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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
COMMISSION FILE NO. 1-12422
CO-COUNSEL, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0248179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
THREE RIVERWAY, SUITE 1140 77056
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 961-5552
Check whether the issuer (1) 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
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State the number of shares outstanding of each of the issuer's classes
of common equity, as of the close of the latest practicable date, May 13, 1996:
COMMON STOCK, $.01 PAR VALUE 3,741,500
(TITLE OF CLASS) (NUMBER OF SHARES OUTSTANDING)
Transitional small business disclosure format (check one). Yes No X
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CO-COUNSEL, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
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PART I. FINANCIAL INFORMATION
Balance Sheets at March 31, 1996 and December 31, 1995 1
Statements of Loss for the three months ended March 31, 1996 and 1995 2
Statements of Cash Flows for the three months ended March 31, 1996 and 1995 3
Notes to Financial Statements 4-5
Management's Discussion and Analysis of Financial Condition and Results of Operations 6-9
PART II. OTHER INFORMATION 10
SIGNATURE PAGE 11
3
CO-COUNSEL, INC.
BALANCE SHEETS
March 31, December 31,
1996 1995
--------------- --------------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 941,377 $ 1,102,416
Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . 1,453,422 1,556,847
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 158,800 48,342
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 2,553,599 2,707,605
--------------- --------------
Equipment:
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . 238,672 229,463
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 144,057 144,057
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . 285,690 279,688
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,985 52,985
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 11,426 11,426
--------------- --------------
732,830 717,619
Less accumulated depreciation and amortization . . . . . . . . . . . (270,896) (239,396)
--------------- ---------------
461,934 478,223
--------------- --------------
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,799 66,169
--------------- ---------------
Total assets $ 3,080,332 $ 3,251,997
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 425,000 $ 425,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 308,435 408,745
Accrued compensation expenses . . . . . . . . . . . . . . . . . . . 417,900 331,951
--------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . 1,151,335 1,165,696
--------------- --------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par, 5,000,000 shares authorized;
none issued . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, $.01 par, 20,000,000 shares authorized;
3,741,500 and 3,547,500 issued and outstanding respectively . . . 37,415 35,475
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 4,098,278 4,003,218
Retained deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,206,696) (1,952,392)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . 1,928,997 2,861,301
--------------- --------------
Total liabilities and stockholders' equity $ 3,080,332 $ 3,251,997
=============== ==============
See accompanying notes to the financial statements.
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CO-COUNSEL, INC.
STATEMENTS OF LOSS
Three Months ended March 31,
---------------------------------------
1996 1995
--------------- --------------
(Unaudited)
Revenue:
Temporary placement fees . . . . . . . . . . . . . . . . . . . . . . $ 2,697,309 $ 1,957,583
Permanent placement fees . . . . . . . . . . . . . . . . . . . . . . 100,190 77,250
--------------- --------------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,797,499 2,034,833
--------------- --------------
Operating expenses:
Direct costs of placements . . . . . . . . . . . . . . . . . . . . . 1,669,180 1,196,819
Administrative and general . . . . . . . . . . . . . . . . . . . . . 1,384,822 1,001,133
--------------- --------------
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . 3,054,002 2,197,952
--------------- --------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (256,503) (163,119)
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,199 39,435
--------------- --------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (254,304) $ (123,684)
=============== ==============
Net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (.07) $ (.03)
=============== ==============
Weighted average number of common shares outstanding . . . . . . . . . . 3,592,665 3,547,500
=============== ==============
See accompanying notes to the financial statements.
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CO-COUNSEL, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three Months ended March 31,
---------------------------------------
1996 1995
--------------- --------------
(Unaudited)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (254,304) $ (123,684)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 32,870 17,943
Legal expenses assumed by a stockholder . . . . . . . . . . . . -- (29,102)
Gain on sale of fixed assets . . . . . . . . . . . . . . . . . . -- (10,922)
Stock issued for services . . . . . . . . . . . . . . . . . . . 44,500 --
Changes in assets and liabilities:
Trade accounts receivable . . . . . . . . . . . . . . . . . 103,425 (353,270)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . (57,958) 9,504
Other assets . . . . . . . . . . . . . . . . . . . . . . . . -- 2,026
Accounts payable and accrued expenses . . . . . . . . . . . (14,361) 244,274
---------------- --------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . (145,828) (243,231)
--------------- --------------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (15,211) (141,119)
Proceeds from sale of fixed assets . . . . . . . . . . . . . . . . . -- 28,000
---------------- --------------
Net cash used in investing activities . . . . . . . . . . . . . . . (15,211) (113,119)
---------------- --------------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . . . . (161,039) (356,350)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . 1,102,416 2,253,275
--------------- --------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 941,377 $ 1,896,925
=============== ==============
See accompanying notes to the financial statements.
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CO-COUNSEL, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with the instructions and requirements of Form 10-QSB and,
therefore, do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In the opinion of
management, such financial statements reflect all adjustments (consisting only
of normal recurring accruals) necessary for a fair statement of the results of
operations and financial position for the interim periods presented. Operating
results for the interim periods are not necessarily indicative of the results
that may be expected for the full year. These financial statements should be
read in conjunction with the Company's 1995 Annual Report on Form 10-KSB.
NOTE 2--LOSS PER SHARE
Loss per common share is computed by dividing the net loss by the
weighted average number of common shares outstanding, or assumed outstanding,
during the period.
NOTE 3--INCOME TAXES
Deferred taxes have been provided to the extent that the financial
statement basis of assets or liabilities differs from their tax basis at March
31, 1996 and December 31, 1995.
The deferred tax liabilities (assets) are comprised of the following
at March 31, 1996 and December 31, 1995:
March 31, December 31,
1996 1995
------------ -------------
Conversion to accrual basis . . . . . . . . . . . . $ 143,000 $ 155,000
Equipment . . . . . . . . . . . . . . . . . . . . . 3,000 10,000
----------- -----------
Gross deferred tax liability . . . . . . . . . . . . 146,000 165,000
Operating loss carryforward . . . . . . . . . . . . (779,000) (716,000)
Deferred tax asset valuation allowance . . . . . . . 633,000 551,000
----------- -----------
Deferred tax liability . . . . . . . . . . . . . . . $ -- $ --
=========== ===========
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Co-Counsel, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited) Continued
The income tax benefit differs from the amount of income tax benefit
determined by applying the statutory income tax rate to pre-tax loss from
operations as follows:
Three Months ended March 31,
1996 1995
--------------- --------------
Tax benefit at the statutory rate . . . . . . . . . . . . . . . $ (86,000) $ (91,000)
Deferred tax asset valuation allowance . . . . . . . . . . . . . 82,000 19,000
Non deductible expenses . . . . . . . . . . . . . . . . . . . . 2,000 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 1,000
--------------- --------------
Tax benefit at the effective rate . . . . . . . . . . . . . . . $ -- $ (71,000)
=============== ==============
At March 31, 1996, the Company had a net operating loss carryforward for
tax reporting purposes of approximately 2,292,000 available to offset future
years taxable income through 2010.
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CO-COUNSEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Substantially all of the Company's revenue is derived from placement fees
generated by its temporary attorneys and temporary paralegals on client
assignments. The remainder of the Company's revenue is earned from the
permanent placement of attorneys or paralegals with clients. Placement fees
related to temporary paralegals as a percent of total revenue may vary from
period to period depending on the number of large temporary paralegal
assignments for which the Company is engaged. The Company's temporary
personnel are paid only for the term of their assignment and for the number of
hours worked on each assignment. When accepting an assignment from a client,
the Company establishes an hourly placement fee for the temporary attorney or
temporary paralegal which is paid by the client to the Company. The Company
then pays the temporary attorney or temporary paralegal from the sums received
from the client on an hourly basis and retains the remainder, which is used to
cover operating expenses. Temporary attorneys and paralegals who are working
on assignments are paid on a weekly basis, without regard to payment terms
negotiated with clients.
The Company experiences fluctuations in the level of revenue from quarter
to quarter to the extent an assignment of attorneys or a large number of
paralegals to one client ends and is not immediately replaced by a similar
assignment. The Company's operating results are affected by the mix of revenue
between temporary attorney fees and temporary paralegal fees, as the Company's
direct costs of placements for temporary paralegals is higher than for
temporary attorneys as a percentage of revenue. Demand for temporary services
is significantly affected by the general level of economic activity. As
economic activity slows, many companies may reduce their usage of temporary
personnel before undertaking layoffs of their regular employees. When economic
activity increases, companies may reduce usage of temporary personnel as they
hire full time employees. The Company is unable to predict the level of
economic activity at any particular time and its effect on the Company's
operating and financial results.
The Company commenced operations in Houston in May 1988, at which time it
provided temporary and permanent placement of attorneys to law firms and
corporate law departments. The Company expanded its operations in June 1990 to
include providing temporary and permanent placement of paralegals to law firms
and corporate law departments. The Company opened offices in Dallas, Chicago,
New York and Los Angeles in June 1992, October 1993, September 1994, and
November 1995, respectively.
The Company's long-term growth strategy is to open and maintain offices in
major metropolitan areas throughout the United States which the Company
believes offer the best prospects for growth and profitability. The Company is
currently reviewing several cities for possible expansion in 1996 to allow for
expansion into at least one additional city during 1996, although there
can be no assurance it will be able to do so. The Company has preliminarily
targeted either Atlanta, San Francisco, or Washington, D.C. for that possible
expansion. Expansion to additional cities may require the Company to obtain
additional capital, however, there can be no assurance that future financing
will be available on terms acceptable to the Company.
The operations of a newly opened office have a negative effect on the
Company's operating income and results of operations until the office achieves
a sufficient level of revenues to cover its operating expenses, which, based on
the Company's experience to date, typically requires from six to nine months of
operation. However, there can be no assurance that the Company will be able to
open a new office in 1996 and achieve a sufficient level of revenues to cover
its operating expenses or becomes profitable. See "--Liquidity and Capital
Resources."
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CO-COUNSEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Revenues for three months ended March 31, 1996 increased by approximately
$763,000 or 37% over revenues of approximately $2,035,000 for the same period
in fiscal 1995. Placement fees related to paralegals increased approximately
$291,000 and placement fees related to attorneys increased approximately
$472,000. Of the total revenues for the three months ended March 31, 1996 and
1995 approximately 42% and 43%, respectively, were attributable to paralegal
assignments and approximately 58% and 57%, respectively, were attributable to
attorney assignments. Of the total revenues for the three months ended March
31, 1996 and 1995 related to paralegals, approximately 97% and 96%,
respectively, were attributable to temporary paralegal assignments and
approximately 3% and 4%, respectively, were attributable to permanent paralegal
placements. Of the total revenues for the three months ended March 31, 1996
and 1995 related to attorneys, approximately 96% and 94%, respectively, were
attributable to temporary attorney assignments and approximately 4% were
attributable to permanent attorney placements. Offices opened prior to the
beginning of 1995 contributed 81% of the Company's revenue growth for the
three months ended March 31, 1996 over the same fiscal period in 1995.
Direct costs of placements consist of wages and related payroll taxes for
temporary paralegals and attorneys while working on specific assignments.
Direct costs of placements increased to approximately $1,669,000 for the three
months ended March 31, 1996 compared to approximately $1,197,000 in fiscal 1995
primarily to support the increase in revenues. Direct costs of placements as a
percentage of revenues was 60% for the three months ended March 31, 1996
compared to 59% for the same period in fiscal 1995. As the Company's business
grows, direct costs of placements are anticipated to increase in relation to
the number of temporary attorneys and paralegals on assignment by the Company.
Administrative and general expenses, which consist primarily of salaries,
wages and commissions for office personnel and officers, office rent,
advertising and other operation expenses increased by approximately $384,000 or
38% for the three months ended March 31, 1996 compared to the same period in
fiscal 1995. The increase was primarily due to increases in compensation to
sales personnel and increased advertising costs to support the increase in
revenues. The increase was also attributable to increases in staffing,
expansion and operating expenses compared to the same period in fiscal 1995.
Other income, net that consists of interest income, interest expense and
gain on asset sale. Other income, net decreased by approximately $37,000 or
94% for the three months ended March 31, 1996 compared to the same period in
fiscal 1995 due to a gain on the sale of assets, in 1995, and decreased
interest income and increased interest expenses in 1996.
Liquidity and Capital Resources
Working capital decreased to approximately $1,402,000 at March 31, 1996 from
approximately $1,542,000 at December 31, 1995. The decrease is due to cash
used to finance the operations and expansion of the business. Increased
revenues, due to revenue growth, is reflected in increased balances in accrued
compensation. Accounts receivable balances, which decreased due to quicker
average collation, collections, indicate increased placement levels, payment
terms and the frequency of billings. The Company generally bills
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CO-COUNSEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
clients every week with payments due in fourteen days. On occasion, special
arrangements allowing for payment every thirty days may be given.
Historically, the Company has not experienced any material difficulty in the
collection of its accounts receivable. Accrued compensation includes payments
due to temporary attorney's and paralegal's, which is directly related to
revenues, and compensation to the Company's office staff, which increased due
to opening a Los Angeles office during 1995. Accounts payable, decreased which
reflects a reduction in operating costs, as well as corporate costs incurred to
support the expansion of the business, including legal fees, and consulting
fees and the timing of payments for operating expenses.
The Company's long-term growth strategy is to maintain and open
offices in major metropolitan areas throughout the United States that the
Company believes offer the best prospects for growth and profitability. The
Company commenced operations in New York City in September 1994 and in Los
Angeles in November 1995. The Company is currently reviewing several cities
for possible expansion in 1996 to allow for expansion into at least one
additional city during 1996, although there can be no assurance it will be able
to do so. The Company has preliminarily targeted either Atlanta, San
Francisco, or Washington, D.C. for that possible expansion. The Company
expects that each additional office will require approximately six to nine
months to achieve a sufficient level of revenues to cover its operating
expenses, although the New York office required twelve months. Historically,
the Company has required from approximately $175,000 to approximately $300,000
to open and operate a new office until it generates a positive cash flow,
although the New York office required approximately $450,000 before generating
positive cash flow. The Company anticipates that similar amounts will be
required to open and operate any new office until it generates a positive cash
flow. Included among the cash requirements for a new office are expenditures
for office personnel, office rent, furniture and fixtures, office equipment,
computer equipment and marketing costs. The Company believes that it has
developed an operating infrastructure capable of supporting the planned
expansion for the next year with the addition of a minimal number of personnel;
however, the success of the Company's strategy will depend in part on the
Company's ability to hire qualified individuals to manage and market the
Company's services in its existing and new markets. There can be no assurance
that the estimated cash expenditures will not increase as a result of local
economic conditions, competition, inflation, changes in the Company's
anticipated method of operation or other factors.
Most temporary attorneys are paid weekly rather than upon receipt
of payment from the client for such services. Likewise, all temporary
paralegals are paid weekly. Accordingly, although the clients ultimately pay
for such costs, to the extent that the Company places more temporary paralegals
and attorneys, and to the extent the Company pays related costs of employment,
such as workers' compensation insurance, state and federal unemployment taxes
and Social Security and Medicare taxes for its temporary attorneys and
paralegals, the Company may have to seek additional capital from time to time
under a revolving credit facility to meet its payroll obligations. The Company
has a line of credit agreement with a bank that provides for a maximum
borrowing facility of $500,000 that expires on July 5, 1996. As of March 31,
1996, the Company had $75,000 available for future borrowings. The Company may
seek to replace or expend the existing credit facility in order to accommodate
increased capital requirements as the business expands, however there can be no
assurance that future financing will be available on terms acceptable to the
Company.
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CO-COUNSEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On November 23, 1993, the Company's sale to the public of 1,250,000
units and 187,500 units in the underwriter's over-allotment was completed and
net proceeds of approximately $3,720,300 (net of the underwriter's discount and
underwriter's expense allowance) were received. The Company has used
approximately $2,973,000 of the net proceeds from the offering primarily to
expand its operations, for working capital purposes and other general corporate
purposes. The Company believes that the remaining proceeds from that offering,
cash flow generated from operations, and borrowings from its credit agreement
will be sufficient to satisfy its working capital and capital expenditure
requirements through at least December 31, 1996.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No.
121). SFAS No. 121 requires, among other things, that impairment losses on
assets to be held, and gains or losses from assets that are expected to be
disposed of, be included as a component of income from continuing operations.
The Company has adopted SFAS No. 121, during the three months ended March 31,
1996, and no material adjustment has been recorded on the financial statements.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." (SFAS No.123). SFAS No. 123 encourages entities to adopt the
fair value method in place of the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), for all
arrangements under which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of its stock. The Company does not anticipate
adopting the fair value method encouraged by SFAS No. 123 and will continue to
account for such transactions in accordance with APB No. 25. Beginning with the
1996 Annual Report on Form 10-KSB, the Company will be required to provide
additional disclosures beginning in 1996 providing pro forma effects as if the
Company had elected to adopt SFAS No. 123.
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PART II
OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE NOT APPLICABLE.
Item 6. Exhibits
3.1.(ii) Amendment to By-laws of the Company
27 Financial Data Schedule
10
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CO-COUNSEL, INC.
(COMPANY)
/s/ JOSEPH A. TURANO, III
----------------------------------------------
May 13, 1996 JOSEPH A. TURANO, III
CHIEF EXECUTIVE OFFICER, PRESIDENT
(PRINCIPAL EXECUTIVE OFFICER)
/s/ JOSEPH G. McDEVITT
----------------------------------------------
May 13, 1996 JOSEPH G. McDEVITT
VICE PRESIDENT - FINANCE
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
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INDEX TO EXHIBITS
3.1.(ii) By-laws of the Company
27 -- Financial Data Schedule