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UNITED STATES
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 March 31, 2004
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: 000-33343
AQUIS COMMUNICATIONS GROUP, INC.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 22-3281446
- ----------------------------------------------------------- ------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1719A Route 10, Suite 300, Parsippany, NJ 07054
- ----------------------------------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 560-8000
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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.
Yes |X| No |_|
Indicate by check mark if the registrant is an accelerated filer (under Exchange
Act Rule 12b-2)
Yes | | No |X|
As of May 12, 2004 there were 179,611,939 shares of the Registrant's Common
Stock outstanding.
-1-
INDEX TO FINANCIAL STATEMENTS
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
Part I Financial Information:
Item 1 - Financial Statements:
Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 ............................................... 3
Consolidated Statements of Operations for the Three Month Periods ended March 31, 2004 and 2003.................... 4
Consolidated Statements of Cash Flows for the Three Month Periods ended March 31, 2004 and 2003.................... 5
Notes to Consolidated Financial Statements......................................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 9
Item 3 - Quantitative and Qualitative Disclosures About Market Risks................................................... 14
Item 4 - Controls and Procedures....................................................................................... 14
Part II Other Information:
Item 1 - Legal Proceedings............................................................................................. 15
Item 2 - Changes in Securities and Use of Proceeds..................................................................... 15
Item 3 - Default Upon Senior Securities................................................................................ 15
Item 4 - Submission of Matters to a Vote of Security Holders........................................................... 15
Item 5 - Other Information............................................................................................. 15
Item 6 - Exhibits and Reports on Form 8-K.............................................................................. 15
Signatures............................................................................................................. 17
-2-
Part I - Financial Information
Item 1 - Financial Statements
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE INFORMATION)
March 31, December 31,
2004 2003
--------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................................ $ 675 $ 671
Accounts receivable (net of allowances of $260 and $266, respectively) ........................... 279 271
Inventory, net ................................................................................... 445 355
Prepaid expenses and other current assets ........................................................ 303 247
------------ ------------
Total current assets ......................................................................... 1,702 1,544
Property and equipment, net ........................................................................ 1,898 2,238
Intangible assets, net ............................................................................. -- --
Deferred charges and other assets .................................................................. 2 --
------------ ------------
Total assets ............................................................................... $ 3,602 $ 3,782
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current maturities of long term debt ............................................................. $ 126 $ 133
Notes payable .................................................................................... 572 565
Accounts payable and accrued expenses ............................................................ 1,232 1,421
Deferred revenue ................................................................................. 290 302
Customer deposits ................................................................................ 165 173
------------ ------------
Total current liabilities .................................................................... 2,385 2,594
Long term debt ..................................................................................... 12,301 12,309
Series B Redeemable 10% Preferred Stock, $0.01 par value, 301 shares authorized,
300.01 shares issued and outstanding at March 31, 2004 and December 31, 2003 ....................... 540 540
------------ ------------
Total liabilities .................................................................................. 15,226 15,443
------------ ------------
Commitments and contingencies
Stockholders' equity (deficiency):
Series A Convertible Preferred Stock, $0.01 par value, 200,000 shares authorized, none issued
and outstanding at March 31, 2004 and December 31, 2003 .......................................... -- --
Common stock, $0.01 par value, 451,000,000 shares authorized, 179,611,939 shares issued and
outstanding at March 31, 2004 and December 31, 2003 .............................................. 184 184
Additional paid-in capital ....................................................................... 17,883 17,883
Accumulated deficit .............................................................................. (29,691) (29,728)
------------ ------------
Net stockholders' equity (deficiency) ............................................................ (11,624) (11,661)
------------ ------------
Total liabilities and stockholders' equity (deficiency) .................................... $ 3,602 $ 3,782
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
-3-
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED; IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
Three Months Ended March 31,
-----------------------------
2004 2003
-------------- ------------
Revenues:
Paging services, rent and maintenance ............................................................ $ 2,479 $ 3,023
Equipment sales .................................................................................. 175 65
------------ ------------
Total revenues .............................................................................. 2,654 3,088
------------ ------------
Operating expenses:
Cost of paging services .......................................................................... 1,122 1,429
Cost of equipment sold ........................................................................... 120 20
Selling and marketing ............................................................................ 291 399
General and administrative ....................................................................... 746 885
Depreciation and amortization .................................................................... 301 428
Provision for doubtful accounts .................................................................. 52 155
------------ ------------
Total operating expenses .................................................................... 2,632 3,316
------------ ------------
Operating income (loss) ............................................................................ 22 (228)
Interest income(expense), net ...................................................................... 15 3
Gain (loss) on sale of equipment ................................................................... -- 115
------------ ------------
Income (loss) before provision for income taxes .................................................... 37 (110)
Provision for income taxes ......................................................................... -- --
------------ ------------
Net income (loss) .................................................................................. 37 (110)
Preferred stock dividends .......................................................................... -- --
------------ ------------
Income (loss) attributable to common stockholders .................................................. $ 37 $ (110)
------------ ------------
------------ ------------
NET INCOME (LOSS) PER COMMON SHARE:
Basic and diluted ................................................................................ $ 0.000 $ (0.001)
Weighted average common shares outstanding ......................................................... 179,611,939 179,611,939
The accompanying notes are an integral part of these financial statements.
-4-
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN THOUSANDS)
Three Months Ended March 31,
-----------------------------
2004 2003
-------------- ------------
Cash flows from operating activities:
Net loss ......................................................................................... $ 37 $ (110)
Adjustments to reconcile net loss to net cash provided by (used by) operating activities:
Depreciation and amortization .................................................................... 301 428
Provision for doubtful accounts .................................................................. 52 155
Inventory valuation allowance .................................................................... 14 --
Capitalized interest ............................................................................. 7 7
(Gain)loss on sale of property and equipment .................................................... -- (115)
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable ........................................................................... (60) 126
Inventory ..................................................................................... (181) (158)
Prepaid expenses and other current assets ..................................................... (56) (200)
Accounts payable and accrued expenses ......................................................... (189) (86)
Deferred revenues and customer deposits ....................................................... (20) (23)
------------ ------------
Net cash provided by (used by) operating activities .............................................. (95) 24
------------ ------------
Cash flows from investing activities:
Acquisition of property, equipment and licenses .................................................. (28) (20)
Sale of property and equipment ................................................................... 142 157
------------ ------------
Net cash provided by investing activities ........................................................ 114 137
------------ ------------
Cash flows from financing activities:
Payments made on long term debt .................................................................. (15) (421)
Deferred financing and stock registration costs .................................................. -- --
------------ ------------
Net cash used by financing activities ............................................................ (15) (421)
------------ ------------
Net increase (decrease) in cash and cash equivalents ............................................... 4 (260)
Cash and cash equivalents - beginning of period .................................................... 671 1,259
------------ ------------
Cash and cash equivalents - end of period .......................................................... $ 675 $ 999
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
-5-
AQUIS COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED; IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS:
Aquis Communications Group, Inc. ("Aquis" or the "Company") is a
holding company, incorporated in the State of Delaware. Through its operating
companies, Aquis provides traditional one-way wireless alpha and numeric
messaging services in portions of nine states in the Northeast and Mid-Atlantic
regions of the United States, from Boston to Virginia, as well as the District
of Columbia. The Company also resells nationwide and regional messaging
services, offers alpha dispatch, news and other messaging enhancements, and
offers data circuits and consulting services. Its customers include businesses,
government agencies, hospitals, individuals and resellers.
The accompanying statements reflect all adjustments considered
necessary by management to present fairly the consolidated financial position as
of March 31, 2004 and December 31, 2003, and the consolidated results of
operations and the related consolidated cash flows for the three months ended
March 31, 2004 and 2003. The balance sheet for the end of the preceding fiscal
year has been derived from the Company's audited balance sheet at December 31,
2003 contained in the Company's Form 10K and is provided for comparative
purposes. All other financial statements are unaudited. In management's opinion,
all adjustments have been made which include only normal recurring adjustments
necessary to fairly present the financial position, results of operations and
changes in cash flows for all periods presented. All material intercompany
accounts and transactions have been eliminated in consolidation. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year. Certain prior period amounts have
been reclassified to conform to the current period presentation.
Footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted in
accordance with the published rules and regulations of the Securities and
Exchange Commission. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Form
10K for the most recent fiscal year.
Effective on December 31, 2003, Aquis and FINOVA Capital Corporation,
the Company's primary lender and equity holder, entered into a Second Amendment
to the Second Amended and Restated Loan Agreement, further amending the loan
agreements between the Company and its senior secured lender and controlling
stockholder. The effect of this amendment was to provide to FINOVA quarterly
payments of debt service in amounts that may vary from those specified under the
prior agreement, and to eliminate all prior financial covenants. The maturity
dates of the related notes remained unchanged. The quarterly payment amount is
determinable based on the Company's cash balances in excess of $350, and is due
on the first day of each calendar quarter. FINOVA gained control of Aquis
effective on August 12, 2002 after receiving FCC approval. At that time,
agreements took effect resulting in the restructuring of Aquis' debt and equity
and a change in control of the Company.
Aquis' consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. However, Aquis has a history of
losses before extraordinary items, continuing working capital deficits and the
Company's common stock was de-listed from the NASDAQ SmallCap Market and now
trades on the OTC Bulletin Board under the symbol AQIS.OB. These factors have
contributed to the technical and functional termination of the right or ability
of Aquis to obtain funding under its Common Stock Purchase Agreement with
Coxton, and the Company's past defaults under the loan agreements with FINOVA
and AMRO. In addition, the Company's subsequent loan agreement modifications
with FINOVA eliminated the Company's ability to raise additional capital through
the sale of equity interests. The Company's management and its auditors believe,
and have disclosed, that these and other factors raise doubt Aquis' ability to
continue as a going concern. With these characteristics, it is not presently
expected that additional significant third party funding will be available in
the foreseeable future.
Aquis operates in a highly competitive wireless messaging marketplace
in which at least three of the industry's largest wireless messaging operators
have sought bankruptcy protection as a result of a shrinking market and intense
price competition. Aquis' two largest competitors, Metrocall and Arch Wireless
have emerged from bankruptcy, and recently announced their intention to complete
a merger of the two organizations during the current year in an effort to
realize economies of scale and other business synergies to gain or maintain
competitive advantages. Aquis can provide no assurance that its ability to
effectively gain market share in a declining wireless messaging marketplace at
sufficiently profitable margins, its ability to generate sufficient cash from
operations to meet operating obligations in a timely manner, its ability to
ensure continuing supplies of goods and services from key vendors, or its
ability to continue to limit or reduce operating costs and capital requirements
will be adequate to ensure an ability to continue as a going concern. In the
event that cash flow needs cannot be met or that future defaults under any of
its key operating agreements, if any, cannot be cured, or if any of its
outstanding debt cannot be satisfied when due, the Company would consider
appropriate responses, which could include filing a request for legal protection
from its creditors.
-6-
2. INTANGIBLE ASSETS AND DEFERRED CHARGES:
Aquis reviews its assets for impairment when events or changes in
circumstances indicate that such costs may not be recoverable in the normal
course of business. Accordingly, during prior years, Aquis recognized charges
for impairment of the carrying value of its FCC licenses, State certificates,
deferred charges and its Midwest wireless messaging assets as required under
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
and related standards. Including the effect of the impairment recorded during
the year ended December 31, 2003, the carrying value of the Company's intangible
assets have been fully written off, although the Company continues to hold and
operate under the related licenses and certificates. As a result of these past
write downs, expenses for the amortization of intangible assets for the
three-month period ended March 31, 2004 have been eliminated.
3. LONG-TERM DEBT:
Effective on December 31, 2003, Aquis and FINOVA, the Company's primary
lender and equity holder, entered into a Second Amendment to the Second Amended
and Restated Loan Agreement, further amending their loan agreements. The effect
of this amendment was to provide to FINOVA quarterly payments of debt service in
amounts that may vary from those specified under the prior agreement, and to
eliminate all prior financial covenants. The maturity dates of the related notes
remained unchanged. The quarterly payment is determinable based on the Company's
cash balances in excess of $350, and is due on the first day of each calendar
quarter. The initial payment in connection with these modifications was made in
December 2003 in the amount of $754. Aquis paid $110 to FINOVA in April 2004
based on its cash position as of March 31, 2004.
Aquis' obligations for principal and interest are summarized at March
31, 2004 and December 31, 2003 as follows:
Interest Scheduled Original Face Recorded Recorded
Rate Maturity Amount 2002 Liability 2004 Liability 2003
---- --------- ----------- -------------- --------------
Tranche A Senior secured promissory note P + 3.5% June 2006 $7,000 $7,586 $7,586
Tranche B Senior secured promissory note 15% June 2006 $2,000 3,183 3,183
Junior unsecured note payable 10% June 2008 $1,000 1,597 1,597
Unsecured note payable and capitalized interest 6% Nov 2004 $500 572 565
Vehicle loans 0% Sept 2007 $54 61 65
Other installment obligations various various various -- 11
------------------------------
12,999 13,007
Classified as currently payable (698) (698)
------------------------------
Long-term maturities, net of current portion $12,301 $12,309
------------------------------
------------------------------
The Tranche A senior secured promissory note bears interest at an
interest rate set at the greater of Citibank's Corporate Base Rate plus 3.5% or
9%. Debt service payments due under this note were modified effective December
31, 2003 and are based on the Company's cash balances in excess of $350, as
noted above. The Tranche B subordinated note requires that interest is accrued
at a rate of 15%, but is not required to be paid until maturity. This Tranche B
note may be cancelled if the Tranche A note is paid in full by March 31, 2006.
FINOVA also received Aquis Series A Convertible Preferred Stock and Common Stock
Purchase Warrants that provide an equity interest of 79.99%. Warrants for the
purchase of 5% would expire if the $7,000 note is paid in full by March 31,
2006, reducing FINOVA's equity interest to 74.99%. A minor portion approximating
2.5% of the debt and equity provided to FINOVA under the restructuring has been
transferred to an unaffiliated lending partner of FINOVA.
In exchange for its prior-issued warrants and its convertible debenture
in the principal amount of $2,000, AMRO was issued Aquis Series A Convertible
Preferred Stock and warrants that provide a 9.9% equity interest and a new note
in the principal amount of $1,000 that will accrue interest at 10% until the
FINOVA debt is paid in full, at which time Aquis will be required to make
quarterly cash payments of current interest. The principal balance of $1,000 and
interest accrued through the date of full payment of FINOVA will become due and
payable two years after maturity of the FINOVA note. Finally, the holders of the
prior-outstanding 7.5% redeemable preferred stock exchanged those shares for
shares of a new issue, Series B Redeemable Preferred Stock, without conversion
rights, valued at $300, and accruing dividends at 10% through the date that the
AMRO note is paid in full. This issue will become redeemable at its face value
plus accrued unpaid dividends two years following repayment of the AMRO debt,
with current cash dividends payable during that two year period leading to the
redemption date.
Aquis has recorded the debt issued pursuant to the restructuring in
accordance with the requirements of SFAS 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." Accordingly, the debt recorded in
connection with this transaction included obligations for future cash payments
of principal and interest to the extent that the total of such cash flows did
not exceed the principal amount of the debt cancelled. All of the Company's
assets continue to serve as collateral for the secured notes under the
restructuring.
-7-
As noted above, one of the effects of the Second Amendment to the
Second Amended and Restated Loan was to eliminate all prior financial covenants.
However, other events of default specified in our agreements have not been
eliminated and remain in effect. These may include, but are not limited to,
matters related to insolvency, impairment of our ability to operate under the
terms of our communications or business licenses, seizure of our operating
assets, significant interruptions in the operations of our wireless messaging
systems and facilities, or the entry of significant judgements against Aquis. If
we fail to cure any such default condition within FINOVA's specifications, we
will be in default and FINOVA will have the right to accelerate payment. Should
such a demand be made, Aquis' present financial and other resources are not
expected to be sufficient to satisfy such a demand. The Company would then
consider available alternatives, including a voluntary filing for protection
from its creditors under the US Bankruptcy Code. In the event of a bankruptcy
filing, it is unlikely that any assets would remain for distribution to any
creditors or equity holders other than our senior lender.
4. NET LOSS PER COMMON SHARE:
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share", which requires a dual presentation of basic and
diluted earnings per share ("EPS"). Basic EPS is based on the weighted average
number of shares outstanding during the periods presented. Diluted EPS reflects
the potential dilution that could occur if options, warrants, convertible
securities or other contracts requiring the issuance of common stock were
converted into common stock during the periods presented. The Company has not
presented diluted EPS because the effect would be anti-dilutive.
5. STOCK-BASED COMPENSATION:
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock plans. Accordingly, no compensation expense has been
recognized under its stock-based compensation plans. Equity securities issued to
non-employees, if and when issued, are accounted for at fair market value.
Further, the Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure", amending SFAS No. 123,
"Accounting for Stock-Based Compensation". SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation and amends prior disclosure guidance. SFAS 148
also requires prominent disclosures in both annual and interim financial
statements about the method of accounting for such compensation and the effects
of the method used on reported results. The provisions of SFAS 148 are generally
effective for fiscal years ending after December 15, 2002. No such employee
compensation was issued during 2003 or 2002.
6. SUPPLEMENTAL CASH FLOW DATA:
The table below provides supplemental information to the consolidated
statements of cash flows:
March 31,
2004 2003
--------------- --------------
Cash paid for interest.................... $ 2 $ 2
Cash paid for taxes....................... $ 7 $ _
Aquis also paid $110 to FINOVA on April 1, 2004 that was applied against
the outstanding balance of the Tranche A note. In accordance with SFAS 15 and as
discussed elsewhere in these footnotes, the recorded balance of that liability
includes the note principal and related interest-based cash flow requirements.
That payment of $110 to FINOVA was fully characterized as part of the Company's
interest-based obligations under this loan.
-8-
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Future revenues, costs, product mix and new product acceptance are all
influenced by a number of factors that are inherently uncertain and difficult to
predict. Therefore, no assurance can be given that financing for such
investments will be available, nor that the Company's operations will generate
positive cash flows sufficient to allow us to implement our business plan.
This quarterly report on Form 10-Q contains forward-looking statements
made by the Company's management that are based on current expectations,
estimates and projections about the industries in which the Company operates and
management's beliefs and assumptions. In addition, other written or oral
statements that constitute forward-looking statements may be made by or on
behalf of the Company. These forward-looking statements are subject to risks and
uncertainties related to the availability of cash or credit as may be required
for the continuation of business operations, reliance on other messaging
companies that have also experienced significant financial challenges, price and
technological competition, satellite or other communications systems failures,
dependence on key management personnel and vendors, regulatory conditions,
litigation, compliance with requirements of debt and other agreements and other
factors that may effect the implementation of our business plans. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Overview
We operate two regional one-way wireless messaging systems providing
wireless alpha and numeric messaging services in portions of nine states,
principally in the Northeast and the Mid-Atlantic regions of the United States,
from Virginia to Boston and including the District of Columbia. Our networks
utilize either 900MHz or VHF frequencies under licenses subject to FCC
regulations. We also resell nationwide and regional services offer alpha
dispatch, news, data circuits, telecommunications consulting services and other
messaging enhancements. Customers include businesses, government agencies,
hospitals, individual users and resellers. Our business strategy and operating
focus has developed from one of growth through strategic acquisitions to that of
integrating acquired operations, achieving operating efficiencies, focusing on
our core market areas and internal growth. Since selling our Midwest wireless
messaging operations and completing the restructuring of our debt and equity in
2002, we have focused our efforts on our sales and customer support operations
and structure, and have continued efforts to optimize our communications
infrastructure both operationally and from a cost-benefit standpoint.
Throughout its development Aquis has incurred operating losses. Since
the 1998 acquisition of paging assets from Bell Atlantic Paging, we have
consistently shown working capital deficits, defaulted under our loan
agreements, had our common stock moved from the NASDAQ SmallCap Market to the
OTC Bulletin Board, and have experienced impairment of our ability to secure any
significant funding through third party lenders. As a result, an equity line of
credit previously available to us was functionally terminated. These
characteristics have led to various modifications of our agreements with our
significant lenders. This has also led to an auditor's opinion on our financial
results and position for the year ended December 31, 2003 that includes a
qualification arising from substantial doubt of Aquis' ability to continue to
operate as a going concern, although our financial statements continue to be
prepared on a going concern basis.
Our financial restructuring took effect in 2002, resulting in a change
in control of Aquis and changes in our debt and equity positions. Accordingly,
our senior secured lender, FINOVA Capital Corporation, acquired voting control
of Aquis and rights to appoint controlling membership to our Board of Directors.
In addition, AMRO International, S.A., an unsecured lender, acquired a
non-controlling equity interest in our Company, and holders of our 7.5%
Redeemable Preferred Stock exchanged those shares for shares of Aquis' Series B
10% Redeemable Preferred Stock. As a result, outstanding debt totaling
approximately $35 million was reduced to approximately $10 million and we
recognized in 2002 an extraordinary gain on this troubled debt restructuring of
more than $22 million. Before recognition of this gain, results of operations
for 2002 produced a loss of $3.27 million. Most recently, further modification
of our loan agreement with FINOVA Capital Corporation, our senior secured lender
and majority shareholder, became effective on December 31, 2003. This
modification eliminated all financial covenants and eliminated previously
scheduled payments of principal and interest. In exchange, we agreed to make
quarterly payments to FINOVA in the amount of our total available cash balances
less $350,000, which may be retained for use in our business.
We operate in a declining but highly competitive wireless
messaging marketplace in which at least three of the industry's largest paging
operators have sought bankruptcy protection as a result of a shrinking market
and intense price competition. Industry consolidation is continuing, as
evidenced by the recently announced merger plans of Metrocall and Arch Wireless,
the industry's two largest competitors. In a prior business combination,
Metrocall acquired Weblink Wireless, another significant wireless messaging
enterprise. In order to continue to compete, we have designed our business plans
and sales strategies to respond to the challenges of our industry, our service
markets and our financial condition. However, we can provide no assurance that
our financial restructuring, our ability to effectively gain market share in a
consolidating and declining paging marketplace at sufficiently profitable
margins, our ability to generate sufficient cash from operations to meet
operating obligations in a timely manner, our ability to continue to procure
continuing supplies of goods and services from key vendors at appropriate
pricing, or our ability to continue to limit or reduce operating costs and
capital requirements will be adequate to ensure any ability to continue as a
going concern. In the event that cash flow needs cannot be met or that future
defaults, if any, cannot be cured and demand is made for payment of the
outstanding debt, management does not believe that its resources will be
sufficient to meet such a demand. Under such circumstances we would consider
appropriate responses which could include filing a request for legal protection
from our creditors. It is management's belief, however, that our business
strategy and focus as a niche provider of one-way wireless messaging services in
our Northeast and Mid-Atlantic regional marketplace and our ability to work
closely with our key creditors and vendors in order to avoid seeking legal
protection from creditors provides a basis for the continued development of our
business.
-9-
RESULTS OF OPERATIONS-THREE MONTH PERIODS ENDED MARCH 31, 2004 AND 2003
General
We generate a substantial majority of our revenue from fixed periodic
fees for paging services that are not generally dependent on usage. Usage
sensitive charges consist primarily of charges for messages exceeding the number
included in a customer's fixed monthly rate plan, and fees charged to resellers
for messages sent to the resellers' subscribers over Aquis' communication
network on a per-character basis under a Telocator Networking Paging Protocol
("TNPP").
Our ability to recover initial operating, selling and marketing costs
and to achieve profitability is dependent on the average duration of each
customer's subscription period. For as long as a subscriber continues to utilize
the service, operating results benefit from the recurring fixed fee payments
without the requirement of any incremental selling expenses. Conversely,
customer disconnections adversely affect operating results. Each month a
percentage of existing customers have their service terminated for reasons
including failure to pay, dissatisfaction with service or coverage limitations,
or switching to competing service providers. This percentage is referred to as
our churn rate.
Units in Service
Units in service totaled 105,000 and 157,000 at March 31, 2004 and
2003, respectively. During this period, approximately 34,000 net units in
service with resellers were disconnected as the wireless messaging market place
continued to become less consumer-oriented and more business-user driven.
Reseller units in service made up approximately 36.8% of our total units in
service at March 31, 2004, compared to approximately 45.7% at the corresponding
date in 2003. Verizon Wireless, one of our largest resellers, continued to
reduce its units in service with us from approximately 14,000 units to about
8,600 units as the industry continued to shrink and this segment of their paging
business was de-emphasized. In addition, our low-cost, low-margin TNPP units
declined similarly, from 14,300 units at March 31, 2003 to approximately 5,300.
Our overall average monthly churn rates during the three months ended March 31,
2004 and 2003, were 6.2% and 4.7%, respectively. These rates were influenced by
industry trends in a nationwide contracting paging market and our own limited
ability to procure and market paging units, negatively affecting our ability to
secure new subscribers or to replace units for our customers who have lost or
damaged their paging devices.
Revenues
Service revenues for the three months ended March 31, 2004 and 2003,
were $2,479,000 and $3,023,000, respectively, a decrease of approximately
$544,000 or about 18.0%. Continuing churn described above, and ongoing
industry-wide pricing pressures were factors contributing to this result. Our
end-user revenues were largely impacted by a slowing in the rate at which we
were able to add units to service; we added about 45% fewer end-user units to
service during the quarter ended March 31, 2004 than during the corresponding
period ended in 2003. In addition, approximately 72% of our end-users leased
their units from us at March 31, 2003, compared to about 68% at March 31, 2004,
adding to the reduction of our end-user revenues. The units disconnected by
Verizon and those aforementioned TNPP units were reseller units producing low
average monthly revenue per unit, or ARPU. The revenue decline attributed to our
reseller business, net of the effects of a small and targeted rate increase
implemented for January 2004, was approximately $91,000, and revenue for this
marketing channel for the quarter ended March 31, 2004 totaled $481,000.
Resellers purchase Aquis' services in bulk and maintain their own billing,
collections and customer service organizations and are therefore provided rates
lower than those made available to Aquis' direct subscribers. The balance of the
decrease in service revenue is attributed to the decline of our direct or
end-user business.
-10-
Revenues from sales of wireless messaging equipment increased to
$175,000 for the three months ended March 31, 2004 from $65,000 for the same
period in 2003. Approximately $106,000 of the current period total was related
to the recognition of previously deferred charges to former subscribers for
leased units that were not returned to us upon termination of service. Aquis
continued its strategy of marketing lower-cost units at reduced sales prices
during both 2004 and 2003.
Cost of Equipment Sales
The cost of wireless messaging equipment sold during the three months
ended March 31, 2004 and 2003, respectively, was $120,000 and $20,000. Excluding
the effects of costs related to the unreturned leased units described above and
the effects of a provision for the value of certain pre-owned units in
inventory, costs during the current three month period climbed to about 45% of
revenue from sales of units delivered, compared to approximately 31% during the
prior 3-month period. This resulted from price competition and increasing demand
for new units, rather than partially depreciated pre-owned units.
Cost of Wireless Messaging Services
Cost of service consists principally of fees paid to third party
carriers, and, to a lesser extent, to message dispatch companies. Third party
carriers are utilized when a customer requires service outside of Aquis' service
area, and are most commonly used to provide nationwide coverage. Also included
are technical operating expenses. Technical operating expenses include
transmission site rentals, telephone interconnect services and the costs of
network maintenance and engineering.
Total services costs decreased from $1,429,000 for the three months
ended March 31, 2003 to $1,122,000 during the corresponding period in 2004.
Costs of third party wireless messaging carriers and dispatch service providers
declined approximately 40.6%, or $114,000, to $167,000 from levels incurred
during the three-month period ended March 31, 2003. This cost reduction was
achieved in part as a result of subscriber churn for customers using these third
party paging networks and in part as the result of sales efforts that are more
concentrated on adding units serviced by our own networks. We also reduced
technical network operating costs by about $193,000 through our continuing
efforts to consolidate our paging networks. Such consolidation provides
reductions of trunking costs and tower site rental expenses that for the three
months ended March 31, 2004 were approximately $135,000 lower than those for the
same period of the prior year. Employment costs were also reduced through
attrition and through the appointment of the VP of Engineering to his current
posts as CEO and President.
Sales and Marketing
Selling and marketing expenses include the cost to acquire and retain
subscribers, operating costs associated with the sales and marketing
organization, and other advertising and marketing expenses. Total costs during
each of the three-month periods declined to $291,000 during the three months
ended March 31, 2004 from $399,000 for the corresponding period of 2003.
Approximately 69% of this cost reduction was realized as a result of the
reorganization of our sales team and the related attrition as and lower
commission costs resulting from lower volumes of new business additions during
the current quarter.
General and Administrative
General and administrative expenses include costs associated with
customer service, field administration and corporate headquarters. These costs
decreased 15.7% or $139,000, from $885,000 during the three months ended March
31, 2003 to $746,000 for the corresponding period of 2004. Continued staff
reductions through attrition and through elimination of certain middle and
senior management positions enabled approximately 35% of this total cost
reduction. Additional reductions were provided by lower insurance costs covering
a smaller business operation, lower professional fees through completion of
consultations related to employment matters and travel costs eliminated as a
result of the restructuring of our management team.
Depreciation and Amortization
Depreciation and amortization decreased to $301,000 for the three
months ended March 31, 2004 from $428,000 in the prior year three-month period.
Amortization of intangible assets was fully eliminated through the impairment
provision recognized during 2003 that resulted in the write-off of the remainder
of the net book value of the communications licenses under which we operate.
Depreciation expenses were also reduced during this time period, resulting
primarily from the disposal of excess transmitters and terminals that became
available as we consolidated our paging networks.
-11-
Provision for Doubtful Accounts
Estimates used in determining the allowance for doubtful accounts are
based on several factors, including receivable aging statistics and related
historical trends, historical collections experience, write-off history, and
other information that may be available and specific to any major account
balances. Although write-offs of subscriber account balances have historically
fallen within our estimates, we must adjust these estimates when actual
collections or other circumstances change and support such adjustments. During
2004, we settled and collected certain charges for services that had aged beyond
typical aging standards. As a result, previously estimated collections
allowances were proven to be in excess of actual collections allowances
required. Accordingly, during the quarter ended March 31, 2004, we recognized
the reversal of approximately $50,000 of these excess collection allowances. No
such settlements, collections or reversals of prior provisions for doubtful
accounts were realized during the quarter ended March 31, 2003.
Interest Expense
As a result of the August 2002 restructuring of our debt and equity,
interest expense was substantially eliminated. This is attributed to both the
lower amount of outstanding debt obligations as well as the effects of SFAS 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings", that
required the recording of the debt issued pursuant to the restructuring to
include obligations for future cash payments of both principal and interest to
the extent that the total of such cash flows did not exceed the principal amount
of the debt cancelled. Accordingly, all payments of principal and interest made
toward the surviving restructured debt obligations are applied to reduce the
total recorded debt, rather than as interest expense.
Income Taxes
We recorded no deferred tax asset as of March 31, 2004, and our
provision for income taxes was fully offset by a benefit from the carryforward
of a portion of our previous net operating losses. The future expected benefit
from the realization of the remaining net operating losses was fully offset by a
related valuation allowance. A full valuation allowance was recorded due to
management's uncertainty about the realizability of the related tax benefits as
of March 31, 2004. However, the amount of the deferred tax assets considered
realizable could be adjusted in the future if estimates of taxable income are
revised. No provision for income taxes is reflected in the period ended March
31, 2003 as a result of the Company's net loss in that period.
Liquidity and Capital Resources
Our financial position, liquidity and available cash balances are
impacted by our operating margins, the timing of our billings to customers and
related collection of those billings, our disbursements to vendors and
compensation of our employees. The substantial majority of our customers are
billed monthly in advance of their service period, and the number of days sales
in average gross billed trade receivables outstanding was 18 as measured as of
and for the three-month period ended March 31, 2004 (exclusive of any advance
billings for periods beginning on or after April 1, 2004). We have customary
trade terms with most of our vendors, and we typically pay our
telecommunications services providers and tower site landlords on a monthly
basis. Fixed and hourly employee compensation is paid twice each month and
commissions are paid monthly in arrears. Aquis' operating expenditures for
employment and occupancy costs have been subject to normal inflationary
pressures. Systems equipment and wireless messaging device costs have trended
downward in recent years, allowing Aquis to offer lower unit prices to customers
who wish to purchase their units.
Of the contractual financial obligations that are outstanding and that
were involved in the Restructuring that we completed in 2002, only the Tranche A
note due to FINOVA Capital Corporation in the original principal amount of
$7,000,000 requires current debt service payments. The interest rate for this
Tranche A note is set at the greater of the base rate plus 3.5% or a minimum of
9% and payment requirements include payments due quarterly in arrears that are
based on our cash balances in excess of $350,000 as measured on the last day of
each calendar quarter. We paid FINOVA approximately $110,000 on April 1, 2004 as
so required. No cash payments are due in the normal course of business under the
Tranche B note due to FINOVA, the unsecured promissory note due to AMRO, or for
dividends or redemption payments due to our Redeemable Preferred stockholders at
any time prior to the maturity date and satisfaction of the Tranche A note.
Other significant commitments include those related to our leases for
tower sites and office locations. For 2004, aggregate future minimum rental
commitments under non-cancelable operating leases were estimated at
approximately $1,826,000. We are continuing to consolidate our wireless
messaging networks with the intent to reduce both our tower lease costs and our
telecommunications expenses. In addition, our business plans provide for capital
expenditures for subscriber wireless messaging devices, network infrastructure
and information systems upgrades. However, the actual amount of such
expenditures will be dependent on actual subscriber levels, actual demand for
wireless messaging device features and actual demand in the marketplace for
network enhancements. None of these planned capital expenditures are subject to
minimum purchase agreements with wireless messaging device suppliers or other
vendors.
-12-
Our principal source of liquidity at March 31, 2004 was $675,000 of
cash and cash equivalents. At that date, we had a working capital deficit
totaling approximately $683,000. Although we have experienced operating losses
since our inception, we have steadily been producing EBITDA since then. Audit
opinions as to the results reported during our last three fiscal years include
going concern qualifications that suggest that we may be unable to meet
obligations as they become due in the normal course of business. Our common
stock was de-listed from the NASDAQ SmallCap Market in October 2000, and this
de-listing technically and functionally terminated our equity line of credit
provided under a Common Stock Purchase Agreement with Coxton Limited. Prior to
modifications effective on March 29, 2003 to two financial covenants relating to
minimum required operating cash flow levels specified in our Second Amended and
Restated Loan Agreement with FINOVA dated August 12, 2002, we were in default of
that Agreement with FINOVA. In addition, the loan agreement modifications
negotiated with FINOVA eliminated our ability to raise additional capital
through the sale or other issuance of equity interests. Effective December 31,
2003, we agreed with FINOVA on a Second Amendment to the Second Amended and
Restated Loan Agreement that eliminated financial covenants and required
quarterly debt payments in the full amount of our cash balances in excess of
$350,000. These factors have prevented us, and continue to prevent us, from
obtaining any additional significant external funding. Accordingly, we can
provide no assurance that we will be able to meet our reduced debt service
requirements for the foreseeable future, that we will be able to acquire
sufficient pagers to fully meet demand for either new business or retention of
existing subscribers who require replacement units, that we will be able to
continue to reduce costs as we optimize our communications network, or that we
can continue to invest in marketing initiatives for wireless messaging or other
communications services.
Our operations consumed approximately $95,000 of cash during the three
months ended March 31, 2004, compared to providing about $24,000 of cash during
the quarter ended March 31, 2003. Excluding the effects of changes in our
working capital accounts, during those respective periods our operations
produced cash totaling $411,000 and $365,000. Continuing uncertainty among our
vendors caused by the financial difficulties of our industry and of several of
our major competitors, as well as our own lack of reported profitability,
resulted in continued pressure from our vendors to keep our accounts with them
current and requiring the use of $189,000 to reduce our current payables and
accrued liabilities, compared to a net reduction of $86,000 during the first
quarter of 2003. In addition, due to a declining customer base producing lower
revenue totals and our diminishing ability to raise cash by reducing the amount
of outstanding credit provided to our customers, collections of cash during the
current quarter slowed in comparison to the quarter ended March 31, 2003.
Cash flows from investing activities during the first three months of
2004 declined from those of the period ended March 31, 2003. During the three
months ended March 31, 2003 proceeds from sales of assets of $157,000 were
derived primarily from the sales of excess paging equipment that became
underutilized as we consolidated our paging networks and reduced our leased
pager base. Similar activities during the corresponding period of 2004 produced
$142,000.
Financing activities consumed $15,000 and $421,000 of cash during the
three-month periods ended March 31, 2004 and 2003, respectively. During the
current quarter, we paid required installments under various equipment and
vehicle loans. During the quarter ended March 31, 2003, in addition to payments
required under those loans, we also made payments to FINOVA totaling $413,000
required under our loan agreement with them. The required cash payment of
approximately $110,000 to FINOVA based on our available excess cash at March 31,
2004 was made on April 1, 2004.
Our business plans for 2004 and beyond require capital to be available
to reasonably service our debt, to purchase wireless messaging equipment for new
and existing subscribers, and to optimize, operate and maintain our
communications and information services networks. We intend to service our debt
and fund our capital requirements with cash provided by operations, proceeds
from sales of communications equipment that becomes available as we continue to
consolidate our wireless messaging networks, and from existing working capital
balances. We believe that our business plan as a niche wireless messaging
carrier in an industry that is moving toward other communications services is
sound, yet our ability to execute this plan is heavily dependent on factors that
are largely beyond our unilateral control.
Our ability to continue as a going concern and execute our wireless
messaging business plan is dependent on industry and technological factors that
we cannot control. Our ability to continue operating is heavily dependent on our
ongoing ability to generate sufficient cash flows to service our debt to the
satisfaction of our primary creditor and controlling stockholder and to pay our
vendors in a timely manner, to continue to be provided with uninterrupted
supplies and services from our vendors, to retain employees and to continue to
reduce operating expenses and limit capital expenditures. In consideration of
our ongoing losses, limited liquid resources, and the ongoing lack of available
additional funding, we can provide no assurance that the terms and requirements
of our financial restructuring as amended, and future amendments that may be
agreed between the parties, if any, will be sufficient to the extent necessary
to execute our current business plan or ensure our ability to continue as a
going concern.
Seasonality
Retail sales were subject to seasonal fluctuations that affect retail
sales generally. Otherwise, the results were generally not significantly
affected by seasonal factors.
-13-
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
Our $7,000,000 Senior Secured Promissory Note carries a floating
interest rate that is 3.5% over the Citibank Corporate Base Rate, subject to a
minimum of 9%. As of March 31, 2004, the effective rate on this debt was that 9%
minimum. Based on the outstanding principal balance of $6,151,000 at that date,
an interest rate increase or decrease of 2% over the minimum rate would result
in a change in annual interest expenses of approximately $123,000. All other
debt obligations at March 31, 2004 provide fixed interest rates. Aquis has not,
and does not plan to, enter into any derivative financial instruments for
trading or speculative purposes. As of March 31, 2004, Aquis had no other
significant material exposure to market risk.
Item 4 - Controls and Procedures
In an effort to ensure that information required in the Company's
filings with the Securities and Exchange Commission is recorded, processed,
summarized and reported on a timely basis, the Company's principal executive
officer and principal financial officer have evaluated the effectiveness of the
Company's disclosure controls and procedures, as defined in Exchange Act Rules
13a-15(e) and 15d-15(e), as of March 31, 2004. Based on such evaluation, these
officers have concluded that, as of March 31, 2004, the Company's disclosure
controls and procedures were effective in timely alerting them to information
relating to the Company required to be disclosed in the Company's periodic
reports filed with the SEC. There has been no change in the Company's internal
control over financial reporting during the quarter ended March 31, 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-14-
Part II - Other Information
Item 1 Legal Proceedings. There were no significant legal proceedings involving
the Company at May 12, 2004.
Item 2 Changes in Securities and Use of Proceeds. None.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Security Holders. None.
Item 5 Other Information. None.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No.:
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3.1 Certificate of Amendment to Restated Certificate of Incorporation of the Registrant (incorporated by reference
to Aquis' Proxy Statement dated March 11, 1999)
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3.2 Bylaws of the Registrant (incorporated by reference to Aquis' Registration Statement on Form SB-2, Registration
No. 33-76744)
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3.3 Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Aquis Communications Group,
Inc. dated as of December 11, 2002 (incorporated by reference to Aquis' Annual Report on Form 10-K for the year
ended December 31, 2002, filed with the Commission as Exhibit 3.3)
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4.1 Form of Common Stock Certificate (incorporated by reference to Aquis' Registration Statement on Form SB-2,
Registration No. 33-76744)
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4.2 Form of Warrant Certificate (incorporated by reference to Aquis' Registration Statement on Form SB-2,
Registration No. 33-76744)
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4.3 Certificate of Designation, Preferences and Rights of 7 1/2% Redeemable Preferred Stock of Aquis Communications
Group, Inc. (incorporated by reference to Aquis' Current Report on Form 8-K dated February 15, 2000)
- ----------------- ------------------------------------------------------------------------------------------------------------------
4.4 Form of Series A Common Stock Purchase Warrant of Aquis Communications Group, Inc. issued to Desert
Communications I, LLC (incorporated by reference to Aquis'Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission as Exhibit 4.4)
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4.5 Form of Series B Common Stock Purchase Warrant of Aquis Communications Group, Inc. issued to Desert
Communications I, LLC (incorporated by reference to Aquis' Annual Report on Form 10-K for the year ended
December 31, 2002, filed with the Commission as Exhibit 4.5)
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4.6 Form of Common Stock Purchase Warrant of Aquis Communications Group, Inc. issued to AMRO International, S.A.
(incorporated by reference to Aquis' Annual Report on Form 10-K for the year ended December 31, 2002,
filed with the Commission as Exhibit 4.6)
- ----------------- ------------------------------------------------------------------------------------------------------------------
4.7 Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock and Series B
Redeemable Preferred Stock of Aquis Communications Group, Inc. dated August 6, 2002 (incorporated by reference
to Aquis' Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Commission
as Exhibit 4.7)
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10.13 Stock Grant and Restricted Stock Agreement by and between Brian M. Bobeck and Aquis Communications Group, Inc.
(filed herewith)
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31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
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-15-
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31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
- ----------------- ------------------------------------------------------------------------------------------------------------------
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith)
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32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith)
- ----------------- ------------------------------------------------------------------------------------------------------------------
(b) Reports on Form 8-K: None.
-16-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
Name Title Date
---- ----- ----
/s/ Brian M. Bobeck
- -----------------------------------------------------
Brian M. Bobeck Chief Executive Officer, President and Director May 12, 2004
/s/ D. Brian Plunkett
- -----------------------------------------------------
D. Brian Plunkett Chief Financial Officer and Vice President May 12, 2004
-17-