U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10416
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INFODATA SYSTEMS INC.
(Exact Name of Small Business Issuer in its Charter)
Virginia 16-0954695
(State of Incorporation) (I.R.S. Employer Identification No.)
12150 Monument Drive, Fairfax, Virginia 22033
(Address of Principal Executive Office) (Zip Code)
(703) 934-5205
(Issuer's Telephone Number)
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Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None Not applicable
Securities registered under Section 12(g) of the Exchange Act:
Common Stock-$.03 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
----- -----
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on August 12, 2002
as reported on the NASD OTC Bulletin Board, was approximately $476,000. Shares
of Common Stock held by each director and officer and by each person who owns 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
The number of outstanding shares of the Company's Common Stock, par value $0.03
per share, was 4,791,734 on August 12, 2002.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
INFODATA SYSTEMS INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page(s)
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 2002 and 2001 4
Condensed Consolidated Balance Sheets June 30,
2002 and December 31, 2001 5
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial
Statements 7 - 12
Item 2. Management's Discussion and Analysis 13 - 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 21
(b) Reports on Form 8-K 21 - 22
SIGNATURES 22
2
PART I. FINANCIAL INFORMATION
Item 1.
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended
June 30,
----------------------
2002 2001
-------- --------
Revenues.............................................. $ 2,459 $ 4,107
Cost of revenues...................................... 1,488 3,168
------- -------
Gross profit.......................................... 971 939
------- -------
Operating expenses:
Research and development............................ 212 106
Selling, general and administrative................. 602 1,069
------- -------
814 1,175
------- -------
Operating income (loss)............................... 157 (236)
Interest income....................................... - 16
Interest expense...................................... (14) (15)
------- -------
Net income (loss)..................................... $ 143 $ (235)
======= =======
Basic and diluted net income (loss) per share..... $ 0.03 $ (0.05)
======= =======
Weighted average basic shares outstanding............. 4,792 4,743
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Amounts In Thousands, Except Per Share Data)
(Unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
-------- --------
Revenues.............................................. $ 5,407 $ 7,723
Cost of revenues...................................... 3,707 6,155
------- -------
Gross profit.......................................... 1,700 1,568
------- -------
Operating expenses:
Research and development............................ 358 271
Selling, general and administrative................. 1,322 2,134
------- -------
1,680 2,405
------- -------
Operating income (loss)............................... 20 (837)
Gain on sale of investment............................ - 1,068
Interest income....................................... 9 38
Interest expense...................................... (24) (34)
------- -------
Net income............................................ $ 5 $ 235
======= =======
Basic net income per share........................ $ 0.001 $ 0.05
======= =======
Weighted average basic shares outstanding............. 4,791 4,732
======= =======
Diluted net income per share...................... $ 0.001 $ 0.05
======= =======
Weighted average diluted shares outstanding........... 4,791 4,749
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
(Unaudited)
June 30, December 31,
2002 2001
-------- ------------
Assets
Current assets:
Cash and cash equivalents......................... $ 890 $ 1,002
Accounts receivable, net of allowance of
$39 in 2002 and $35 in 2001...................... 1,636 2,994
Prepaid expenses and other current assets......... 284 447
-------- ---------
Total current assets...................... 2,810 4,443
-------- ---------
Property and equipment, net......................... 115 185
Other assets........................................ 20 20
-------- ---------
Total assets........................................ $ 2,945 $ 4,648
======== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Line of credit.................................... $ - $ 616
Accounts payable.................................. 348 1,223
Accrued expenses.................................. 963 1,116
Deferred revenue.................................. 682 747
-------- ---------
Total current liabilities................. 1,993 3,702
-------- ---------
Commitments and contingencies
Shareholders' equity: - -
Common stock............................... 143 142
Additional paid-in capital................. 20,221 20,221
Accumulated deficit........................ (19,412) (19,417)
-------- ---------
Total shareholders' equity.......................... 952 946
-------- ---------
Total liabilities and shareholders' equity.......... $ 2,945 $ 4,648
======== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
INFODATA SYSTEMS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 5 $ 235
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Gain on sale of investment.......................... - (1,068)
Depreciation and amortization....................... 79 108
Goodwill and other intangible amortization.......... - 63
Provision for doubtful accounts 4 -
Changes in operating assets and liabilities:
Accounts receivable................................. 1,354 (248)
Prepaid expenses and other current assets........... 163 (60)
Other assets........................................ - (6)
Related party receivable............................ - 302
Accounts payable.................................... (875) (29)
Accrued expenses.................................... (153) (116)
Deferred revenue.................................... (65) (135)
------- -------
Net cash provided by (used in)
operating activities....................... 512 (954)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (9) (12)
Purchases of short-term investments................... - (200)
Proceeds from maturity of short-term investments...... - 700
Proceeds from sale of investment...................... - 1,092
------- -------
Net cash (used in) provided by investing activities... (9) 1,580
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit............................ (616) (52)
Issuance of common stock.............................. 1 29
------- -------
Net cash (used in) financing activities..... (615) (23)
------- -------
Net (decrease) increase in cash and cash
equivalents.......................................... (112) 603
Cash and cash equivalents at beginning of period...... 1,002 321
------- -------
Cash and cash equivalents at end of period............ $ 890 $ 924
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month and six-month periods
ended June 30, 2002, are not necessarily indicative of the results for the year
ending December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2001.
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. However, as
reflected in the accompanying condensed consolidated financial statements,
though the Company has made a profit in the quarter ended June 30, 2002, the
Company suffered recurring losses from operations prior to this quarter. This
factor, including the uncertainty surrounding whether the Company will meet its
2002 budget expectations, indicate that there is substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. The Company's financial statements do not include any adjustments relating
to the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on, among other things,
its ability to meet its 2002 budgeted cash flow projections.
Although the Company believes that it will be able to meet its budget
projections in 2002, there can be no assurance that the Company will be
successful in so doing. Failure by the Company to meet its budget expectations
may have a material adverse effect on the Company's financial position, results
of operations or cash flows.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
1) Revenue Recognition - The Company recognizes revenue from the sale of
software licenses in accordance with Statement of Positions No. 97-2,
"Software Revenue Recognition," as amended. Revenue from license
arrangements is recognized upon shipment of the product when persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed
and determinable and collectibility is probable. If an ongoing vendor
obligation exists under the license arrangement, revenue is deferred based
on vendor-specific objective evidence of the undelivered element. If
vendor-specific objective evidence does not exist for all undelivered
elements, all revenue is deferred until sufficient evidence exists or all
elements have been delivered. Revenue from annual maintenance and support,
including third party maintenance, was deferred and recognized ratably over
the term of the contract. License revenue from resellers is recognized when
product is sold through to the end user and such sell through is reported
to the Company. Revenue from consulting and training is recognized when the
services are performed and collectibility is deemed probable. Revenue from
consulting and professional services contracts is recognized on the
percentage-of-completion method for fixed price contracts and on the basis
of hours incurred at contract rates for time and materials contracts.
Revenue from cost reimbursement contracts is recognized as costs are
incurred. Any
7
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time the amounts are
recognized in accordance with the type of contract.
2) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
3) Adoption of Accounting Pronouncements - Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was
issued in June 2001. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized, but are reviewed at
least annually for impairment. A two-step impairment test is used to first
identify potential goodwill impairment and then measure the amount of
goodwill impairment loss, if any. SFAS No. 142 is effective for the Company
beginning in 2002, and is required to be applied as of January 1, 2002. The
Company has adopted SFAS 142 as of April 1, 2002 and since the Company had
no goodwill or intangibles on January 1, 2002, there has been no impact of
adopting SFAS No. 142 in the accompanying condensed consolidated financial
statements.
In accordance with SFAS No. 142, goodwill amortization was discontinued as
of January 1, 2002. The following table adjusts the reported loss from
continuing operations for the quarter and six months ended June 30, 2001
and the related basic and diluted per share amounts to exclude goodwill
amortization (in thousands, except per share amounts):
Six Months
Quarter Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
Net (loss) income, as reported................... $ (235) $ 235
Goodwill amortization............................ 36 63
------- ------
Adjusted net (loss) income....................... $ (199) $ 298
Basic and diluted net (loss) income
per share, as reported.......................... $ (0.05) $ 0.05
Goodwill amortization............................ $ 0.01 $ 0.01
------- ------
Adjusted basic and diluted net (loss)
income per share................................ $ (0.04) $ 0.06
======= ======
NOTE C - CREDIT FACILITY
The Company maintained a working capital line of credit with Merrill Lynch
Business Financial Services Inc., collateralized by accounts receivable,
equipment and other intangibles that expired on April 30, 2001, which
accelerated all amounts due under that line of credit. The credit facility
provided the Company with up to a $1,000,000 line of credit at a per annum
interest rate equal to 2.9% over the 30-day commercial paper rate. Advances
under the facility were based on eligible billed accounts receivable less than
90 days old. As of June 30, 2002, the Company had fully repaid all amounts
outstanding under this line of credit and, accordingly, Merrill Lynch Business
Financial Services Inc. has fully released all accounts receivable, equipment
and other intangibles collateralized under the line of credit.
8
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
On June 3, 2002, the Company entered into an Assignment and Transfer of
Receivables Agreement ("Assignment Agreement") with Commerce Funding Corporation
("Commerce Funding"). The terms of the Assignment Agreement provide for
assignment of the Company's receivables by Commerce Funding from time to time
and Commerce Funding will, at its sole discretion, make funding available to the
Company up to an amount not to exceed $1,000,000. Interest under this Assignment
Agreement is to be paid semi monthly at Prime +1.75 percentage points and
Commerce Funding will also charge a processing fee of 0.65% for the first thirty
day period based on gross invoice amounts. The Company has to pay a minimum
charge of $1,950 per month for the interest and processing fees that is
deductible from the actual interest and processing fees due for the month.
Commerce Funding has full recourse against the Company in the event of
non-payment of any receivable assigned by the Company to Commerce Funding. The
Company has granted a security interest to Commerce Funding in all receivables
owned or hereinafter acquired, including all contract rights, proceeds and
returned goods thereof, and all accounts and cash held therein maintained by the
Company with any bank or financial institution. The Assignment Agreement can be
terminated by either party at their discretion and at any time, by giving a
thirty-day written notice to the other party. Commerce Funding may terminate the
Assignment Agreement at any time if the Company commits any event of default. As
of June 30, 2002, the Company had not assigned any of its receivables.
NOTE D - BUSINESS ACQUISITIONS
On March 30, 2000, the Company acquired a business unit from Earth Satellite
Corporation specializing in providing software development services to the U.S.
Government intelligence community. The Company issued 40,000 shares of its
Common Stock with a fair market value of $3.563 per share, which was equal to
the average of the closing bid and ask prices of the Company's Common Stock on
that date. On February 9, 2001, the Company issued an additional 13,334 shares
of its Common Stock with a fair market value of $1.50 per share to Earth
Satellite Corporation pursuant to an adjustment provision included in the
acquisition agreement between the Company and Earth Satellite Corporation in
this transaction. This event resulted in a purchase price adjustment of
approximately $20,000 that was attributed to goodwill. The acquisition cost of
this business unit was approximately $199,000, including $37,000 of direct cost
attributed to the business unit's sole contract. The contract's acquisition
value has been amortized over its life of 18 months, and as of October 31, 2001,
the Company had fully amortized that amount.
NOTE E - AGREEMENT OF MERGER
On January 10, 2002, the Company entered into an Agreement and Plan of Merger
(the "Agreement of Merger") between the Company and Science Applications
International Corporation ("SAIC") and Info Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of SAIC ("Acquisition"). Pursuant to the
Agreement of Merger, SAIC was to acquire all of the issued and outstanding
common stock of the Company through the merger (the "Merger") of Acquisition
with and into the Company.
At a meeting of the Company's shareholders held on March 1, 2002, the
shareholders of the Company approved the Agreement of Merger. However,
consummation of the Merger was delayed after the Company was notified by its
major U.S. Government intelligence community customer that the scope of a large
contract (the "Customer Contract"), accounting for approximately 40% of the
Company's revenue in 2001, was going to be substantially reduced. Although the
Company believes that it had performed well under the Customer Contract, and in
fact subsequently received a 100% award fee rating on its performance, the terms
of the Customer Contract gave the government customer the right to change the
scope of its services engagement, which is typical in government contracts.
In January 2002, pursuant to the terms of the Agreement of Merger, the Company's
Board of Directors adopted a resolution to suspend the 1997 Employee Stock
Purchase Plan during the first
9
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
quarter of 2002 and to subsequently terminate it upon the then anticipated
consummation of the Merger.
On April 19, 2002, the Company received a notice from SAIC terminating its
proposed acquisition of the Company pursuant to the Agreement of Merger. As per
the Agreement of Merger, the Company may be required to pay a termination fee of
$50,000 to SAIC under certain specific conditions. Management does not believe
that these conditions exist and does not believe that it will have to pay this
termination fee and accordingly, this amount has not been accrued for in the
accompanying condensed consolidated financial statements.
As a result of the reduction in the scope of the Customer Contract, the Company
has taken certain steps to reduce its expenses, including reducing the number of
its employees, rent expense and expenditures in other areas.
NOTE F - COMMITMENTS AND CONTINGENCIES
Costs charged to cost-type U.S. Government contracts are subject to annual audit
by the Defense Contract Audit Agency or other duly authorized representatives of
the U.S. Government. No audits have been completed for any periods commencing
after 1998. During the year 2002, the Company anticipates that the audit for the
year 1999 will commence and in the opinion of management, adjustments resulting
from the completion of such audit and future audits are not expected to have a
material impact on the Company's financial position or results of future
operations.
As discussed in Note E, under certain specific conditions, the Company may be
required to pay a termination fee of $50,000 to SAIC.
From time to time, the Company is subject to claims arising in the ordinary
course of business. In the opinion of management, no such matter, individually
or in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of the Company.
NOTE G - SUBSEQUENT EVENTS
On April 26, 2002, the Company submitted a proposal to a U.S. Government agency
client in an effort to recover approximately $130,000 in costs expended (or
expected to be expended) by the Company related to the reduction in scope of a
contract and potential termination fees as discussed in Note E. Based on
information received by the Company during July 2002, the Government has agreed
to pay approximately $70,000 of these costs; however, since there has been no
formal communication of recovery of these costs, the Company has expensed
approximately $80,000, which represents all actual costs expended to date. While
all costs have been recorded, no revenue representing the recovery of such costs
has been recorded in the accompanying condensed consolidated financial
statements.
On May 20, 2002, the Company's Chief Executive Officer and President left the
Company and, on August 2, 2002, agreed to a lump-sum severance payment of
$108,922. This amount, along with estimated associated legal fees of $25,000,
has been accrued for in the accompanying condensed consolidated financial
statements.
NOTE H - SEGMENT REPORTING
The table below presents information about reported segments for the three and
six month periods ended June 30, 2002 and 2001, as well as a reconciliation to
reported income (loss) before income taxes. Management does not assign
identifiable assets to its segments.
10
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
Infodata Systems Inc.
Three Months Ended
June 30, 2002
Segment Information
(In Thousands)
Third
Proprietary Party
Solutions Products Products Total
--------- ----------- -------- -------
Revenues $ 1,830 $ 466 $ 163 $ 2,459
Direct costs 1,161 67 161 1,389
------- ----- ----- -------
Segmental profit $ 669 $ 399 $ 2 1,070
======= ===== =====
Research and development (212)
Other costs not allocated to
segments, primarily selling,
general and administrative (701)
Interest income - net (14)
-------
Net income $ 143
=======
Infodata Systems Inc.
Three Months Ended
June 30, 2001
Segment Information
(In Thousands)
Third
Proprietary Party
Solutions Products Products Total
--------- ----------- -------- -------
Revenues $ 3,444 $ 366 $ 297 $ 4,107
Direct costs 2,545 27 279 2,851
------- ----- ----- -------
Segmental profit $ 899 $ 339 $ 18 1,256
======= ===== =====
Research and development (106)
Other costs not allocated to
segments, primarily selling,
general and administrative (1,386)
Interest income - net 1
-------
Loss $ (235)
=======
11
INFODATA SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2002 and 2001
Infodata Systems Inc.
Six Months Ended
June 30, 2002
Segment Information
(In Thousands)
Third
Proprietary Party
Solutions Products Products Total
--------- ----------- -------- -------
Revenues $ 4,227 $ 819 $ 361 $ 5,407
Direct costs 2,925 95 357 3,377
------- ----- ----- -------
Segmental profit $ 1,302 $ 724 $ 4 2,030
======= ===== =====
Research and development (358)
Other costs not allocated to
segments, primarily selling,
general and administrative (1,652)
Interest income - net (15)
-------
Net income $ 5
=======
Infodata Systems Inc.
Six Months Ended
June 30, 2001
Segment Information
(In Thousands)
Third
Proprietary Party
Solutions Products Products Total
--------- ----------- --------- -------
Revenues $ 6,384 $ 772 $ 567 $ 7,723
Direct costs 5,006 61 520 5,587
------- ----- ----- -------
Segmental profit $ 1,378 $ 711 $ 47 2,136
======= ===== =====
Research and development (271)
Other costs not allocated to segments,
primarily selling, general and
administrative (2,702)
Gain on sale of asset 1,068
Interest income - net 4
-------
Net income $ 235
=======
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS RELATING TO PRODUCT AND SERVICE DEVELOPMENT, FUTURE
CONTRACTS, REVENUE, NET INCOME AND THE ADEQUACY OF WORKING CAPITAL ARE BASED ON
CURRENT EXPECTATIONS THAT INVOLVE UNCERTAINTIES AND RISKS ASSOCIATED WITH NEW
PRODUCT AND SERVICE OFFERINGS INCLUDING, BUT NOT LIMITED TO, MARKET CONDITIONS,
SUCCESSFUL PRODUCT DEVELOPMENT, SERVICE INTRODUCTION AND ACCEPTANCE, THE
INTRODUCTION OF COMPETITIVE PRODUCTS, ECONOMIC CONDITIONS, AND THE TIMING OF
ORDERS AND CONTRACT INITIATION. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM CURRENT EXPECTATIONS. READERS ARE CAUTIONED NOT TO PUT UNDUE
RELIANCE ON FORWARD-LOOKING STATEMENTS. THE COMPANY DISCLAIMS ANY INTENT OR
OBLIGATION TO UPDATE PUBLICLY THESE FORWARD-LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Company Overview
The Company provides its customers with complex information technology solutions
in the area of knowledge management. The Company specializes in creating
solutions that are enabled for use over internal intranets as well as the public
Internet. These products and services are provided to corporate and government
workgroups, departments and enterprises in three market segments. The segments
are information technology consulting services ("Solutions"), sales of
proprietary products ("Proprietary Products"), and the sale of third party
software and hardware ("Third Party Products"). Solutions includes systems
integration, document management analysis and implementation, training, and
consulting services surrounding the implementation of the Company's Proprietary
Products, Third Party Products, and other related services. Proprietary Products
include license sales of INQUIRE(R)/Text, Compose(R), AnnoDoc(TM) and their
associated maintenance. Third Party Products include software and hardware with
some related services. For the quarter ended June 30, 2002, Solutions accounted
for 74% of total revenue, Proprietary Products accounted for 19%, and Third
Party Products accounted for the remaining 7%.
On March 30, 2000, the Company acquired a business unit from Earth Satellite
Corporation specializing in providing software development services to the U.S.
Government intelligence community. The Company issued 40,000 shares of its
Common Stock with a fair market value of $3.563 per share, which was equal to
the average of the closing bid and ask prices of the Company's Common Stock on
that date. On February 9, 2001, the Company issued an additional 13,334 shares
of its Common Stock with a fair market value of $1.50 per share to Earth
Satellite Corporation pursuant to an adjustment provision included in the
acquisition agreement between the Company and Earth Satellite Corporation in
this transaction, which resulted in an addition to the purchase price of
approximately $20,000 that was attributed to goodwill. The acquisition cost of
this business unit was approximately $199,000, including $37,000 of direct cost
attributed to the business unit's sole contract. The acquisition value of that
contract was amortized over its life of 18 months and, as of October 31, 2001,
the Company had fully amortized that amount
On February 9, 2001, the Company sold its holdings of common stock and preferred
stock of Buckaroo.com, Inc., a Silicon Valley-based on-line commodity exchange
site that serves the computer chip market, to six private investors for a total
of $1,092,740 in cash. The Company originally obtained such shares in July 1999
for $24,575. As a result of the sale of such shares, the Company recorded a gain
of $1,068,165 in the quarter ended March 31, 2001.
13
At June 30, 2002, the Company had net operating loss carryforwards ("NOLs")
aggregating approximately $13,660,000 available to affect future taxable income.
Under Section 382 of the Internal Revenue Code of 1986, as amended ("Code"),
utilization of prior NOLs is subject to certain limitations following a change
in ownership. As a result of a business acquisition in July 1997, the Company is
subject to limitations on the use of its NOLs. Accordingly, there can be no
assurance the Company will be able to utilize a significant amount of NOLs. Due
to the uncertainty of taxable income to utilize the NOLs, a full valuation
allowance has been established with respect to the deferred tax asset.
Revenues from consulting services are recognized as the work progresses. Any
amounts paid by customers prior to the actual performance of services are
recorded as deferred revenue until earned, at which time they are recognized in
accordance with the type of contract. Revenue from software licenses are
recognized in accordance with the provisions of the Statement of Position 97-2,
"Software Revenue Recognition"; as amended. Revenues from post customer support
and maintenance agreements are recognized over the period that support is
provided. Deferred revenue is recognized with respect to pre-payments of
maintenance agreements.
Deferred revenue at June 30, 2002 was $682,000. This related primarily to
amounts from maintenance revenue on the INQUIRE/Text and AnnoDoc products, and
to third party software maintenance agreements. The margins that will be
realized on transactions involving deferred revenue depend on the type of
service rendered by the Company. Most of the Company's maintenance revenue
pertains to INQUIRE/Text, which is a mature software product.
The components of the Company's cost of revenue are dependent on the product or
service. For consulting, the most significant item is the direct labor cost of
the consultants. Other cost components include any subcontractor costs, any
non-labor direct costs, such as travel, and any associated indirect costs (e.g.,
office rent, administration, etc.) allocated to the consulting engagement.
Indirect costs are allocated based on head count and square footage of office
space. For Third Party Products and associated maintenance, the cost of revenue
includes the cost incurred by the Company to acquire the product/ service,
shipping and delivery charges, associated taxes, any customization work done by
the Company and any special packaging costs incurred prior to shipment. The cost
of maintenance revenue includes the customer service and software engineering
personnel supporting the product and an allocation of associated indirect costs
based on head count and square footage of office space. For Proprietary
Products, the Company includes in the cost of revenue, shipping, delivery,
packaging, production, the direct labor of personnel involved in delivering the
product and any associated expenses involved with the installation of the
product for the purchaser.
The Company's future operating results may vary significantly and are difficult
to predict due to a number of factors, of which many are beyond our control.
These factors include the demand for our services and products, the level of
product and price competition, the length of the consulting services sales
cycle, the delay of deferral or customer implementation, the success of our
direct sales force and indirect distribution channels, the mix of products and
services sold, the timing of new hires, the ability of the Company to control
costs, and general domestic economic and political conditions which could have
an adverse effect on the Company's ability to meet its operating goals.
Critical Accounting Policies and Significant Estimates
The preparation of condensed consolidated financial statements requires
management to make judgments based upon estimates and assumptions that are
inherently uncertain. Such judgments affect the reported amounts of revenues on
long-term contracts. Management continuously evaluates its estimates and
assumptions related to long-term contracts and award fee provisions. Management
bases its estimates on historical experience and on various other assumptions
that
14
are believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
A portion of our revenue is derived primarily from long-term contracts. Revenues
on long-term fixed-price or time and material contracts with a maximum price are
generally recognized using the percentage-of-completion method of accounting.
Such revenues are recorded based on the percentage that costs incurred in the
applicable reporting period bear to the most recent estimates of total costs to
complete each contract. Estimating future costs and, therefore, revenues and
profits, is a process requiring a high degree of management judgment, including
management's assumptions regarding future operations of the Company as well as
general economic conditions. In the event of a change in total estimated
contract cost or profit, the cumulative effect of such change is recorded in the
period the change in estimate occurs. Frequently, the period of performance of a
contract extends over a long period of time and, as such, revenue recognition
and our profitability from a particular contract may be adversely affected to
the extent that estimated cost to complete or award fee estimates are revised,
delivery schedules are delayed or progress under a contract is otherwise
impeded. Accordingly, our recorded revenues and gross profits from year to year
can fluctuate significantly. In the event cost estimates indicate a loss on a
contract, the total amount of such loss is recorded in the period in which the
loss is first estimated. License revenue from resellers is recognized when
product is sold through to the end user and such sell through is reported to the
Company.
Certain contracts include award fee provisions for increased or decreased
revenue and profit based on actual performance against established targets.
Award fees are included in estimated contract revenue at the time the amounts
can be reasonably determined and are reasonably assured based on historical
experience and other objective criteria. Should the Company fail to perform
sufficiently under such contracts, previously recognized revenues could be
reversed and/or future period revenues could be reduced.
We have recorded a full valuation allowance to reduce our deferred tax assets to
the amount that is more likely than not to be realized. In the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax
valuation allowance would increase income in the period such determination is
made.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30,
2002 AND JUNE 30, 2001.
Revenues
The Company derives revenues from three segments, Solutions, Proprietary
Products and Third Party Products. Solutions revenue includes consulting
services for both commercial and government customers. Proprietary Product
revenue includes the sale of INQUIRE/Text and AnnoDoc products and services and
related maintenance, and sales of the Company's plug-in based software products.
Third Party Products include software and hardware sold to both government and
commercial customers. Total revenue decreased by $1,648,000, or 40%, for the
three months ended June 30, 2002 as compared to the corresponding period of the
prior year. Revenues for each period consisted of the following:
15
Three Months Ended
(Dollar Amounts in Thousands)
Increase
June 30, 2002 June 30, 2001 (Decrease) %
------------- ------------- ------------
Solutions
---------
Business Solutions $ 496 $ 1,151 (57%)
Intelligence 1,253 2,220 (44%)
INQUIRE 81 73 11%
--------------------------------------------
Total Solutions Revenue $ 1,830 $ 3,444 (47%)
============================================
Proprietary Products
--------------------
AnnoDoc, Compose and Others 305 141 116%
INQUIRE/Text 161 225 (28%)
--------------------------------------------
Total Proprietary Products Revenue $ 466 $ 366 27%
============================================
Total Third Party Products Revenue $ 163 $ 297 (45%)
- ---------------------------------- ============================================
Total Revenue $ 2,459 $ 4,107 (40%)
============================================
Revenues from Solutions decreased overall by $1,614,000, or 47%, from $3,444,000
for the three months ended June 30, 2001 to $1,830,000 for the three-month
period ended June 30, 2002. The Business Solutions unit within the Solutions
segment decreased by $655,000, or 57%, from $1,151,000 for the three months
ended June 30, 2001 to $496,000 for the three months ended June 30, 2002. This
decline resulted from the completion of several large contracts without
follow-on or new contracts to replace them. The Intelligence Solutions unit
within the Solutions segment decreased by $967,000 or 44%, from $2,220,000 for
the three months ended June 30, 2001 to $1,253,000 for the three months ended
June 30, 2002, largely because the Company's major U.S. Government intelligence
community customer substantially reduced the scope of a large contract with the
Company. Although the Company had performed well, the terms of the contract gave
the U.S. Government customer the right to change the scope of its services
engagement, which is typical in government contracts. The INQUIRE Solutions unit
within the Solutions segment increased by $8,000, or 11%, from $73,000 for the
three months ended June 30, 2001 to $81,000 for the three months ended June 30,
2002 due to an increase in consulting work from a state government customer in
the quarter ended June 30, 2002.
Proprietary Product revenue increased by $100,000, or 27%, from $366,000 for the
three months ended June 30, 2001 to $466,000 for the three months ended June 30,
2002. The increase in proprietary revenue was from the Company's recently
introduced AnnoDoc product, which had sales of $152,000 in the quarter ended
June 30, 2002. However, the INQUIRE/Text maintenance revenues declined by
$64,000 and will continue to decline over time as customers move applications
off mainframes. In addition, sales of Compose and related products declined by
$2,000.
Third Party Product sales decreased by $134,000, or 45%, from $297,000 for the
three months ended June 30, 2001 to $163,000 for the three months ended June 30,
2002. The decrease in the second quarter ended June 30, 2002 is due to the
decision by the Company to eliminate low margin sales except for sales of third
party products for those engagements that require hardware and software
components integrated with consulting services.
16
Gross Profit
Gross profit increased by $32,000, or 3% from $939,000 for the three months
ended June 30, 2001 to $971,000 for the three months ended June 30, 2002. Gross
margin as a percent of revenues increased from 23% for the three months ended
June 30, 2001 to 39% for the three months ended June 30, 2002. The reasons for
the increase in gross margin ended June 30, 2002 were (i) increase in
utilization for consulting personnel resulting in reductions in unabsorbed
overhead labor, (ii) high margins on the Company's product sales for AnnoDoc,
Compose and related products, and (iii) the previously mentioned receipt of a
$195,000 award fee (100% of the maximum).
Research and Development Expenses
Research and development expenses increased $106,000, or 100%, from $106,000 for
the three months ended June 30, 2001 to $212,000 for the three months ended June
30, 2002. The increase is due to increased spending for the development and
enhancement of the Company's proprietary products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $467,000, or 44%, from
$1,069,000 for the three months ended June 30, 2001 to $602,000 for the three
months ended June 30, 2002. The substantial decrease was due to a reduction in
selling and administrative personnel costs. The decrease in selling, general and
administrative expenses was partially offset by estimated costs of approximately
$110,000 for the severance of the Company's CEO and the associated legal fees of
$25,000.
Interest Income and Expense
Interest income decreased $16,000, or 100%, from $16,000 for the three months
ended June 30, 2001 to $0 for the three months ended June 30, 2002. The
reduction in interest income is due to significantly lower cash and cash
equivalent balances, lesser short-term investments, and lower interest rates
compared to the same period in 2001. Conversely, the Company incurred
approximately $14,000 in interest expense for the quarter ended June 30, 2002
compared to $15,000 of interest expense for the quarter ended June 30, 2001.
Net Profit
As a result of the above, the Company recorded a net profit of $143,000 in the
second quarter ended June 30, 2002, compared to a net loss of $235,000 for the
quarter ended June 30, 2001. The return to profitability was primarily
attributable to (i) improved margins and reduced costs, and (ii) the receipt of
the $195,000 award fee, partially offset by the $135,000 in the above mentioned
severance costs.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
2002 AND 2001
Revenues
Total revenue decreased by $2,316,000, or 30%, for the six months ended June 30,
2002 as compared to the corresponding period of the prior year. Revenues for
each period consisted of the following:
17
Six Months Ended
(Dollar Amounts in Thousands)
Increase
June 30, 2002 June 30, 2001 (Decrease) %
------------- ------------- ------------
Solutions
---------
Business Solutions $ 1,174 $ 2,047 (43%)
Intelligence 2,918 4,174 (30%)
INQUIRE 135 163 (17%)
-----------------------------------------
Total Solutions Revenue $ 4,227 $ 6,384 (34%)
=========================================
Proprietary Products
--------------------
AnnoDoc, Compose and Others 502 334 50%
INQUIRE/Text 317 438 (28%)
--------------------------------------------
Total Proprietary Products Revenue $ 819 $ 772 6%
============================================
Total Third Party Products Revenue $ 361 $ 567 (36%)
- ---------------------------------- ============================================
Total Revenue $ 5,407 $ 7,723 (30%)
============================================
Revenues from Solutions decreased overall by $2,157,000, or 34%, from $6,384,000
for the six months ended June 30, 2001 to $4,227,000 for the six-month period
ended June 30, 2002. The Business Solutions unit within the Solutions segment
decreased by $873,000, or 43%, from $2,047,000 for the six months ended June 30,
2001 to $1,174,000 for the six months ended June 30, 2002. This decline resulted
from the completion of several large contracts without follow-on or new
contracts to replace them. The Intelligence Solutions unit within the Solutions
segment decreased by $1,256,000 or 30%, from $4,174,000 for the six months ended
June 30, 2001 to $2,918,000 for the six months ended June 30, 2002, largely
because the Company's major U.S. Government intelligence community customer
substantially reduced the scope of a large contract with the Company. Although
the Company had performed well under the contract, the terms of the contract
gave the U.S. Government customer the right to change the scope of its services
engagement, which is typical in government contracts. The INQUIRE Solutions unit
within the Solutions segment decreased by $28,000 or 17%, from $163,000 for the
six months ended June 30, 2001 to $135,000 for the second quarter ended June 30,
2002 due to a decline in INQUIRE/Text maintenance and INQUIRE consulting
services.
Proprietary Product revenue increased by $47,000, or 6%, from $772,000 for the
six months ended June 30, 2001 to $819,000 for the six months ended June 30,
2002. The increase in proprietary products revenue is attributed to sales of the
Company's recently introduced AnnoDoc product that had sales of $209,000 for the
six months ended June 30, 2002. This increase was partially offset by the
decline in INQUIRE/Text maintenance revenues of $121,000 that are expected to
decline over time as customers move applications off mainframes. Compose and
related product sales declined by $41,000 in the six months ended June 30,2002.
Third Party Product sales decreased by $206,000 or 36%, from $567,000 for the
six months ended June 30, 2001 to $361,000 for the six months ended June 30,
2002. The decrease in the second quarter ended June 30, 2002 is due to the
decision by the Company to eliminate low margin sales except for sales of third
party products for engagements that require hardware and software components
integrated with consulting services.
18
Gross Profit
Gross profit increased by $132,000, or 8%, from $1,568,000 for the six months
ended June 30, 2001 to $1,700,000 for the six months ended June 30, 2002. Gross
margin as a percent of revenues increased from 20% for the six months ended June
30, 2001 to 31% for the six months ended June 30, 2002. The reasons for the
increase in gross margin for the six months ended June 30, 2002 were (i)
increase in utilization for consulting personnel resulting in reductions in
unabsorbed overhead labor, (ii) high margins on the Company's product sales for
AnnoDoc, Compose and related products, and (iii) the previously mentioned
receipt of a $195,000 award fee (100% of the maximum).
Research and Development Expenses
Research and development expenses increased $87,000, or 32%, from $271,000 for
the six months ended June 30, 2001 to $358,000 for the six months ended June 30,
2002. The increase was attributable to increased spending for the development
and enhancement of the Company's proprietary products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $812,000, or 38%, from
$2,134,000 for the six months ended June 30, 2001 to $1,322,000 for the six
months ended June 30, 2002. The decrease was a result of a reduction in selling
costs and in administrative personnel.
Interest Income and Expense
Interest income decreased $29,000, or 76%, from $38,000 for the six months ended
June 30, 2001 to $9,000 for the six months ended June 30, 2002. The reduction in
interest income was due to lower cash and cash equivalent balances, lesser
short-term investments, and lower interest rates compared to the same period in
2001. Conversely, the Company incurred approximately $24,000 in interest expense
for the six months ended June 30, 2002 compared to $34,000 of interest expense
for the six months ended June 30, 2001 that resulted from lower interest rates
and the paying down of the line of credit balance.
Net Profit
The Company recorded a net profit of $5,000 in the first six months ended June
30, 2002 compared to a net profit of $235,000 for the six months ended June 30,
2001. The net profit in the six months ended June 30, 2001 was primarily
attributable to the gain of $1,068,000 recognized by the Company for the sale of
its equity stake in Buckaroo.com in the quarter ended March 31, 2001.
Liquidity and Capital Resources
- -------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and satisfaction of liabilities in the normal course of business. However, as
reflected in the accompanying condensed consolidated financial statements,
though the Company has made a profit in the quarter ended June 30, 2002, the
Company suffered recurring losses from operations prior to this quarter. This
factor, including the uncertainty surrounding whether the Company will meet its
2002 budget expectations, indicate that there is substantial doubt about the
Company's ability to continue as a going concern for a reasonable period of
time. The Company's financial statements do not include any adjustments relating
to the recoverability of assets and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent on, among other things,
its ability to meet its 2002 budgeted cash flow projections.
19
Although the Company believes that it will be able to meet its budget
projections in 2002, there can be no assurance that the Company will be
successful in so doing. Failure by the Company to meet its budget expectations
may have a material adverse effect on the Company's financial position, results
of operations or cash flows.
At June 30, 2002, the Company had cash and cash equivalents of $890,000. Net
working capital on June 30, 2002 amounted to $817,000 as compared to $741,000 at
December 31, 2001. On June 3, 2002, the Company entered into an agreement to
assign its receivables to Commerce Funding Corporation of Vienna, Virginia for
up to $1,000,000. This agreement will be collateralized by all receivables owned
or hereinafter acquired, including all contract rights, proceeds and returned
goods thereof, and all accounts and cash held therein maintained by the Company
with any bank or financial institution.
Net cash provided by operating activities for the six months ended June 30, 2002
was $512,000. The primary adjustments to the net income of $5,000 to arrive at
net cash provided in operating activities included (i) increases in depreciation
and amortization of $79,000, and (ii) decreases in accounts receivable of
$1,354,000, prepaid expenses and other current assets of $163,000, accrued
expenses of $153,000, accounts payable of $875,000, and deferred revenue of
$65,000.
Net cash used in investing activities for the six months ended June 30, 2002 of
$9,000 was for the purchase of equipment.
Net cash used in financing activities for the six months ended June 30, 2002 of
$615,000 arose from the paying down the entire line of credit of $616,000.
Net cash flow from operating activities for the six months ended June 30, 2002
was sufficient to fund the operations of the business. In addition, a new
facility to assign its receivables has been put in place and Management believes
that it will be able to sufficiently meet the Company's working capital
requirements for the next twelve months. The Company's actual cash requirements
may vary materially from those now planned and will depend upon numerous
factors, including the general market acceptance of the Company's products and
services, the growth of the Company's marketing channels, the technological
advances and activities of competitors, and other factors.
Termination of Agreement of Merger
On January 10, 2002, the Company entered into an Agreement and Plan of Merger
(the "Agreement of Merger") between the Company and Science Applications
International Corporation ("SAIC") and Info Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of SAIC ("Acquisition"). Pursuant to the
Agreement of Merger, SAIC was to acquire all of the issued and outstanding
common stock of the Company through the merger (the "Merger") of Acquisition
with and into the Company.
At a meeting of the Company's shareholders held on March 1, 2002, the
shareholders of the Company approved the Agreement of Merger. However,
consummation of the Merger was delayed after the Company was notified by its
major U.S. Government intelligence community customer that the scope of a large
contract (the "Customer Contract"), accounting for approximately 40% of the
Company's revenue in 2001, was going to be substantially reduced. Although the
Company believes that it had performed well under the Customer Contract, and in
fact subsequently received a 100% award fee rating on its performance, the terms
of the Customer Contract gave the government customer the right to change the
scope of its services engagement, which is typical in government contracts.
In January 2002, pursuant to the terms of the Agreement of Merger, the Company's
Board of Directors adopted a resolution to suspend the 1997 Employee Stock
Purchase Plan during the first
20
quarter of 2002 and to subsequently terminate it upon the then anticipated
consummation of the Merger.
On April 19, 2002, the Company received a notice from SAIC terminating its
proposed acquisition of the Company pursuant to the Agreement of Merger. As per
the Agreement of Merger, the Company may be required to pay a termination fee of
$50,000 to SAIC under certain specific conditions. Management does not believe
that these conditions exist and does not believe that it will have to pay this
termination fee and accordingly, this amount has not been accrued for in the
accompanying condensed consolidated financial statements.
As a result of the reduction in the scope of the Customer Contract, the Company
has taken certain steps to reduce its expenses, including reducing the number of
its employees, rent expense and expenditures in other areas.
Termination of Chief Executive Officer
On May 20, 2002, the Company's Chief Executive Officer and President left the
Company and, on August 2, 2002, agreed to a lump-sum severance payment of
$108,922. This amount, along with estimated associated legal fees of $25,000,
has been accrued for in the accompanying condensed consolidated financial
statements. On August 8, 2002, Harry Kaplowitz, who was then serving as
Executive Vice-President of the Company, was appointed President and Chief
Executive Officer.
Contingencies
Costs charged to cost-type U.S. Government contracts are subject to annual audit
by the Defense Contract Audit Agency or other duly authorized representatives of
the U.S. Government. No audits have been completed for any periods commencing
after 1998. During the year 2002, the Company anticipates that the audit for the
year 1999 will commence and in the opinion of management, adjustments resulting
from the completion of such audits and future audits are not expected to have a
material impact on the Company's financial position or results of future
operations.
As discussed above, under certain specific conditions the Company might be
required to pay a termination fee of $50,000 to SAIC.
From time to time, the Company is subject to claims arising in the ordinary
course of business. In the opinion of management, no such matter, individually
or in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of the Company.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith:
Exhibit Number Document
- -------------- --------
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2 Certification of Chief Accounting Officer Pursuant to
18 U.S.C. Section 1350
(b) Reports on Form 8 - K
On April 8, 2002, the Company filed a report on Form 8-K to report the reduction
in scope of a large government contract and the possible termination of the
Agreement of Merger with SAIC.
21
The Company filed a report on Form 8-K on April 19, 2002, to report that the
Company had received a notification from SAIC terminating its proposed
acquisition of the Company pursuant to the Agreement of Merger entered into on
January 10, 2002.
On June 3, 2002, the Company filed a report on Form 8-K reporting that it had
entered into a new credit facility with Commerce Funding Corporation of Vienna,
Virginia.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
INFODATA SYSTEMS INC.
Date: August 14, 2002
BY: /s/ Harry Kaplowitz
----------------------------------------------
Harry Kaplowitz
President and Chief
Executive Officer
BY: /s/ Gary I. Gordon
----------------------------------------------
Gary I. Gordon
Chief Accounting Officer
(Principal Financial and Accounting Officer)
22