recognized from sales when a product is
shipped and when services are performed.
Revenue and anticipated profits under long-term contracts are recorded on a
percentage-of-completion basis, generally using the cost-to-cost method of
accounting, where sales and profits are recorded based on the ratio of costs
incurred to estimated total costs to completion. We recognize the revenue
related to the sale of indefinite software licenses upon delivery, installation
and acceptance of the software product, unless the fee is not fixed or
determinable or collectibility is not probable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from the customer. If
collectibility is not considered probable, revenue is recognized when the fee is
collected.
Arrangements that include software services, such as training or installation,
are evaluated to determine whether those services are essential to the
functionality of other elements of the arrangement. When software services are
considered essential, revenue under the entire arrangement is recognized as the
services are performed using the percentage-of-completion contract accounting
method. When software services are not considered essential, the fee allocable
to the service element is recognized as revenue as the services are performed.
Where software licenses are granted for a specific period of time, with related
content and maintenance contracts, revenue is deferred and then recognized
ratably over the life of the license.
We formerly recorded a charge or a credit to stock-based compensation expense
for increases or decreases in the market value of the our common stock in excess
of the exercise price of certain employee options that were subject to variable
option accounting treatment. In the first quarter of 2002, we rescinded the
applicable option exercise provisions that resulted in variable option
accounting treatment in our financial statements for such options, requiring the
outstanding grant of options to be marked-to-market at each reporting period.
In the first quarter of 2002, we canceled outstanding options totaling 2,093,334
shares at exercise prices of $6.50 to $13.50 and, in their place, granted new
options totaling 1,046,667 shares at an exercise price of $2.00 per share, which
was above the market value of such shares at the time of grant. All the grantees
were employees whose salary compensation had been reduced in conjunction with
our restructuring efforts in the second half of 2001. However, certain executive
officers whose salary compensation was reduced at the same time were not
eligible to participate.
The newly granted options are be subject to variable option accounting
treatment. That is, if the closing market price of our common stock is greater
than $2.00 per share at any reporting date, we must recognize a non-cash
compensation expense equal to the difference between such market price and $2.00
multiplied by the number of outstanding option shares subject to variable
accounting treatment. To the extent that we are carrying an accrued expense of
this type at any given reporting date and there is a decline in the market price
of our stock at the end of the subsequent reporting period, we will recognize a
reduction in expense for the subsequent period. Our consolidated financial
statements reflect no expense related to the 1,046,667 variable options for the
quarter ended March 31, 2003 and March 31, 2002, since the closing market price
of our common stock on those dates was less than the option exercise price of
$2.00 per share.
We adopted SFAS No. 142 beginning on January 1, 2002. We completed the
transitional goodwill impairment test as required by SFAS No. 142 using a
measurement date of January 1, 2002, and no impairment was noted at the date of
adoption. We will continue to perform future impairment tests as required by
SFAS No. 142.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America ("generally accepted
accounting principles") requires us to make estimates and assumptions that
affect the reported amount 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. Our
actual results could differ from these estimates.
IMPACT OF INFLATION
Inflation has not had any significant effect on the Company's operating costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our interest income is affected by changes in the general level of U.S. interest
rates. Changes in U.S. interest rates could affect the interest earned on our
cash equivalents and investments. Currently, changes in U.S. interest rates
would not have a material effect on the interest earned on our cash equivalents
and investments. A majority of these cash equivalents and investments earn a
fixed rate of interest while the remaining portion earns interest at a variable
rate. We do not anticipate that exposure to interest rate market risk will have
a material impact on us due to the nature of our investments.
13
During April 2000, we received a warrant to acquire 2.5 million shares of Ascent
Media Group, a publicly traded company. The warrant becomes exercisable at the
rate of 500,000 shares per year, commencing on April 13, 2001, includes certain
registration rights and may be exercised until March 31, 2015. The warrant is
non-forfeitable and fully vested (as the term "vesting" is used by the Financial
Accounting Standards Board in its EITF 00-8, "Accounting by a Grantee for an
Equity Instrument to Be Received in Conjunction with Providing Goods or
Services"). The warrant is not transferable, except in certain circumstances. We
estimated the value of the warrant to be $76.0 million at the date it was
received, using the Black-Scholes pricing model, with a risk free rate of 6.5%,
a volatility of 80% and assuming no cash dividends. The estimated value of the
warrant at December 31, 2000 was $17.3 million, using the same assumptions. On
January 1, 2001, we began to record changes in the fair value of the warrant to
the statement of operations, pursuant to our adoption of SFAS No. 133. The
estimated fair value of the warrant at March 31, 2003 was $2.5 million, based on
a calculation utilizing the Black-Scholes pricing model with a risk free rate of
3.97%, a volatility of 120% and assuming no cash dividends. We expect the value
of the warrant to fluctuate based on the underlying stock price of Ascent Media
Group. We do not currently expect to exercise or register shares in the coming
year.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. ACTV management, including the
Chief Executive Officer and Chief Financial Officer, have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this quarterly report has been made known to them in a timely
fashion.
Changes in Internal Controls. There have been no significant changes in our
internal controls or in factors that could significantly affect internal
controls subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ACTV, Inc. and its wholly-owned subsidiary HyperTV Networks, Inc. are
co-plaintiffs in a civil action filed against The Walt Disney Company, ABC,
Inc., and ESPN, Inc. in December 2000, which action alleges that the defendants'
"Enhanced TV" system synchronizing a Web site application to, among others, ESPN
Sunday Night and ABC Monday Night Football telecasts has infringed and is
continuing to infringe certain of the plaintiffs' patents. In May 2002, the
United States District Court for the Southern District of New York granted
summary judgment in favor of the defendants. Without addressing the validity and
enforceability of the three patents in the suit, the Court reached summary
judgment on non-infringement alone. On July 3, 2002, ACTV appealed the District
Court's decision to the United States Court of Appeals for the Federal Circuit
in Washington, D.C.; the appeal is currently pending.
On November 18, 2002, a purported class action complaint was filed in the Court
of Chancery of the State of Delaware in and for the County of New Castle against
ACTV, its directors and OpenTV. The complaint generally alleges that the
directors of ACTV have breached their fiduciary duties to the ACTV stockholders
in approving the merger agreement and that, in approving the merger agreement,
ACTV`s directors failed to take steps to maximize the value of ACTV to its
stockholders. The complaint seeks certain forms of equitable relief, including
enjoining the consummation of the merger. We believe that the allegations are
without merit and intend to defend against the complaint vigorously. We cannot,
however, provide any assurance that ACTV or OpenTV will be successful.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of Net (loss)/income per share - See Note 8
99.1 CERTIFICATION BY DAVID REESE, CHIEF EXECUTIVE OFFICER
99.2 CERTIFICATION BY CHRISTOPHER C. CLINE, CHIEF FINANCIAL OFFICER
(b) Reports on Form 8-K: None.
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 the
undersigned thereunto duly authorized.
ACTV, INC.
Registrant
Date: May 15, 2003 /s/ David Reese
----------------------------------------------
David Reese
Chairman, Chief Executive Officer and Director
Date: May 15, 2003 /s/ Christopher C. Cline
----------------------------------------------
Christopher C. Cline
Chief Financial Officer
(principal financial and accounting officer)
Form of Sarbanes-Oxley Section 302(a) Certification
I, David Reese, Chief Executive Officer of ACTV, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ACTV, 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: May 15, 2003
/s/ David Reese
---------------
David Reese
Chief Executive Officer
Form of Sarbanes-Oxley Section 302(a) Certification
I, Christopher C. Cline, Chief Financial Officer of ACTV, Inc., certify that:
1. I have reviewed this quarterly report on Form 10- Q of ACTV, 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: May 15, 2003
/s/ Christopher C. Cline
------------------------
Christopher C. Cline
Chief Financial Officer