SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark one
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2002
or
[ ] 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 1-9974
ENZO BIOCHEM, INC.
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(Exact name of registrant as specified in its charter)
New York 13-2866202
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
60 Executive Blvd., Farmingdale, New York 11735
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(Address of Principal Executive office) (Zip Code)
(631-755-5500)
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value New York Stock Exchange
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(Title of Class) Name of Each Exchange on which Registered)
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant has
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of June 10, 2002 the Registrant had 28,450,000 shares of Common Stock
outstanding.
ENZO BIOCHEM, INC.
FORM 10-Q
April 30, 2002
INDEX
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PAGE
NUMBER
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheet - April 30, 2002 (unaudited)
and July 31, 2001 3
Consolidated Statement of Operations
For the nine months ended April 30, 2002 and 2001 (unaudited) 4
Consolidated Statement of Operations
For the three months ended April 30, 2002 and 2001 (unaudited) 5
Consolidated Statement of Cash Flows
For the nine months ended April 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II -- Other Information
Item 1. Legal Proceedings 12
2
ENZO BIOCHEM, INC.
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
April 30, July 31,
2002 2001
(unaudited)
-----------------------------
(in Thousands)
ASSETS
Current assets:
Cash and cash equivalents $63,542 $58,671
Accounts receivable, less allowance for doubtful accounts 25,491 24,559
Inventories 2,970 2,020
Deferred taxes 1,708 1,708
Prepaid taxes 351 350
Other 1,433 1,132
-------- --------
Total current assets 95,495 88,440
Property and equipment, at cost, less accumulated depreciation and amortization
2,315 2,671
Cost in excess of fair value of net tangible assets acquired, less accumulated
amortization 7,544 7,823
Deferred patent costs, less accumulated amortization 3,631 3,865
Other 142 132
-------- --------
$109,127 $102,931
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $880 $2,040
Income taxes payable 2,543 ---
Accrued legal fees --- 251
Accrued payroll 327 322
Other accrued expenses 683 734
-------- --------
Total current liabilities 4,433 3,347
Deferred taxes 1,392 1,392
Deferred liability 555 675
Stockholders' equity:
Preferred Stock, $ .01 par value; authorized 25,000,000 shares; no shares
issued or outstanding
Common Stock, $ .01 par value; authorized 75,000,000 shares; shares
issued and outstanding; 28,447,900 shares at April 30, 2002 and
27,080,100, shares at July 31, 2001 284 271
Additional paid-in capital 160,238 133,136
Accumulated deficit (57,775) (35,890)
-------- --------
Total stockholders' equity 102,747 97,517
-------- --------
$109,127 $102,931
See accompanying notes
3
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Nine Months Ended April 30,
2002 2001
-------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $18,331 $12,339
Clinical laboratory services 21,903 26,226
------- -------
Total operating revenues 40,234 38,565
Costs and expenses:
Cost of research product revenues 495 576
Cost of clinical laboratory services 7,555 7,310
Research and development expense 5,143 4,688
Selling expense 2,847 2,798
Provision for uncollectable accounts receivable 8,908 9,234
General and administrative expenses 7,623 7,251
----- -----
Total costs and expenses 32,571 31,857
------ ------
Income before interest income and provision for taxes on income 7,663 6,708
Interest income 1,078 2,415
----- -----
Income before provision for taxes on income 8,741 9,123
Provision for taxes on income (3,543) (4,024)
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Net income $5,198 $5,099
====== ======
Net income per common share:
Basic $.18 $.18
==== ====
Diluted $.18 $.17
==== ====
Denominator for per share calculation:
Basic 28,442 28,317
====== ======
Diluted 29,381 29,483
====== ======
See accompanying notes
4
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
Three Months Ended April 30,
2002 2001
-------------------------------------
(In thousands, except per share data)
Revenues:
Research product revenues $8,243 $4,840
Clinical laboratory services 6,778 9,097
------ ------
Total operating revenues 15,021 13,937
Costs and expenses:
Cost of research product revenues 155 228
Cost of clinical laboratory services 2,250 2,810
Research and development expense 2,135 1,749
Selling expense 937 1,028
Provision for uncollectable accounts receivable 2,588 3,038
General and administrative expenses 2,916 2,451
------ ------
Total costs and expenses 10,981 11,304
------ ------
Income before interest income and provision for taxes on income 4,040 2,633
Interest income 251 702
------- -------
Income before provision for taxes on income 4,291 3,335
Provision for taxes on income (1,740) (1,474)
------- -------
Net income $2,551 $1,861
====== ======
Net income per common share:
Basic $.09 $.07
==== ====
Diluted $.09 $.06
==== ====
Denominator for per share calculation:
Basic 28,448 28,349
====== ======
Diluted 29,389 29,294
====== ======
See accompanying notes
5
ENZO BIOCHEM, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
Nine Months Ended April 30,
2002 2001
-----------------------------------
(In thousands)
Cash flows from operating activities:
Net income $5,198 $5,099
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of property
and equipment 758 820
Amortization of costs in excess of fair
value of tangible assets acquired 278 278
Amortization of deferred patent costs 585 540
Deferred taxes ----- 2,208
Provision for uncollectable accounts receivable 8,908 9,234
Provision for 401k expense - paid in common stock ----- 150
Other (120) 194
Changes in operating assets and liabilities:
Accounts receivable before provision for
uncollectable amounts (9,840) (11,805)
Inventories (950) (40)
Other assets (301) (5)
Trade accounts payable and other accrued expenses (1,211) (358)
Income taxes payable 2,543 (129)
Accrued payroll 5 (61)
Accrued legal fees (251) (490)
----- -----
Total adjustments 404 536
--- ---
Net cash provided by operating activities $5,602 $5,635
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Cash flows from investing activities:
Capital expenditures (402) (756)
Patent costs deferred (351) (427)
Security deposit (10) (10)
----- ------
Net cash used in investing activities (763) (1,193)
----- ------
Cash flows from financing activities:
Payment of dividend for fractional shares (96) ---
Proceeds from exercise of stock options 128 1,015
--- -----
Net cash provided by financing activities 32 1,015
-- -----
Net increase in cash and cash equivalents 4,871 5,457
Cash and cash equivalents at the beginning of the year 58,671 51,027
------ ------
Cash and cash equivalents at the end of the period $63,542 $56,484
======= =======
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ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002
(Unaudited)
Note 1 - The consolidated balance sheet as of April 30, 2002, the consolidated
statements of operations for the three and nine months ended April 30, 2002
("2002 Period") and 2001 ("2001 Period") and the consolidated statements of cash
flows for the nine months ended April 30, 2002 and 2001 have been prepared by
the Company without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at April 30, 2002 and
for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2001 Annual Report on Form 10-K. The results
of operations for the nine months ended April 30, 2002 are not necessarily
indicative of the results that may be expected for the full year.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". The following table sets forth
the computation of basic and diluted earnings per share pursuant to SFAS 128.
Nine Months Ended April 30, Three Months Ended April 30,
2002 2001 2002 2001
---------------------------- -----------------------------
(In Thousands, except per share data)
Numerator:
Net income for numerator for basic and
diluted earnings per common share $5,198 $5,099 $2,551 $1,861
Denominator:
Denominator for basic earnings per common
equivalent share during the period 28,442 28,317 $28,448 28,349
Effect of dilutive securities
Employee and director stock options and
warrants 939 1,166 941 945
---- ----- --- ---
Denominator for diluted earnings per common
equivalent share and assumed conversions 29,381 29,483 29,389 29,294
======= ====== ====== ======
Basic earnings per share $.18 $.18 $.09 $.07
==== ==== ==== ====
Diluted earnings per share $.18 $.17 $.09 $.06
==== ==== ==== ====
The Company declared a 5% stock dividend on January 23, 2002 payable February
27, 2002 to shareholders of record as of February 4, 2002. The shares and per
share data have been adjusted to retroactively reflect this stock dividend. The
Company recorded a charge to accumulated deficit and a credit to common stock
and additional paid in capital in the amount of $26,988,000, which reflects the
fair value of the dividend on the date of declaration.
7
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002
(Unaudited)
Note 2 - Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board Emerging Issues Task
Force ("EITF") reached final consensus on EITF No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products" ("EITF 00-25"), EITF 00-25 generally requires that consideration,
including equity instruments, given to a customer be classified in a vendor's
financial statements not as an expense, but as a reduction to revenue up to the
amount of cumulative revenue recognized or to be recognized. In November 2001,
the EITF reached consensus on EITF No. 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products" ("EITF
01-09"). EITF 01-09 clarifies and modifies certain items discussed in
EITF 00-25. We adopted these new standards in the quarter ended April 30, 2002.
The Company has certain non-exclusive distribution agreements, which provide for
consideration to be paid to the distributors for the manufacture of certain
products. Such consideration was previously included in cost of research
product revenues. In accordance with EITF 00-25 and EITF 01-09, the Company has
reclassified consideration provided to distributors under these non-exclusive
distribution agreements as a reduction to research product revenues. The prior
year and prior quarter comparative amounts have been reclassified to be
consistent with the current year presentation. This change reflects a new
reporting presentation only and did not affect the Company's gross profit or net
income as previously reported.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and No. 142,
"Goodwill and Other Intangible Assets". Statement 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the
discontinuance of amortization of goodwill and intangible assets with indefinite
useful lives, subject to an annual review for impairment. Other intangible
assets will continue to be amortized over their estimated useful lives. The
Company will adopt the provisions of the statement on August 1, 2002. Although
the Company is in the process of assessing the impact of adopting Statement No.
142, based upon its current level of goodwill and qualifying intangible assets,
management expects the adoption to reduce its fiscal 2003 annualized
amortization expense by approximately $370,000.
8
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002
(Unaudited)
Note 2 - Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). The Company has two
reportable segments: research and development and clinical reference
laboratories. The Company's research and development segment conducts research
and development activities as well as selling products derived from these
activities. The clinical reference laboratories provide diagnostic services to
the health care community. The Company evaluates performance based on income
before (provision) for taxes on income. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Costs excluded from income before (provision)
for taxes on income and reported as other consist of corporate general and
administrative costs which are not allocable to the two reportable segments.
Management of the Company assesses assets on a consolidated basis only and
therefore, assets by reportable segment has not been included in the reportable
segments below.
The following financial information (in thousands) represents the reportable
segments of the Company:
Research and Development Clinical Reference Other Consolidated
Nine Months Ended April 30, Nine Months Ended April 30, Nine Months Ended April 30, Nine Months Ended April 30,
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
----------------------------------------------------------------------------------------------------------------
Operating revenues:
Research product
revenues $18,331 $12,339 --- --- --- --- $18,331 $12,339
Clinical laboratory
services --- --- 21,903 $26,226 --- --- 21,903 26,226
Cost and expenses:
Cost of research
product revenues 495 576 --- --- --- --- 495 576
Cost of clinical
laboratory services --- --- 7,555 7,310 --- --- 7,555 7,310
Research and
development expense 5,143 4,688 --- --- --- --- 5,143 4,688
Interest income --- --- --- --- 1,078 2,415 1,078 2,415
Income (loss)
before provision
for taxes on income $10,442 $5,711 ($369) $3,124 $(1,332) $288 $8,741 $9,123
======= ====== ====== ====== ======= ==== ====== ======
Three Months Ended April 30, Three Months Ended April 30, Three Months Ended April 30, Three Months Ended April 30,
2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------
Operating revenues:
Research product
revenues $8,243 $4,840 --- --- --- --- $8,243 $4,840
Clinical laboratory
services --- --- 6,778 $9,097 --- --- 6,778 9,097
Cost and expenses:
Cost of research
product revenues 155 228 --- --- --- --- 155 228
Cost of clinical
laboratory services --- --- 2,250 2,810 --- --- 2,250 2,810
Research and
development expense 2,135 1,749 --- --- --- --- 2,135 1,749
Interest income --- --- --- --- 251 702 251 702
Income (loss)
before provision
for taxes on income $5,215 $2,310 $35 $998 $(959) $27 $4,291 $3,335
====== ====== === ==== ===== === ====== ======
9
ENZO BIOCHEM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2002
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Capital Resources
At April 30, 2002, our cash and cash equivalents totaled $63.5 million, an
increase of $4.9 million from July 31, 2001. We had working capital of $91.1
million at April 30, 2002 compared to $85.1 million at July 31, 2001.
Net cash provided by operating activities for the period ended April 30, 2002 of
approximately $5.6 million was consistent with the period ended April 30, 2001.
Net cash used in investing activities decreased by approximately $0.4 million
from the 2001 period, primarily as a result of an decrease in capital
expenditures.
Net cash provided by financing activities decreased by approximately $1.0
million from the 2001 period primarily as a result of the decrease in proceeds
from the exercise of stock options.
We believe that our current cash position is sufficient for our foreseeable
liquidity and capital resource needs, although there can be no assurance that
future events will not alter such view.
Management is not aware of any material claims, disputes or settled matters
concerning third-party reimbursements that would have a material effect on our
financial statements
Results of Operations
Nine months ended April 30, 2002 compared with nine months ended April 30, 2001
Revenues from operations for the nine month period ended April 30, 2002 were
$40.2 million which represents a increase of $1.7 million over revenues from
operations for the nine month period ended April 30, 2001. This increase was due
to a increase of $6.0 million in revenues from our research product sales and
offset by an decrease of $4.3 million in revenues from clinical reference
laboratory operations.
The decline of clinical laboratory services revenue was due primarily to reduced
reimbursement rates which were being experienced from various managed care
agreements and the negative results of an unprofitable contract which was
cancelled effective January 31, 2002. Clinical laboratory services are provided
to patients covered by various third party payor programs, including Medicare
and health maintenance organizations ("HMO's"). Billings for services are
included in revenue net of allowances for contractual discounts and allowances
paid for differences between the amounts billed and the estimated amount to be
paid. Recent trends had indicated a decrease in the collection rates from
certain third party payors and HMO's and the effect of such reduced collection
rates was reflected in the third quarter.
The increase in research product sales resulted primarily from an increase in
direct sales of research products of labeling and detection reagents for the
genomics and sequencing markets.
The cost of clinical laboratory services increased by $0.2 million primarily due
to an increase in direct operating expenses based on the increased number of
customers being serviced and the increase in volume of units tested for the
first six months. The cost of sales for research products decreased by $0.1
million as a result of an increase in efficiency of manufacturing the direct
sales of research products.
10
Research and development expenses increased by approximately $0.5 million as a
result of an increase in expenses associated with the research programs.
Our provision for uncollectible accounts receivable decreased by $0.3 million,
primarily due to a change in the revenue mix from certain providers.
Selling, general and administrative expenses increased by approximately $0.4
million primarily due to the increase in legal fees.
Interest income, decreased by $1.3 million as a result of a decrease in interest
rates.
Net income for the nine months amounted to $5.2 million, compared with $5.1
million in the corresponding year-earlier period. Per share earnings, fully
diluted, amounted to $0.18 compared with $0.17 per share a year ago.
For the nine month periods ending April 30, 2002 and 2001 we recorded a
provision for income taxes which was based on the combined effective federal,
state and local income tax rates.
Results of Operations
Three months ended April 30, 2002 compared with three months ended April 30,
2001
Revenues from operations for the period ended April 30, 2002 were $15.0 million
which represents an increase of $1.1 million over revenues from operations for
the three month period ended April 30, 2001. This increase was due to an
increase of $3.4 million in revenues from research product sales and a decrease
of $2.3 million in revenues from our clinical reference laboratory operations.
The decline of clinical laboratory services revenue was due primarily to reduced
reimbursement rates which were being experienced from various managed care
agreements and the negative results of an unprofitable contract which was
cancelled effective January 31, 2002. Clinical laboratory services are provided
to patients covered by various third party payors programs, including Medicare
and health maintenance organizations ("HMO's"). Billings for services are
included in revenue net of allowances for contractual discounts and allowances
paid for differences between the amounts billed and the estimated amount to be
paid. Recent trends have indicated a decrease in the collection rates from
certain third party payors and HMO's and the effect of such reduced collection
rates was reflected in the third quarter.
The increase in research product sales resulted primarily from and an increase
in direct sales of research products of labeling and detection reagents for the
genomics and sequencing markets.
The cost of clinical laboratory services decreased by $0.6 million primarily due
to a decrease in direct operating expenses based on the decreased volume of
units tested. The cost of sales for research products decreased by $0.1 million
as a result of an increase in efficiency of manufacturing the direct sales of
research products.
Research and development expenses increased by approximately $0.4 million as a
result of an increase in expenses associated with the research programs.
Our provision for uncollectible accounts receivable decreased by $.5 million,
primarily due to a decrease in revenue from the clinical reference laboratory.
11
Selling, general and administrative expenses increased by approximately $0.4
million as a result of an increase in legal fees.
Interest income, decreased by $.5 million as a result of a decrease in interest
rates.
Net income amounted to $2.6 million, compared with $1.9 million a year ago. Per
share earnings, fully diluted, amounted to $0.09 in the third quarter of fiscal
2002, compared with $.06 per share in the corresponding year-earlier period.
For the three month periods ending April 30, 2002 and 2001 we recorded a
provision for income taxes which was based on the combined effective federal,
state and local income tax rates.
PART II -- Other Information
Item 1. Legal Proceedings
In June 1999, the Company filed suit in the United States District Court for the
Southern District of New York against Gen-Probe Incorporated, Chugai Pharma
U.S.A., Inc., Chugai Pharmaceutical Co., Ltd., bioMerieux, Inc., bioMerieux SA,
and Becton Dickinson and Company, charging them with infringing the Company's
U.S. Patent 4,900,659, which concerns probes for the detection of the bacteria
that causes gonorrhea. On January 26, 2001, the court granted the defendants'
motion for summary judgment that the Company's patent is invalid. The judgment
was affirmed by a divided panel of the Court of Appeals for the Federal Circuit
on April 2, 2002. The Company has petitioned the entire Court of Appeals to
rehear the appeal. There can be no assurance that the Company will be successful
in these proceedings. However, even if the Company is not successful, management
does not believe that there will be a significant adverse monetary impact.
On March 6, 2002, the Company was named, along with certain of its officers and
directors among others, in a complaint entitled Lawrence F. Glaser and Maureen
Glaser, individually and on behalf of Kimberly, Erin, Hannah, and Benjamin
Glaser v. Hyman Gross, Barry Weiner, Enzo Biochemical Inc., Elazar Rabbani,
Sharim Rabbani, John Delucca, Dena Engelhardt, Richard Keating, Doug Yeats, and
Docs I-50, in the U.S. District Court for the Eastern District of Virginia. The
complaint was filed by an investor in the Company who has filed for bankruptcy
protection and his family. The complaint alleges securities and common law fraud
and breach of fiduciary duty and seeks in excess of $150 million in damages. The
Company has moved to dismiss the complaint, the motion is currently pending
before the Court.
In March 2002, Enzo Life Sciences, a subsidiary of the Company, filed suit in
the United States District Court for the District of Delaware against Digene
Corp., charging it with infringing the Company's U.S. Patent No. 6,221,581 B1,
which concerns a novel process for detecting nucleic acids of interest. On May
31, 2002, Digene filed counterclaims in that suit against Enzo Life Sciences and
the Company, including business tort counterclaims relating to the `581 patent.
The case is at an early stage. There can be no assurance that the Company and
Enzo Life Sciences will be successful in these proceedings. However, even if
Enzo Life Sciences is not successful in its patent infringement suit, management
does not believe that there will be a significant adverse monetary impact. With
respect to Digene's counterclaims, the Company and Enzo Life Sciences believe
them to be without merit and intend to defend themselves vigorously.
12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ENZO BIOCHEM, INC.
------------------
(registrant)
Date: June 11, 2002 by: /s/ Shahram K. Rabbani
----------------------
Chief Operating Officer,
Secretary and Treasurer
13