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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2002
Commission File Number: 1-14371
INFORMATION HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1518007
(State of incorporation) (IRS Employer Identification Number)
2777 SUMMER STREET, SUITE 209
STAMFORD, CONNECTICUT 06905
(Address of principal executive offices) (Zip Code)
(203) 961-9106
(Registrant's telephone number, including area code)
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 was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
As of June 30, 2002, there were 21,813,386 shares of the Company's common
stock, par value $0.01 per share outstanding.
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INFORMATION HOLDINGS INC.
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 1
As of June 30, 2002 (Unaudited) and December 31, 2001
Consolidated Statements of Operations (Unaudited) for the 2
Three Months Ended June 30, 2002 and 2001 and
Six Months Ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows (Unaudited) for the 3
Six Months Ended June 30, 2002 and 2001
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of 12
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
INFORMATION HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 37,797 $ 38,612
Short-term investments 14,555 17,762
Accounts receivable (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS AND
SALES RETURNS OF $3,935 AND $3,273, RESPECTIVELY) 37,931 35,130
Inventories 7,420 7,323
Prepaid expenses and other current assets 5,364 7,268
Deferred income taxes 3,423 3,423
----------- ------------
Total current assets 106,490 109,518
Property and equipment, net 9,374 9,868
Pre-publication costs (NET OF ACCUMULATED AMORTIZATION OF $7,349 AND
$5,758, RESPECTIVELY) 4,826 4,750
Identified intangible assets, net 105,114 111,463
Goodwill (NET OF ACCUMULATED AMORTIZATION OF $7,075 AND
$6,624, RESPECTIVELY) 118,947 102,666
Other assets 9,150 8,292
----------- ------------
TOTAL $ 353,901 $ 346,557
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capitalized lease obligations $ 520 $ 490
Accounts payable 25,570 21,598
Accrued expenses 12,817 17,793
Royalties payable 2,022 1,625
Deferred revenue 21,031 18,293
----------- ------------
Total current liabilities 61,960 59,799
Capital leases 1,689 1,959
Deferred income taxes 15,485 16,826
Other long-term liabilities 987 1,023
----------- ------------
Total liabilities 80,121 79,607
----------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued $ - $ -
Common stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 21,813,386 shares at June 30, 2002
and 21,758,052 shares at December 31, 2001 218 218
Additional paid-in capital 246,990 245,911
Retained earnings 26,703 20,821
Accumulated other comprehensive loss (131) -
----------- ------------
Total stockholders' equity 273,780 266,950
----------- ------------
TOTAL $ 353,901 $ 346,557
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-1-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
Revenues $ 35,645 $ 25,314 $ 68,933 $ 49,558
Cost of sales 10,609 5,968 19,880 11,542
--------- ---------- ---------- ----------
Gross profit 25,036 19,346 49,053 38,016
--------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative 15,943 12,336 31,560 23,556
Depreciation and amortization 4,412 4,747 8,551 8,598
--------- ---------- ---------- ----------
Total operating expenses 20,355 17,083 40,111 32,154
--------- ---------- ---------- ----------
Income from operations 4,681 2,263 8,942 5,862
--------- ---------- ---------- ----------
Other income (expense):
Interest income 269 1,060 531 2,702
Interest expense (135) (136) (271) (272)
Other expense (3) - (3) (3)
--------- ---------- ---------- ----------
Income before income taxes 4,812 3,187 9,199 8,289
Provision for income taxes 1,744 1,283 3,317 3,381
--------- ---------- ---------- ----------
Net income $ 3,068 $ 1,904 $ 5,882 $ 4,908
========= ========== ========== ==========
Basic and diluted earnings per common share amounts:
Net income $ 0.14 $ 0.09 $ 0.27 $ 0.23
========= ========== ========== ==========
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-2-
INFORMATION HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,882 $ 4,908
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 2,913 1,553
Amortization of goodwill - 2,257
Amortization of other intangible assets 5,638 4,788
Amortization of pre-publication costs 1,637 1,304
Change in non-current deferred income tax liabilities (826) (561)
Other 87 73
Changes in operating assets and liabilities, net of effect
of acquisitions:
Increase in accounts receivable, net (2,085) (287)
Increase in inventories (97) (327)
Decrease (increase) in prepaid and other current assets 1,707 (1,214)
Decrease in accounts payable and accrued expenses (5,399) (4,292)
Income tax benefit from stock options exercised 321 306
Net change in income taxes (receivable) payable 3,556 (2,435)
Increase (decrease) in deferred revenue 1,083 (410)
Net change in other assets and liabilities (769) (412)
------------- -------------
Net Cash Provided by Operating Activities 13,648 5,251
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses and equity interests (14,043) (34,066)
Purchases of property and equipment (1,678) (2,006)
Investment in pre-publication costs (1,713) (1,577)
Sales (purchases) of short-term investments 3,207 (8,852)
Capitalized internal-use software (434) (178)
Capitalized software development costs (353) -
Proceeds from disposal of property and equipment 33 2
------------- -------------
Net Cash Used in Investing Activities (14,981) (46,677)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued from stock options exercised 758 683
Principal payments on capital leases (240) (150)
------------- -------------
Net Cash Provided by Financing Activities 518 533
------------- --------------
NET DECREASE IN CASH AND EQUIVALENTS (815) (40,893)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 38,612 96,375
------------- --------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 37,797 $ 55,482
============= ==============
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
-3-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
A. BASIS OF PRESENTATION
The consolidated balance sheet of Information Holdings Inc. (IHI, or the
Company) at December 31, 2001 has been derived from IHI's Annual Report on
Form 10-K for the year then ended. All other consolidated financial
statements contained herein have been prepared by IHI and are unaudited.
These consolidated financial statements should be read in conjunction with
the consolidated financial statements for the year ended December 31, 2001
and the notes thereto contained in IHI's Annual Report on Form 10-K.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of IHI as of June 30, 2002, and the consolidated results of
operations and cash flows for the periods presented herein. Results for the
three and six months ended June 30, 2002 are not necessarily indicative of
the results to be expected for the full fiscal year.
Certain reclassifications have been made to the financial statements of the
prior period to conform to the June 30, 2002 presentation.
B. INVENTORIES
Inventories, consisting primarily of finished goods, are stated at the
lower of cost (first-in, first-out method) or market. Shipping costs, which
consist of transportation costs associated with the delivery of the
Company's products to customers, and handling costs are included in cost of
sales. The vast majority of inventories are books, which are reviewed
monthly on a title-by-title basis for salability. The cost of inventory
determined to be impaired is charged to income in the period of
determination.
-4-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
C. EARNINGS PER SHARE DATA
The following table sets forth the computation of basic and diluted
earnings per common share for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
Basic:
Net income $ 3,068 $ 1,904 $ 5,882 $ 4,908
Average common shares outstanding 21,807 21,633 21,784 21,624
----------- ----------- ----------- -----------
Basic EPS $ 0.14 $ 0.09 $ 0.27 $ 0.23
=========== =========== =========== ===========
Diluted:
Net income $ 3,068 $ 1,904 $ 5,882 $ 4,908
=========== =========== =========== ===========
Average common shares outstanding 21,807 21,633 21,784 21,624
Net effect of dilutive stock options -
based on the treasury stock method 197 163 186 164
----------- ----------- ----------- -----------
Total 22,004 21,796 21,970 21,788
=========== =========== =========== ===========
Diluted EPS $ 0.14 $ 0.09 $ 0.27 $ 0.23
=========== =========== =========== ===========
During the first half of 2002, employees exercised stock options to acquire
55,334 shares at an exercise price of between $12.00 and $21.09 per share.
For the three and six months ended June 30, 2002, 372,248 and 462,773 stock
options, respectively, were excluded from the computation of diluted
earnings per common share due to their antidilutive effect. For the three
and six months ended June 30, 2001, 324,248 stock options in each of the
periods, respectively, were excluded from the computation of diluted
earnings per common share due to their antidilutive effect.
D. ACQUISITIONS
On May 9, 2002, the Company acquired substantially all of the assets of
Aurigin Systems, Inc. (Aurigin) for cash consideration of approximately
$14,043,000 including the assumption of certain liabilities. Aurigin
provides intellectual property management systems used primarily by
corporations to search, analyze, annotate and group patent information, as
well as proprietary corporate data. The purchase price was preliminarily
allocated to net tangible liabilities of $1,592,000, identified intangible
assets of $1,600,000 and goodwill of $14,035,000. The Company has obtained
a preliminary independent appraisal of the fair value of the identified
intangible assets and their remaining useful lives. The result of
operations of the assets and liabilities acquired is not material to the
current period or the comparable periods presented herein.
-5-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
D. ACQUISITIONS (CONTINUED)
On December 20, 2001, the Company completed a tender offer and acquired all
of the outstanding common shares of Liquent, Inc. (Liquent) for cash
consideration equal to $2.27 per share, or approximately $41,100,000.
Liquent is a leading provider of software and service solutions that aid in
content assembly and publishing for the life sciences industry. The
purchase price was allocated to net tangible assets of $6,026,000,
identified intangible assets of $6,790,000 and non-deductible goodwill of
$25,875,000. The Company has obtained an independent appraisal of the fair
value of the identified intangible assets and their remaining useful lives.
The Company also recorded a deferred income tax asset as a result of
Liquent's net operating loss carryforwards of $5,010,000, offset by a
deferred income tax liability as a result of the gross up of acquired
intangible assets in the amount of $2,565,000.
On May 15, 2001, the Company acquired the stock of Parthenon Publishing
Group (Parthenon), for cash consideration of approximately $8,300,000.
Parthenon, based in the United Kingdom, is a leading provider of medical
and environmental reference products, including books, journals and medical
communication services.
On March 29, 2001, the Company acquired the IDRAC business of IMS Health
and entered into multiple perpetual agreements with IMS Health and certain
affiliates, for aggregate cash consideration of approximately $20,400,000.
IDRAC, based in France, is a leading provider to pharmaceutical companies
worldwide of regulatory and intellectual property information related to
pharmaceutical product registrations.
All acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of their operations have been
included in the Company's results of operations from their respective date
of acquisition. In accordance with SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, no goodwill amortization was recorded for acquisitions
after June 30, 2001, which includes Liquent and Aurigin.
The following unaudited pro forma information presents the results of
operations of the Company, as if the 2001 acquisitions of IDRAC and Liquent
had taken place as of January 1, 2001, is as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2001
Revenues $ 29,856 $ 60,928
================== ===================
Net loss $ (535) $ (1,186)
================== ===================
Basic loss per common share $ (0.02) $ (0.05)
================== ===================
Diluted loss per common share $ (0.02) $ (0.05)
================== ===================
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the operating results
that would have occurred had the acquisitions been consummated as of the
above date, nor are they necessarily indicative of future operating
results.
-6-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Effective as of January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized but are reviewed at least annually, or more
frequently if impairment indicators arise.
During the year ended December 31, 2001, the Company began the required
transitional impairment review of goodwill and intangible assets with
indefinite lives. This review required the Company to estimate the fair
value of its identified reporting units as of December 31, 2001. For each
of the reporting units, the estimated fair value was determined utilizing
the expected present value of the future cash flows of the units. In all
instances, the estimated fair value of the reporting units exceeded their
respective book values and therefore no write-down of goodwill or
intangible assets with indefinite lives was required as of January 1, 2002.
In addition, as of January 1, 2002, the Company ceased the amortization of
goodwill and intangible assets with indefinite lives and reclassified the
December 31, 2001 carrying value of its assembled workforce acquired
intangible assets included in other identified intangibles to goodwill.
The following unaudited reconciliation presents pro forma net income, basic
and diluted EPS as if SFAS No. 142 had been adopted on January 1, 2001, is
as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2001
Reported net income $ 1,904 $ 4,908
Adjustment for goodwill amortization, net of tax 965 1,602
Adjustment for trademark and tradename amortization,
net of tax 78 155
------------------ ------------------
Pro forma net income $ 2,947 $ 6,665
================== ==================
Basic and diluted earning per common share:
As reported $ 0.09 $ 0.23
================== ==================
Pro forma $ 0.14 $ 0.31
================== ==================
-7-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E GOODWILL AND IDENTIFIED INTANGIBLE ASSETS (CONTINUED)
Identified intangible assets and goodwill subject to amortization consisted
of the following (in thousands):
JUNE 30, 2002
---------------------------------------------------------------------
Gross Amortization
Carrying Accumulated Net Period
Amount Amortization Balance (Years)
----------------------------------------------------------------------------------------------------------------
Trademarks and tradenames $ 11,469 $ 2,167 $ 9,302 6-20
Publishing rights 23,571 5,290 18,281 7-20
Customer lists and relationships 46,548 8,976 37,572 10-20
Databases and content 27,400 5,986 21,414 5-20
Other identified intangibles 11,714 1,976 9,738 3-20
-------------- ------------------- -------------
$ 120,702 $ 24,395 $ 96,307
============== =================== =============
DECEMBER 31, 2001
---------------------------------------------------------------------
Gross Amortization
Carrying Accumulated Net Period
Amount Amortization Balance (Years)
----------------------------------------------------------------------------------------------------------------
Trademarks and tradenames $ 21,129 $ 2,792 $ 18,337 6-20
Publishing rights 23,572 4,611 18,961 7-20
Customer lists and relationships 46,548 7,039 39,509 10-20
Databases and content 27,400 4,479 22,921 5-20
Other identified intangibles 20,531 8,796 11,735 2-20
-------------- ------------------- --------------
139,180 27,717 111,463
Goodwill subject to amortization 82,367 6,624 75,743 10-20
-------------- ------------------- --------------
$ 221,547 $ 34,341 $ 187,206
============== =================== ==============
Total amortization expense of goodwill and identified intangible assets
amounted to $5,638,000 and $15,252,000 for the six months ended June 30,
2002 and the year ended December 31, 2001, respectively.
During the first half of 2002, the Company removed from its Balance Sheet
fully amortized other identified intangibles with a cost of approximately
$7,300,000.
-8-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
E. GOODWILL AND IDENTIFIED INTANGIBLE ASSETS (CONTINUED)
Identified intangible assets and goodwill not subject to amortization
consisted of the following (in thousands):
JUNE 30, 2002
-----------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net Balance
-------------------------------------------------------------------------------------------
Trademarks and tradenames $ 10,000 $ 1,193 $ 8,807
Goodwill 126,022 7,075 118,947
------------------- ------------------ ---------------
$ 136,022 $ 8,268 $ 127,754
=================== ================== ===============
DECEMBER 31, 2001
------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net Balance
-------------------------------------------------------------------------------------------
Goodwill $ 26,923 $ - $ 26,923
=================== ================== ===============
Anntual pretax amortization for identified intangible assets over the
next five years is estimated to be as follows (in thousands):
Year ending December 31,
2003 $ 11,411
2004 $ 11,154
2005 $ 10,756
2006 $ 9,774
2007 $ 8,902
The following table sumarizes the change in the carrying amount of
goodwill for the periods indicated (in thousands):
SIX MONTHS TWELVE MONTHS
ENDED ENDED
JUNE 30, DECEMBER 31,
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
Beginning balance $ 102,666 $ 61,272
Net change from acquisitions 14,487 46,729
Amortization expense - (5,002)
Reclassification of assembled workforce, net 1,834 -
Other (40) (333)
------------------ ------------------
Total $ 118,947 $ 102,666
================== ==================
-9-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. SEGMENT INFORMATION
The Company has three reportable segments: intellectual property (IP),
scientific and technology information (STI) and information technology
learning (ITL). The intellectual property segment, which includes
MicroPatent, Master Data Center, Liquent and IDRAC, provides a broad array
of databases, information products and complementary services for
intellectual property and regulatory professionals. The scientific and
technology information segment is CRC Press, which publishes professional
and academic books, journals, newsletters and electronic databases covering
areas such as life sciences, environmental sciences, engineering,
mathematics, physical sciences and business. The information technology
learning segment is Transcender, which is a leading online provider of IT
certification test preparation products.
Transfers between geographic areas are recorded at agreed upon prices and
intercompany revenue and profits are eliminated.
The following tables set forth the information for the Company's reportable
segments based on the nature of the products and services offered for the
periods indicated:
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- ------------------------------
SEGMENT SEGMENT
IP STI ITL IP STI ITL
----------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
Revenues from external customers $ 19,455 $ 12,864 $ 3,326 $ 10,569 $ 9,576 $ 5,169
EBITDA 6,204 3,509 1,187 4,128 1,942 2,540
Operating income 3,435 1,860 361 1,627 674 897
Segment assets excluding goodwill 136,068 53,393 12,157 105,322 52,857 16,046
Goodwill, net 69,479 5,868 43,600 31,902 150 44,615
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
----------------------------------- ------------------------------
SEGMENT SEGMENT
IP STI ITL IP STI ITL
----------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
Revenues from external customers $ 38,374 $ 23,920 $ 6,639 $ 18,674 $ 18,587 $ 12,297
EBITDA 12,970 6,073 2,066 6,695 4,204 6,500
Operating income 7,588 2,934 412 2,466 1,814 3,229
Segment assets excluding goodwill 136,068 53,393 12,157 105,322 52,857 16,046
Goodwill, net 69,479 5,868 43,600 31,902 150 44,615
-10-
INFORMATION HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
F. SEGMENT INFORMATION (CONTINUED)
A reconciliation of combined EBITDA for the intellectual property,
scientific and technology information, and information technology learning
segments to consolidated income before income taxes is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(IN THOUSANDS) 2002 2001 2002 2001
Total EBITDA for reportable segments $ 10,900 $ 8,610 $ 21,109 $ 17,399
Corporate expenses (970) (930) (1,982) (1,638)
Interest income, net 134 924 260 2,430
Depreciation and amortization (1) (2) (5,252) (5,417) (10,188) (9,902)
----------- ----------- ---------- -----------
Income before income taxes $ 4,812 $ 3,187 $ 9,199 $ 8,289
=========== =========== =========== ===========
(1) Depreciation and amortization includes $840,000 and $670,000 of
amortization of pre-publication costs, included in operations in cost
of sales for each of the three month periods ended June 30, 2002 and
2001, respectively.
(2) Depreciation and amortization includes $1,637,000 and $1,304,000 of
amortization of pre-publication costs, included in operations in cost
of sales for each of the six month periods ended June 30, 2002 and
2001, respectively.
G. COMPREHENSIVE INCOME
The following table is a reconciliation of the Company's net income to
comprehensive income:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
(IN THOUSANDS) 2002 2001 2002 2001
Net income $ 3,068 $ 1,904 $ 5,882 $ 4,908
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (74) (70) (81) (70)
----------- ----------- ---------- -----------
Comprehensive income $ 2,994 $ 1,834 $ 5,801 $ 4,838
=========== =========== ========== ===========
-11-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS PRESENTS A REVIEW OF THE COMPANY FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001. THIS REVIEW SHOULD BE READ IN
CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES PRESENTED
HEREIN AS WELL AS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS CONTAINED IN THE COMPANY'S 2001 ANNUAL REPORT ON FORM
10-K.
OVERVIEW
Impact of Acquisitions and Outlook
A key component of the Company's growth strategy is to pursue acquisitions in
attractive niche markets where opportunities exist to internally grow the
acquired companies' revenues and increase profitability through operating
efficiencies. Since beginning operations in January 1997, the Company has
completed fourteen strategic acquisitions, including eight in the intellectual
property area, five in scientific and technology information and one in the
information technology learning market, as well as some minor acquisitions. The
Company continues to actively seek acquisitions that will further the Company's
growth and operating strategies. As the Company acquires additional companies,
its sales mix, market focus, cost structure and operating leverage may change
significantly. Consequently, the Company's historical and future results of
operations reflect and will reflect the impact of acquisitions from the date of
acquisition, and period-to-period comparisons may not be meaningful in some
respects. Historical information for companies subsequent to their acquisition
may include integration and other costs that are not expected to continue in the
future.
CONSOLIDATED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
The Company reported net income of $3.1 million, or $0.14 per diluted common
share, for the second quarter of 2002 compared with $1.9 million, or $0.09 per
diluted common share, in the second quarter of 2001. Results for the second
quarter of 2001 include amortization of goodwill and certain other acquired
intangible assets of approximately $1.0 million, net of tax. Upon adoption of
Statement of Financial Accounting Standard (SFAS) No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS, the Company ceased amortizing goodwill as well as certain
other acquired intangible assets. Excluding amortization of these items net
income for the three months ended June 30, 2001 would have been $2.9 million, or
$0.14 per diluted common share, compared with $3.1 million, or $0.14 per diluted
common share, for the second quarter of 2002.
The overall increase in second quarter 2002 earnings over the prior year was due
primarily to increased gross profits in the Company's IP and STI segments,
including both a positive impact from businesses acquired in 2001 and growth in
core businesses, the impact of the accounting change pursuant to SFAS No. 142,
as well as a decrease in the Company's effective income tax rate. The positive
factors were partially offset by decreased earnings in the Company's ITL
segment, increased depreciation related to capital expenditures, increased
amortization of acquired intangible assets and lower interest income.
-12-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Net interest income (expense) decreased to $0.1 million from $0.9 million due
primarily to the use of cash from the secondary public stock offering to acquire
businesses during 2001 and 2002 (See Note D - ACQUISITIONS). Additionally, the
average interest rate decreased to 1.9% in the second quarter of 2002 from 4.5%
in the comparable prior year period.
The provision for income taxes as a percentage of pre-tax income for the three
months ended June 30, 2002 was 36.2%, compared to 40.3% for the second quarter
of 2001, due primarily to the adoption of SFAS No. 142, which eliminates
goodwill amortization, a significant amount of which was not tax-deductible.
Additionally, the Company was also subject to foreign taxes during the second
quarter of 2002 and 2001, which were immaterial in the periods.
SEGMENT REVIEW
INTELLECTUAL PROPERTY (IP)
IP revenue for the second quarter of 2002 increased 84.1%, or $8.9 million, to
$19.5 million compared to $10.6 million in the comparable period in 2001. The
increase in revenues includes $0.8 million from continued strong internal growth
in existing IP information and IP management businesses, $0.9 million of
revenues from Aurigin products acquired in 2002 and an increase of $7.2 million
in revenue at Liquent-IDRAC, primarily as a result of the acquisition of Liquent
in fiscal 2001. Operating income increased 111.1%, or $1.8 million, to $3.4
million for 2002, compared to $1.6 million of operating income in the prior year
quarter. The increase in operating income includes an increase of $1.0 million
at Liquent-IDRAC and an increase of $0.8 million in core IP information and IP
management businesses. IP cost of sales, expressed as a percentage of revenues,
increased from 27.5% to 30.2%, due primarily to the inclusion of Liquent in
fiscal 2002 results. Selling, general and administrative (S,G&A) expenses,
increased $3.8 million or 108.4%, due primarily to the expenses of Liquent and
Aurigin, businesses acquired in December 2001 and in May 2002, respectively.
Included in S,G&A expenses for the quarter ended June 30, 2002 is an unrealized
foreign exchange loss of $0.3 million, due primarily to the revaluation of U.S.
dollar denominated cash held by the Company's French subsidiary. IP depreciation
and amortization increased $0.3 million, or 10.8%, primarily as a result of the
amortization of intangible assets and depreciation of purchased equipment
related to the above acquisitions, partially offset by the impact of the
accounting change pursuant to SFAS No. 142.
SCIENTIFIC AND TECHNOLOGY INFORMATION (STI)
STI revenue for the second quarter of 2002 increased 34.3%, or $3.3 million, to
$12.9 million from $9.6 million in the comparable period in 2001. The revenue
increase includes an increase of $0.8 million in international reference product
sales at CRC Press and an increase of $2.0 million at Parthenon Press (acquired
in May 2001), including an increase of approximately $0.8 million in its medical
communication division. Operating income increased 176.1%, or $1.2 million, to
$1.9 million for 2002, compared to $0.7 million in the prior year quarter, due
primarily to contributions from increased revenues. STI cost of sales, expressed
as a percentage of revenues, increased from 28.9% to 35.0%, due primarily to
increased contributions from Parthenon Press, which has lower gross margins than
CRC Press. S,G&A expenses were relatively constant in the periods. STI
depreciation and amortization increased $0.2 million, or 35.1%, primarily as
result of depreciation on new software systems.
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INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
INFORMATION TECHNOLOGY LEARNING (ITL)
ITL revenue for the second quarter of 2002 decreased 35.7%, or $1.8 million, to
$3.3 million compared to $5.1 million in the comparable period in 2001. The
revenue decline is a result of continued difficult overall market conditions in
information technology and a lack of significant new certifications by major
software companies in recent months. Operating income in the second quarter of
2002 decreased 59.8%, or $0.5 million, to $0.4 million, compared to prior year
operating income of $0.9 million, as a result of the revenue decline. Cost of
sales, expressed as a percentage of revenues, was relatively constant in the
periods, while S,G&A expenses decreased by $0.4 million, or 18.5%, as a result
of cost reduction initiatives. ITL depreciation and amortization decreased by
50%, or $0.8 million, based on the impact of the accounting change pursuant to
SFAS No. 142.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
The Company reported net income of $5.9 million, or $0.27 per diluted common
share, for the first six months of 2002 compared with $4.9 million, or $0.23 per
diluted common share, in the first six months of 2001. Results for the first
half of 2001 include amortization of goodwill and certain other acquired
intangible assets of approximately $1.8 million, net of tax. Upon adoption of
SFAS No. 142, the Company ceased amortizing goodwill as well as certain other
acquired intangible assets. Excluding amortization of these items net income for
the six months ended June 30, 2001 would have been $6.7 million, or $0.31 per
diluted common share, compared with $5.9 million, or $0.27 per diluted common
share, for the first half of 2002.
The overall increase in earnings in the first six months of 2002 over the prior
year period was due primarily to increased gross profits in the Company's IP and
STI segments, including both a positive impact from businesses acquired in 2001
and growth in core businesses, and a decrease in the Company's effective income
tax rate. The positive factors were partially offset by decreased earnings in
the Company's ITL segment and lower interest income. Depreciation and
amortization was relatively constant in the periods with increases in
depreciation related to capital expenditures and amortization of acquired
intangible assets, offset by the effect of the adoption of SFAS No. 142.
Net interest income (expense) decreased to $0.3 million from $2.4 million due
primarily to the use of cash from the secondary public stock offering to acquire
businesses during 2001 and 2002 (See Note D - ACQUISITIONS). Additionally, the
average interest rate decreased to 1.9% in the first six months of 2002 from
5.0% in the comparable prior year period.
The provision for income taxes as a percentage of pre-tax income for the six
months ended June 30, 2002 was 36.1%, compared to 40.8% for the first six months
of 2001, due primarily to the adoption of SFAS No. 142, which eliminates
goodwill amortization, a significant amount of which was not tax-deductible.
Additionally, the Company was also subject to foreign taxes during the first
half of 2002 and 2001, which were immaterial in the period.
-14-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
SEGMENT REVIEW
INTELLECTUAL PROPERTY (IP)
IP revenue for the first six months of 2002 increased 105.5%, or $19.7 million,
to $38.4 million compared to $18.7 million in the comparable period in 2001. The
increase in revenues includes $1.8 million from continued strong internal growth
in existing IP information and IP management businesses, $0.9 million of
revenues from Aurigin products acquired in 2002 and an increase of $17.0 million
in revenue at Liquent-IDRAC, primarily as a result of the acquisition of Liquent
in fiscal 2001. Operating income increased 207.7%, or $5.1 million, to $7.6
million for 2002, compared to $2.5 million of operating income in the prior year
period. The increase in operating income includes an increase of $2.8 million at
Liquent-IDRAC, an increase of $1.6 million in core IP information and IP
management businesses, and a decrease of operating expenses of $0.7 million at
LPS. IP cost of sales, expressed as a percentage of revenues, increased from
28.4% to 29.6%, due primarily to the inclusion of Liquent in fiscal 2002
results. SG&A expenses, excluding costs of Liquent, increased $0.6 million, or
9.2%, primarily as a result of expenses related to Aurigin and increases at
IDRAC (acquired in March 2001), partially offset by decreased spending levels in
the LPS Group. IP depreciation and amortization increased $1.2 million, or
27.2%, primarily as a result of the amortization of intangible assets and
depreciation of purchased equipment related to acquisitions, partially offset by
the impact of the accounting change pursuant to SFAS No. 142.
SCIENTIFIC AND TECHNOLOGY INFORMATION (STI)
STI revenue for the first six months of 2002 increased 28.7%, or $5.3 million,
to $23.9 million from $18.6 million in the comparable period in 2001. The
revenue increase includes an increase of $1.0 million in reference product sales
at CRC Press and an increase of $4.0 million at Parthenon Press, which was
acquired in May 2001. Operating income increased 61.8%, or $1.1 million, to $2.9
million for 2002, compared to $1.8 million in the prior year period, due
primarily to contributions from increased revenues. STI cost of sales, expressed
as a percentage of revenues, increased from 29.7% to 33.9%, due primarily to
increased contributions from Parthenon Press, which has lower gross margins than
CRC Press. S,G&A expenses increased $1.2 million, or 11.9%, due primarily to the
acquisition of Parthenon Press. STI depreciation and amortization increased $0.4
million, or 38.2%, primarily as result of amortization of Parthenon Press
intangible assets and depreciation on new software systems.
INFORMATION TECHNOLOGY LEARNING (ITL)
ITL revenue for the first six months of 2002 decreased 46.0%, or $5.7 million,
to $6.6 million compared to $12.3 million in the comparable period in 2001. The
revenue decline is a result of continued difficult overall market conditions in
information technology and a lack of significant new certifications by major
software companies in recent months. Operating income in the first half of 2002
decreased 87.2%, or $2.8 million, to $0.4 million, compared to prior year
operating income of $3.2 million, as a result of the revenue decline. Cost of
sales, expressed as a percentage of revenues, was relatively constant in the
periods, while S,G&A expenses decreased by $0.9 million, or 18.3%, as a result
of cost reduction initiatives. ITL depreciation and amortization decreased by
49.4%, or $1.6 million, based primarily on the impact of the accounting change
pursuant to SFAS No. 142.
-15-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
In the first quarter of 2000, the Company sold 4,500,000 shares of its common
stock in a public offering and received approximately $155 million of net
proceeds. As of June 30, 2002, proceeds of approximately $147 million have been
used from this offering to fund acquisitions in the Company's information and
publishing businesses. See Note D - ACQUISITIONS for details on fiscal 2002 and
2001 acquisitions. The remaining net proceeds will be used to finance future
acquisitions and for general corporate purposes. The Company currently does not
have any other agreements, arrangements or understandings with respect to any
prospective material acquisitions. Pending such uses, the proceeds will be
invested in short-term, investment grade securities.
On September 24, 1999, the Company entered into a seven-year revolving credit
facility in an amount not to exceed $50,000,000 initially, including a
$10,000,000 sub-limit for the issuance of standby letters of credit (the Credit
Facility). Total commitments under the Credit Facility shall be permanently
reduced to $45,000,000 at the end of the third year, $37,500,000 at the end of
the fourth year, $25,000,000 at the end of the fifth year and $12,500,000 at the
end of the sixth year. The proceeds from the Credit Facility are to be used to
fund acquisitions, to meet short-term working capital needs and for general
corporate purposes.
Borrowings under the Credit Facility bear interest at either the higher of the
bank's prime rate and one-half of 1% in excess of the overnight federal funds
rate plus a margin of 0.50% to 1.25% or the Eurodollar Rate plus a margin of
1.5% to 2.25%, depending on the Company's ratio of indebtedness to earnings
before interest, taxes, depreciation and amortization. The Company also pays a
commitment fee of 0.375% on the unused portion of the Credit Facility. As of and
for the quarter ended June 30, 2002, the Company had no outstanding borrowings
under the Credit Facility.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios related to fixed charge coverage, leverage and interest
coverage, in addition to certain other covenants. As of June 30, 2002, the
Company was in compliance with all covenants. The Credit Facility is secured by
a first priority perfected pledge of all notes and capital stock owned by the
Company's subsidiaries and a first priority perfected security interest in all
other assets of the Company and its subsidiaries, subject to certain exceptions.
Obligations under the Credit Facility will be guaranteed by the Company and its
subsidiaries. The Credit Facility also prohibits the Company from incurring
certain additional indebtedness, limits certain investments, mergers or
consolidations and restricts substantial asset sales, and dividends.
Cash and equivalents, including short-term investments, totaled $52.4 million at
June 30, 2002, compared to $56.4 million at December 31, 2001. Excluding cash,
cash equivalents and short-term investments, the Company had a working capital
deficit of $(7.8) million at June 30, 2002 compared to a working capital deficit
of $(6.6) million at December 31, 2001. The Company receives patent annuity
payments and subscription payments in advance and is, therefore, expected to
maintain very low or negative working capital balances, excluding cash. Included
in current liabilities at June 30, 2002 are obligations related to patent
annuity payments and deferred revenue of approximately $41.1 million.
-16-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Cash generated from operating activities was $13.6 million for the six months
ended June 30, 2002, derived from net income of $5.9 million plus non-cash
charges of $9.4 million less a decrease in operating assets and liabilities of
$1.7 million. The overall decrease in operating assets and liabilities is
primarily due to the timing of and the increase in the number of patent annuity
payments, and an increase in income tax liabilities offset primarily by a
decrease in accrued expenses related to acquisition deal costs for Liquent.
Cash used in investing activities was $15.0 million for the six months ended
June 30, 2002 primarily due to acquisition costs for Aurigin of $14.0 million
(See Note D - ACQUISITIONS). Spending related to capital expenditures, including
pre-publication costs and capitalized software, was $4.2 million in the first
half of 2002. Excluding acquisitions of businesses, the Company's existing
operations are not capital intensive.
Cash generated from financing activities was $0.5 million for the six months
ended June 30, 2002, primarily due to net cash proceeds received from the
issuance of common stock from stock option exercises. The Company has no
outstanding debt obligations as of June 30, 2002 related to the Credit Facility.
The Company believes that funds generated from operations, together with cash on
hand and borrowings available under its Credit Facility will be sufficient to
fund the cash requirements of its existing operations for the foreseeable
future. The Company currently has no commitments for material capital
expenditures or agreements with respect to any prospective material
acquisitions. The Company may choose to obtain additional capital or financing
to consummate future acquisitions. Future operating requirements and capital
needs may be subject to economic conditions and other factors, many of which are
beyond the Company's control.
SEASONALITY
The Company's business is somewhat seasonal, with revenues typically reaching
slightly higher levels during the third and fourth quarters of each calendar
year, based on publication schedules and other factors. In 2001, 28% of the
Company's revenues were generated during the fourth quarter with the first,
second and third quarters accounting for 23%, 24% and 25% of revenues,
respectively. In addition, the Company may experience fluctuations in revenues
from period to period based on the timing of acquisitions and new product
launches.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material impact on the results
of operations presented herein.
-17-
INFORMATION HOLDINGS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are disclosed in the Company's 2001 Annual
Report on Form 10-K. There have been no material changes to these policies
during the first six months of fiscal 2002.
FORWARD-LOOKING STATEMENTS
Certain statements in this report contain forward-looking statements, including,
without limitation, statements relating to the Company's plans, strategies,
objectives, expectations, and intentions that are made pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Readers are cautioned that forward-looking statements contained in this Form
10-Q should be read in conjunction with the Company's disclosures under the
heading IMPORTANT FACTORS RELATING TO FORWARD-LOOKING STATEMENTS contained in
the Company's 2001 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK - The Company may be subject to market risks arising from
changes in interest rates. Interest rate exposure results from changes in the
Eurodollar or the prime rate, which are used to determine the interest rate
applicable to borrowings under the Credit Facility. As of June 30, 2002, the
Company had no outstanding borrowings under the Credit Facility.
FOREIGN CURRENCY EXCHANGE RATE RISK - The financial statements of the Company's
foreign subsidiaries are translated from the local currency into U.S. dollars.
Assets and liabilities are translated using current exchange rates, except
certain accounts of subsidiaries whose functional currency is the U.S. dollar
and translation adjustments are accumulated in a separate component of
stockholders' equity. Revenue and expenses are translated at average monthly
exchange rates, and translation adjustments are charged and credited to income.
As such, the Company's operating results are affected by fluctuations in the
value of the U.S. dollar compared to the British pound and the Euro. Foreign
exchange translation losses for the three and six months ended June 30, 2002
were $299,000 and $134,000, respectively.
A subsidiary of the Company routinely enters into forward contracts to acquire
various international currencies in an effort to hedge foreign currency
transaction exposures of its operations. Such forward contracts have been
designated as hedges for future annual patent payments to related international
regulatory agencies. At June 30, 2002, the subsidiary of the Company had entered
into forward contracts to acquire various international currencies, all having
maturities of less than seven months, aggregating approximately $15,735,000.
Realized gains and losses relating to the forward contracts were immaterial for
the quarter ended June 30, 2002.
The Company does not use derivative financial instruments for trading purposes.
-18-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following report relates to the Company's secondary public stock
offering:
Commission file number of registration statement: 333-30202
Effective Date: March 14, 2000
Expenses incurred through June 30, 2002:
Underwriting discounts $ 8,595,000
Other expenses $ 522,000
Total expenses $ 9,117,000
Application of proceeds through June 30, 2002:
Acquisitions of businesses, titles and equity interests $ 147,476,000
Temporary investments $ 7,524,000
(Commercial paper and money market funds)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's Annual Meeting of Stockholders on April 29, 2002 a total of
18,061,777 shares, or 83% of outstanding shares, were represented and
entitled to vote.
(a) The following members were elected to the Board of Directors:
Total Vote For Total Vote Withheld
Each Director From Each Director
-------------- -------------------
Michael E. Danzinger 17,894,867 166,910
David R. Haas 17,895,612 166,165
Sidney Lapidus 17,874,228 187,549
David E. Libowitz 17,826,099 235,678
John R. Purcell 17,895,412 166,365
Mason P. Slaine 16,383,241 1,678,536
(b) The following proposal was approved:
The amendment to the 1998 Stock Option Plan.
Affirmative Votes 16,618,405
Negative Votes 1,431,835
Abstain 11,534
(c) The following proposal was approved:
Ratification of Ernst & Young LLP as the independent public accountants for
the Company for the 2002 fiscal year.
Affirmative Votes 17,827,391
Negative Votes 233,556
Abstain 830
-19-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the three months
ended June 30, 2002.
(c) Exhibits
10.1 Employment agreement, dated as of April 30, 2002, between
Information Holdings Inc. and Mason Slaine
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
-20-
SIGNATURE
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.
INFORMATION HOLDINGS INC.
Date: August 14, 2002 By:/s/ Vincent A. Chippari
----------------------
Vincent A. Chippari
Executive Vice President and Chief Financial
Officer
Signing on behalf of the registrant and
as principal financial and accounting officer
-21-