FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2001
Commission File No. 1-9972
Hooper Holmes, Inc.
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(Exact name of registrant as specified in
its charter)
New York 22-1659359
- ----------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
170 Mt. Airy Rd., Basking Ridge, NJ 07920
- --------------------------------------- ---------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (908) 766-5000
None
- ------------------------------------------------------------------------------
(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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Class Outstanding at June 30, 2001
- --------------------------------------------- ---------------------------------
Common stock, $.04 par value 65,057,315
HOOPER HOLMES, INC. AND SUBSIDIARIES
INDEX
Page No.
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PART I - Financial Information
ITEM 1 - Financial Statements
Consolidated Balance Sheets 1
as of June 30, 2001 and
December 31, 2000
Consolidated Statements of Income 2
for the Six Months Ended
June 30, 2001 and 2000
Consolidated Statements of Cash Flows 3
for the Six Months Ended
June 30, 2001 and 2000
Notes to Consolidated
Financial Statements 4-5
ITEM 2 - Management's Discussion and 6-10
Analysis of Financial Condition
and Results of Operations
PART II - Other Information
Item 4 - Submission of Matters to a vote of
Security Holders 11
Hooper Holmes, Inc.
Consolidated Balance Sheets
(unaudited)
06/30/01 12/31/00
------------------- -------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 36,617,815 $ 45,680,471
Marketable securities 31,666,148 29,188,309
Accounts receivable, net 29,292,001 28,870,624
Other current assets 4,992,275 4,539,330
------------------- -------------------
Total current assets 102,568,239 108,278,734
Property, plant and equipment:
Land and land improvements 618,972 618,972
Building 4,561,085 4,554,105
Furniture, fixtures and equipment 22,134,025 21,830,027
Leasehold improvements 397,229 379,376
------------------- -------------------
Total property, plant and equipment 27,711,311 27,382,480
Less: Accumulated depreciation and amortization 19,278,866 18,058,073
------------------- -------------------
Property, plant and equipment, net 8,432,445 9,324,407
Goodwill, net 81,399,702 78,815,845
Intangible assets, net 12,718,494 13,865,768
Other assets 5,770,743 751,128
------------------- -------------------
Total assets $ 210,889,623 $ 211,035,882
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 189,492 $ 196,836
Accounts payable 7,201,016 7,402,862
Accrued expenses:
Insurance benefits 338,765 291,408
Salaries, wages and fees 1,591,413 2,585,457
Payroll and other taxes 263,369 232,348
Income taxes payable 0 902,721
Other 2,803,493 3,362,025
------------------- -------------------
Total current liabilities 12,387,548 14,973,657
Long term debt, less current maturities 3,389,011 3,195,295
Deferred income taxes 1,550,739 1,708,954
Minority interest 168,319 81,355
Stockholders' equity:
Common stock, par value $.04 per share; authorized 240,000,000 2,699,963 2,698,167
shares, issued 67,499,074 in 2001 and 67,454,174 in 2000.
Additional paid-in capital 134,841,381 135,419,195
Accumulated other comprehensive income 93,185 0
Retained earnings 78,205,177 71,009,995
------------------- -------------------
215,839,706 209,127,357
Less: Treasury stock at cost (2,441,759 and 1,993,564 shares) 22,445,700 18,050,736
------------------- -------------------
Total stockholders' equity 193,394,006 191,076,621
------------------- -------------------
Total liabilities and stockholders' equity $ 210,889,623 $ 211,035,882
=================== ===================
See accompanying notes to unaudited consolidated financial statements.
-1-
Hooper Holmes, Inc.
Consolidated Statements Of Income
(unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------------------------------------------------------------------
2001 2000 2001 2000
------------------- ------------------- ------------------- -------------------
Revenues $ 60,730,318 $ 67,581,280 $ 124,356,682 $ 153,353,959
Cost of operations 43,828,854 48,859,666 88,603,912 108,832,996
------------------- ------------------- ------------------- -------------------
Gross profit 16,901,464 18,721,614 35,752,770 44,520,963
Selling, general and administrative
expenses 11,618,316 11,982,483 23,298,506 23,610,219
------------------- ------------------- ------------------- -------------------
Operating income 5,283,148 6,739,131 12,454,264 20,910,744
Other income (expense):
Interest expense (54,649) (233,022) (119,136) (1,152,749)
Interest income 830,564 1,206,801 1,835,453 1,849,384
Other (expense) Income, net (104,292) 419,767 (158,638) 380,554
------------------- ------------------- ------------------- -------------------
671,623 1,393,546 1,557,679 1,077,189
------------------- ------------------- ------------------- -------------------
Income before income taxes 5,954,771 8,132,677 14,011,943 21,987,933
------------------- ------------------- ------------------- -------------------
Income taxes 2,462,000 3,468,000 5,841,000 9,426,000
------------------- ------------------- ------------------- -------------------
Net income $ 3,492,771 $ 4,664,677 $ 8,170,943 $ 12,561,933
=================== =================== =================== ===================
Earnings per share:
Basic $ 0.05 $ 0.07 $ 0.13 $ 0.20
Diluted $ 0.05 $ 0.07 $ 0.12 $ 0.19
=================== =================== =================== ===================
Weighted average number of shares: (1)
Basic 64,936,162 66,497,164 65,069,858 63,721,028
Diluted 67,011,418 70,325,995 67,186,118 67,639,877
=================== =================== =================== ===================
(1) Adjusted to reflect a two for one stock split effective April 12, 2000.
See accompanying notes to unaudited consolidated financial statements.
-2-
Hooper Holmes, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30,
---------------------------------------------
2001 2000
-------------------- -------------------
Cash flows from operating activities:
Net income $ 8,170,943 $ 12,561,933
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,647,042 4,512,233
Provision for bad debt expense 150,000 0
Deferred tax benefit (158,215) (314,757)
Issuance of stock awards 5,689 153,750
Loss on sale of fixed assets 16,837 17,278
Change in assets and liabilities:
Accounts receivable (571,377) 5,078,933
Other current assets (472,561) 219,867
Accounts payable and accrued expenses (1,483,801) (6,847,321)
-------------------- -------------------
Net cash provided by operating activities 10,304,557 15,381,916
-------------------- -------------------
Cash flows from investing activities:
Purchases of marketable securities (15,305,540) 0
Redemptions of marketable securities 12,920,885 0
Business acquisition, net of cash acquired (4,364,136) 0
Investment in e-nable.com (5,000,000) 0
Capital expenditures (344,362) (1,028,142)
-------------------- -------------------
Net cash used in investing activities (12,093,153) (1,028,142)
-------------------- -------------------
Cash flows from financing activities:
Issuance of long term debt 250,000 0
Principal payments on long term debt (63,628) (62,079,338)
Proceeds from issuance of common stock, net 0 86,963,634
Proceeds from employee stock purhcase plan 0 680,738
Proceeds related to the exercise of stock options 874,758 3,003,531
Treasury stock acquired (7,359,429) (3,549,770)
Dividends paid (975,761) (934,684)
-------------------- -------------------
Net cash (used in) provided by financing activities (7,274,060) 24,084,111
-------------------- -------------------
Net (decrease) increase in cash and cash equivalents (9,062,656) 38,437,885
Cash and cash equivalents at beginning of year 45,680,471 41,363,019
-------------------- -------------------
Cash and cash equivalents at end of period $ 36,617,815 $ 79,800,904
==================== ===================
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 123,278 $ 1,928,887
Income taxes $ 6,086,487 $ 7,779,137
See accompanying notes to unaudited consolidated financial statements.
-3-
HOOPER HOLMES, INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2001
Note 1: Basis of Presentation
The financial information included herein is unaudited unless otherwise
indicated; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The interim financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K.
The results of operations for the three month and six month periods ended June
30, 2001 are not necessarily indicative of the results to be expected for the
full year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for additional information.
On January 31, 2001, the Company entered into a marketing and equity investment
agreement with e-Nable.com, at a total cost of $5.0 million. The Company's
investment is included in other assets on the accompanying unaudited balance
sheet, which is being accounted for under the cost method of investments, as it
owns less than 20% of e-Nable.com.
Note 2: Net Income Per Common Share
Basic net income per common share equals net income divided by weighted average
common shares outstanding during the period. Diluted net income per common
share equals net income divided by the sum of weighted average common shares
outstanding during the period plus common stock equivalents. Common stock
equivalents (2,075,256 and 3,828,831 for the three months ended and 2,116,260
and 3,918,849 for the six months ended June 30, 2001 and 2000, respectively) are
shares assumed to be issued if outstanding stock options were exercised. All
appropriate share and per share amounts have been restated for the April 12,
2000 two for one stock split.
-4-
Note 3: Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130") requires that items defined as other comprehensive
income, such as unrealized investment gains and losses, be separately classified
in the consolidated financial statements and that the accumulated balance of
other comprehensive income be reported separately from retained earnings and
additional paid-in capital in the equity section of the consolidated balance
sheet. Comprehensive income for the three months ended June 30, 2001 was $
3,483,782 and for the six months ended June 30, 2001 was $ 8,264,128,
respectively.
Note 4: Capital Stock
The Company declared a two for one stock split effective April 12, 2000.
The net tax benefit derived from the exercise of stock options was $ 1.0 million
for the six months ended June 30, 2001. Options exercised for the six months
ended June 30, 2001 were 309,000 shares, of which 264,100 shares were issued
from Treasury Stock. Additionally, 5000 shares of Treasury Stock were used for
employee stock awards, and 49,505 shares of Treasury Stock were issued as part
of a second quarter acquisition.
On May 30, 2000, the Board of Directors authorized the repurchase of 2.5 million
shares of the Company's common stock during the calendar year 2001 for an
aggregate purchase price not to exceed $ 25 million. For the six months ended
June 30, 2001, the Company purchased 766,800 shares at a total cost of $ 7.3
million.
Note 5: Legal Matters
The Company is a party to a number of legal actions arising in the ordinary
course of its business. The Company is a defendant in an action arising out of
the Company's resale of a drug screening business it acquired and subsequently
sold in 1995. The plaintiff claims to have suffered damages from the Company's
alleged failure to comply with the terms of a non-competition agreement and a
first right of refusal, as well as incomplete disclosure about the transaction.
The Company believes that the plaintiff suffered no damages and will vigorously
defend this action in court. In the opinion of management, the Company has
substantial legal defenses and/or insurance coverage with respect to all of its
pending legal actions; accordingly, none of these actions is expected to have a
material adverse effect on the Company, its consolidated results of operations
or its consolidated financial position.
-5-
Item 2
HOOPER HOLMES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operation - Three months ended June 30, 2001 compared to
Three months ended June 30, 2000
Revenues for the second quarter of 2001 decreased 10.1% to $60.7 million from
$67.6 million for the second quarter of 2000. The number of paramedical
examinations performed decreased to 752,000 from 829,000 while the number of
Infolink reports increased to 108,000 from 96,000. The decrease in the number
of paramedical examinations is the result of a slower than expected recovery in
the life insurance industry, an increasingly difficult economic environment, and
certain competitive issues. The increase in the number of Infolink reports is
due to increased volume of lower priced reports from one major Infolink client.
The Company's cost of operations for the second quarter of 2001 totaled $43.8
million compared to $48.9 million for the second quarter of 2000. Cost of
operations as a percentage of revenues remain relatively unchanged at 72.2% for
the second quarter, compared to the 72.3% for the second quarter 2000.
Selling, general and administrative expenses totaled $ 11.6 million for the
second quarter of 2001 compared to $ 12.0 million for the second quarter of
2000, and as a percentage of revenue totaled 19.1% compared to 17.7%,
respectively. The increase, as a percentage of revenues, is due to lower
revenue levels in the second quarter 2001.
Accordingly, the Company's operating income decreased to $5.3 million from $6.7
million and as a percentage of revenues, decreased to 8.7% from 10.0% for the
second quarter of 2001 compared to the second quarter of 2000.
Interest expense decreased to $.1 million for the second quarter of 2001 from $
.2 million for the second quarter 2000, due to lower debt levels. Interest
income decreased to $ .8 million from $ 1.2 million, due to lower levels of
invested funds and lower interest rates. The decrease in Other income, net, for
the three months ended June 30, 2001, as compared to the three months ended June
30, 2000, is due to a one time pre-tax gain realized in the second quarter 2000,
from the sale of securities owned by the Company of $.4 million.
The effective tax rate was 41% and 43% for the quarters ended June 30, 2001 and
2000, respectively.
Net income and net income per share for the second quarter of 2001 were $3.5
million or $.05 per diluted share versus $4.7 million or $.07 per diluted share
for the second quarter of 2000. Average diluted shares for the respective
periods were 67,011,418 and 70,325,995.
-6-
HOOPER HOLMES, INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operation - Six months ended June 30, 2001 compared to
Six months ended June 30, 2000
Revenues for the six months ended June 30, 2001 decreased 18.9% to $124.4
million from $153.4 million for the six months ended June 30, 2000. The number
of paramedical examinations performed decreased to 1,504,000 from 1,883,000
while the number of Infolink reports increased to 213,000 from 205,000. The
decrease in the number of paramedical examinations is the result of a slower
than expected recovery in the life insurance industry, following the "Triple X",
phenomenon in the first quarter of 2000, an increasingly difficult economic
environment, and certain competitive issues. The increase in the number of
Infolink reports is due to increased volume of lower priced reports from one
major Infolink client.
The Company's cost of operations for the six month's ended June 30, 2001 totaled
$88.6 million compared to $108.8 million for the six months ended June 30, 2000.
Cost of operations as a percentage of revenues, increased to 71.2% for the six
months ended June 30, 2001 from 71.0% for the six months ended June 30, 2000.
Branch operating expenses for the six months ended June 30, 2001, are down
approximately 11.3% compared to the six months ended June 30, 2000, however,
they remain slightly higher as a percentage of revenues, thus contributing to
the modest percentage increase in cost of sales.
Selling, general and administrative expenses totaled $23.3 million for the six
months ended June 30, 2001 compared to $ 23.6 million for the six months ended
June 30, 2000, and as a percentage of revenue totaled 18.7% compared to 15.4%,
respectively. The increase, as a percentage of revenues, is due to lower
revenue levels for the six months ended June 30, 2001.
Accordingly, the Company's operating income decreased to $12.5 million from
$20.9 million and as a percentage of revenues, decreased to 10.0% from 13.6% for
the six months ended June 30, 2001 compared to the six months ended June 30,
2000.
The effective tax rate was 41% and 43% for the six months ended June 30, 2001
and 2000, respectively.
Interest expense decreased to $ .1 million for the six months ended June 30,
2001, from $1.2 million for the six months ended June 30, 2000, due to lower
debt levels. Interest income remained consistent at $1.8 million. The
decrease in Other income, net, for the six months ended June 30, 2001, as
compared to June 30, 2000, is due to a one time pre-tax gain realized in the
second quarter 2000, from the sale of securities owned by the Company of $.4
million.
Net income and net income per share for the six months ended June 30, 2001 were
$8.2 million or $.12 per diluted share versus $12.6 million or $.19 per diluted
share for six months ended June 30, 1999. Average diluted shares for the
respective periods were 67,186,118 and 67,639,877.
-7-
Liquidity and Financial Resources
The Company's primary sources of cash are internally generated funds and cash,
cash equivalents, and marketable securities, as well as the Company's bank
credit facility.
On January 31, 2001, the Company entered into a marketing and equity investment
agreement with e-Nable.com, at a total cost of $ 5.0 million. e-Nable.com
provides an Internet-based business processing solutions that allow integration
of data sources, underwriting intelligence, distribution channels and insurance
products. The Company's investment is included in other assets on the
accompanying consolidated balance sheet.
Net cash provided by operating activities for the six months ended June 30, 2001
was $10.3 million compared to $15.4 million for the six month's ended June 30,
2000. The significant sources were net income of $8.2 million, $4.6 million of
depreciation and amortization, and was offset by a $1.5 million decrease in
accounts payable and accrued expenses.
Days Sales Outstanding (DSO) for the six months ended June 30, 2001 was 41.5
days, compared to 38.5 days for the year ended December 31, 2000, and down from
47.5 days at March 31, 2001.
As of June 30, 2001, the Company has outstanding borrowings against the term
loan in the amount of $ 3 million, and has no borrowings against the $ 35
million revolving loan.
The Company's current ratio at June 30, 2001 stood at 8.3:1 as compared to 7.2:1
at December 31, 2000. Inflation has not, nor is it expected to have a material
impact on the Company's financial results in 2001 and there have been no
material commitments for capital expenditures.
On May 30, 2000, the Board of Directors authorized the repurchase of 2.5 million
shares of the Company's common stock during this calendar year for an aggregate
purchase price not to exceed $ 25 million. For the period ended June 30, 2001,
the Company purchased 767,000 shares for a total cost of $ 7.3 million.
Dividends declared in January and April 2001 were declared at $.0075 per share.
At its board meeting of August 7, 2001, the company declared a quarterly
dividend of $.0075 per share.
Management believes that the combination of cash and cash equivalents, other
working capital sources, and borrowings under the Company's credit facility
along with the anticipated cash flows from operations, will provide sufficient
capital resources for the foreseeable future.
Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately.
-8-
Statement 142 will require that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142 will
also require that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately,
and Statement 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-Statement 142 accounting literature. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the transitional goodwill impairment evaluation, Statement
142 will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's consolidated
statement of earnings.
-9-
As of June 30, 2001, the Company has unamortized goodwill in the amount of $81.4
million, unamortized identifiable intangible assets in the amount of $12.7
million, all of which will be subject to the transition provisions of Statements
141 and 142. Amortization expense related to goodwill was $ 3.2 million and $
1.8 million for the year ended December 31, 2000 and the six months ended June
30, 2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably estimate
the impact of adopting these Statements on the Company's consolidated financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle.
-10-
PART II - Other Information
Item 4: Submission of Matters to a vote of Security Holders
At the Company's Annual Meeting of Shareholders on May 22, 2001, the
shareholders elected James M. McNamee, Kenneth R. Rossano and G. Earle Wight to
serve as directors until the 2004 Annual Meeting, and ratified the selection of
KPMG LLP to serve as the Company's independent auditors for 2001.
The chart below names each director nominated for election by the shareholders
at the 2001
Annual Meeting, the number of votes cast for, against or withheld and the number
of broker nonvotes with respect to each such person:
Votes Cast Broker
Nominee For Against Withheld Nonvotes
- -------------------- ---------- ------- ---------- --------
James M. McNamee 47,140,154 - 12,591,271 0
Kenneth R. Rossano 55,780,092 - 3,951,333 0
G. Earle Wight 47,118,565 - 12,62,860 0
The name of each director whose term of office as a director continued after the
annual meeting is as follows:
Benjamin A. Currier
Elaine L. Rigolosi
Quentin J. Kennedy
John E. Nolan
With respect to the ratification of KPMG LLP as independent auditors, the number
of votes cast was 59,135,555 For, 488,400 Against, 107,470 Abstained and 0
Broker Nonvotes.
-11-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Hooper Holmes, Inc.
Dated: August 14, 2001
BY: /s/ James M. McNamee
------------------------------------
James M. McNamee
Chairman, President and
Chief Executive Officer
BY: /s/ Fred Lash
------------------------------------
Fred Lash
Senior Vice President
Chief Financial Officer &
Treasurer
-12-